Some of Europe’s best-known lessors are backed by French banks that have continued to finance fossil fuels since the Paris Agreement five years ago. As world leaders converge on Glasgow for COP26, the focus on a warming planet is hotting up and backers of fossil fuel companies are likely to come under more pressure. Alejandro Gonzalez reports
Asset finance professionals would have to be living under a large rock not to have noticed just how many extreme global weather events have appeared in the news recently.
As the news often appears to veer from one climate-related disaster to another, the pressure is ramping up for concrete action to be taken by world leaders in Glasgow and companies that profit from fossil fuel enterprises to respond accordingly.
It was not so long ago that the pressure to reduce greenhouse gases was exclusively directed at the carbon-heavy, fossil fuel enterprises – such as the oil, gas and coal extraction, refining and transport industries – but today it is the bankers and financiers behind the dirty fuel projects who are feeling the heat, if you will pardon the expression.
Climate science consensus: The overwhelming weight of scientific opinion, since around 1990, is that the effects of global warming are man-made, and if we are to avoid catastrophe, global temperatures cannot be allowed to rise beyond 1.5°C or 2°C of the Earth’s pre-industrial level.
The French Connection
The UN Paris Climate Agreement, signed in 2015, offers 2050 as a target against which publicly listed companies can prove how serious they are about limiting their greenhouse gas emissions. Under these agreements, the priority is for signatory enterprises to first phase out coal-burning – given its prevalence and toxicity – from the global energy mix, followed by oil and gas.
Just what progress global financiers have made to meet the Paris Agreement targets is the subject of an 80-page report, entitled Banking on Climate Chaos 2021, currently in its 12th annual edition, by the Rainforest Action Network and published in March 2021.
Its authors have monitored the financing of 2,300 fossil fuel companies globally in the coal, oil and fossil gas sectors from 2016 to 2020.
The report finds that the world’s 60 largest commercial and investment banks have invested $3.8trn in fossil fuels since the Paris Agreement was signed and says: “The overall trend of the last five years is one heading definitively in the wrong direction.”
“Banks must ensure that the fossil fuel financing binge of the first half of 2020 turns out to have been a pandemic-induced blip, and not a sign that the opportunity for short-term profit will trump the banking industry’s growing professions of concern over the climate crisis,” the report says.
Whilst North American banks dominate the list, for the leasing industry in Europe the fact that French banks also appear so prominently means there is a big knock-on effect for lessors in terms of their role and responsibilities in the climate crisis.
“This report serves as a reality check for banks that think that vague ‘net-zero’ goals are enough to stop the climate crisis,” says Lorne Stockman, senior research analyst at Oil Change International, one of the report’s authors, in a statement released with the report. “Our future goes where the money flows, and in 2020 these banks have ploughed billions into locking us into further climate chaos.”
Lucie Pinson, founder and executive director of Reclaim Finance, another of the report’s authors, comments: “These numbers expose the hollowness of banks’ ever-multiplying commitments to be net-zero or align with the Paris Agreement climate targets. A perfect example can be found in France.
“Finance Minister Bruno Le Maire is fond of calling Paris the capital of green finance – but this data exposes it as 2020’s capital of climate hypocrisy, with four unscrupulous banks making France the largest backer of oil, gas and coal in Europe.
“BNP Paribas merits singling out as the world’s fourth-largest fossil financier in 2020, having funnelled multi-billion-dollar loans to oil giants like BP and Total. Nonetheless, it is clear that all banks need to replace empty promises with meaningful policies enacting zero-tolerance for fossil fuel developers.”
Top five French banks and their asset finance subsidiaries
The largest bank in France is BNP Paribas which was created in 2000 when Banque Nationale de Paris (BNP) and Paribas merged, although BNP itself was founded in 1848 as a French National Bank. BNP Paribas Leasing Solutions was established in 2010 and was formerly BNP Paribas Lease Groupe (which itself was the product of the M&A of BNP Lease, UFB Locabail and Fortis Lease Group). BNP Paribas LS boasts an almost 70-year leasing history and has €34bn in assets under management (2019).
Crédit Agricole, established in 1894 as an agricultural lending bank, is France’s second-largest financial services group based on total assets. In 2010, Crédit Agricole Leasing and Eurofactor joined forces to become Crédit Agricole Leasing & Factoring, which has €22.9bn in assets under management (2019).
Société Générale is the third-largest bank in France and was founded in 1864 by a group of industrialists and financiers “driven by the ideals of progress”. The bank was privatised in 1987 after more than four decades of state backing following its nationalisation in 1945. Société Générale Equipment Finance (SGEF) is the group’s international equipment and vendor finance division and has €23.7bn in assets under management (2020).
Groupe BPCE is a cooperative banking group formed when CNCE (Caisse Nationale des Caisses d’Epargne) and BFBP (Banque Fédérale des Banques Populaires) merged in 2009. BPCE runs its leasing business through its subsidiary BPCE Lease (formerly Natixis Lease), which has €13.1bn in assets under management (2019).
Crédit Mutuel is France’s fifth-largest bank and began life as a communal bakery in response to an 1846-1848 food shortage and financial crisis. Its asset finance acquisition came much later when General Electric sold its leasing operation in 2016, which became Crédit Mutuel Leasing and today boasts “more than 50 years in the financing of capital goods through leasing and rental,” the bank said. The subsidiary has €12bn in assets under management (2020).
The French Connection II
French bank lessors are among Europe’s most established brands, and France frequently features in the top 10 global leasing country rankings. According to statistics compiled by UK-based think-tank Asset Finance Policy: “France is home to three of the top 10 asset finance companies [in Europe]” commanding 30 per cent market share in Europe in 2019.”
Also citing pre-Covid figures, the Global Leasing Report 2021, which ranks nations by leasing volume, ranked France sixth in its international league table and third within Europe, coming in behind the UK and Germany. The publisher, White Clarke Group, who sourced figures from Leaseurope, noted that growth in 2019 was up 7.32 per cent on the previous year (total new leasing business was $57.94bn).
France’s market dominance as a European asset finance powerhouse is, in large part, attributable to the strength of its banks, with its top four banks (BNP Paribas, Crédit Agricole, Société Générale and Groupe BPCE) managing assets in excess of $1trn each.
How addiction affects the family
French bank lessors are, therefore, despite their best circular economy efforts, invested in levels of the fossil fuel funding addiction of the parent company. While equipment leasing by a bank’s subsidiary may be ostensibly siloed from the funding activities of its parent, the nature of the group dynamic involves the sharing of risks.
Risk and return
In 2021, funding of the ‘oil majors’ (BP, Chevron, Eni, Equinor, ExxonMobil, Repsol, Shell and Total) by a lessor’s bank parent may deliver solid returns, but it also poses risks to the wider corporate family.
Various risk scenarios are possible. Competition from clean technologies (competitive risk) and tougher government climate policies (compliance risk) may drive down the value of fossil fuel reserves over time.
According to analysis by the climate science website Carbon Brief, the world reached ‘peak oil’ demand in 2019, which raises questions about how to manage investor demand in decline (investment risk), and in the court of public opinion, being seen to be playing an active role in funding global warming, ultimately threatens brand loyalty (reputational risk).
However, the biggest risk that executives take from unchecked fossil fuel funding is the risk that their behaviour may lead to ecological breakdown and economic decline (systemic risk). According to an April 2021 report by the Swiss Re Institute, the global economy could lose 10 per cent of its total economic value by 2050 if temperature increases remain on their current trajectory and the Paris Agreement is not met.
Under a worst-case scenario, The economics of climate change: no action not an option report warns that the global economy could lose up to 18 per cent of GDP by 2050 if no action is taken and temperatures rise by 3.2°C.
Running counter to these risk factors is short-term financial return.
Fossil fuel financing: binge or abstinence?
The Banking on Climate Chaos 2021 report quantifies fossil fuel financing between 2016 and 2020 by the world’s 60 largest commercial and investment banks, of which five are French banks (each with sizeable asset finance operations).
How did the French banks fare in the pack of 60? BNP Paribas claimed 10th place (after four US, two Canadian, two Japanese and one UK bank) for the world’s worst financer of fossil fuels. Société Générale is 21st, Crédit Agricole is 23rd, PBCE/Natixis is 30th and Crédit Mutuel comes in last place at 60th in the league table.
According to the authors of the report: “Though it has strong policies on unconventional oil and gas, BNP Paribas’s largely unrestricted financing for the supermajors allowed it to emerge as the world’s worst banker of offshore oil and gas over the last five years.”
The report assesses bank financing for the fossil fuel sector as a whole as well as for top expanders of the fossil fuel industry. Below we’ve isolated the French bank contribution – from 2016 to 2020 – for 100 key oil, gas, and coal companies expanding fossil fuels, and for financing for 2,300 companies active across the fossil fuel life cycle.
Looking exclusively at the 2020 fossil fuel financing data casts BNP Paribas in even less favourable light.
“Another surprising result from the 2020 data is that BNP Paribas, a bank that never loses an opportunity to boast of its clean, green credentials ... came in as the fourth worst fossil bank in 2020,” the report says.
The report continues: “BNP Paribas did $40.8bn in fossil fuel financing in 2020, a huge 41 per cent increase over its 2019 activity. BNP Paribas’s 2020 fossil fuel financing is a shocking 141 per cent higher than it was in 2016.
“In 2020, BNP Paribas is credited with leading $12.7bn in financing to BP, $4.2bn to Shell, $3.7bn to Total, $1.8bn to Saudi Aramco, and more than a half-billion each to Eni, Exxon, Pemex, Chevron, Equinor, and Petrobras; while BNP Paribas has strong restrictions on unconventional oil and gas financing, its support for the majors continues unabated.
“BNP Paribas’s French megabank peers also saw disturbingly high jumps in their fossil fuel financing in 2020. Crédit Agricole shovelled $7.8bn more into fossil fuel companies than in 2019 — including $3.7bn to Total — an increase of 66 per cent. Société Générale’s fossil fuel financing, including $1.9bn to ExxonMobil, soared by $4.4bn, or 30 per cent,” the report says.
Adding ESG to the bank-parent / lessor-subsidiary relationship mix
By Lindsay Town, CEO at IAA-Advisory
Time, regulation, products and economic cycles have all contributed to leasing companies becoming increasingly close to their parent bank. Historically, through scale, superior returns and high-quality risk outcomes, the leasing companies enjoyed considerable latitude, albeit always within parental oversight and policies. As the products tended towards “money on money” the vanilla or mainstream aspects of the industry have become far less differentiated from pure bank products.
Some lessors have gone on to build strong and sustainable differentiation through specialisation, for example: routes to market such as vendor/captives/manufacturers, asset classes such as IT or specific equipment categories or industries, or product such as operating leasing. These specialisations require very specific lessor level strategic and operating policies, but none could override a parent bank overall policy or strategic imperative.
The development of regulatory frameworks and the continuing impact of the 2008-09 global financial crisis have also cemented the parent/subsidiary relationship further. Reporting, capital risk allocation and process have all made the relationships far less “arm’s length” in the vast majority of cases. None of this is a negative when properly led and implemented.
It seems to me inconceivable that a lease subsidiary could materially divert from or ignore a parent’s strategic or policy imperative in critical areas. This would be especially the case in a negative policy, for example no facilities to XYZ asset class or ABC industrial sector.
Where the tension could feasibly build would be in areas where the parent wished to support a sector or asset type that the leadership of the leasing company fundamentally disagreed with – something I have not seen cause a major issue in my 40-plus years in the industry.
In the reverse situation the parent rightly has the argument of ownership in its favour to dictate risk or strategic policy – and this situation I have seen occur. As always, these tensions can lead to healthy and constructive debate, but in the developing world of ESG especially, tensions may arise that cause harder discussions as the principles are still developing.
The Banking on Climate Chaos 2021 report continues: “In contrast with these major French banks, their much smaller competitor Crédit Mutuel was the only one of the 60 banks covered in this report that did not lead any financing in 2020 to the thousands of fossil fuel companies we analyse.”
Leasing Life contacted the French banks criticised in this report for comment.
Crédit Agricole said: "As of 2019, the group made a commitment through its Climate Strategy to a trajectory that is consistent with the objectives of the Paris Agreement. This strategy, which includes a precise timetable for our total elimination of carbon, represents a commitment for the group.
"For it to be successful, we will be relying on a gradual reduction of our fossil fuel commitments in favour of the energy transition: As a result, in 2020, our financing for fossil fuels (large corporate customers and SMEs) was down 4.9 per cent and our investments decreased by 14.9 per cent. At the same time, we increased our financing for renewable energies during the year," the bank added.
The French leasing trade body, the Association Française des Sociétés Financières, as well as Société Générale and PBCE/Natixis were also invited to comment but declined.
BNP Paribas Leasing Solutions said it remains convinced it can meet its long-standing commitment to green financing "by our own decisions and actions, supported by those of our parent group" which it will achieve by tracking its "own activities and by supporting our clients in transitioning to cleaner sources of energy" and offered a recent example of its funding of a 7ha solar meadow in The Netherlands.
BNP Paribas Group said the Banking on Climate Change report recognised that BNP held "second place in the world for the quality of its restrictions policies regarding the most adverse energy sources for the environment and first position among the top 20 largest international banks".
Besides highlighting the high standing of its green policies, BNP Paribas also pointed to the decrease of its coal exposure in 2020. It added: "During the Covid-19 crisis, all sectors of the economy needed support and BNP Paribas, like other banks, played an important stabilising role for the economy.
"However, BNP Paribas supported the oil and gas sector to a lower extent than other sectors of activity. At this time when corporate needs have been totally atypical, our outstanding loan amount in the oil and gas sector grew by 4.1% compared to 6.5% for all sectors of the economy. By the end of 2020, BNP Paribas' financing support to the oil and gas industry represented only 1.9% of the group's total loans.
"In 2020, BNP Paribas kept reinforcing its exclusion policies in the most-at-risk sectors for the climate, as well as its financing to new energies. By the end of 2020, 82% of power generation projects financed by the group were within the renewable energy sphere, representing 40% of all projects financed by BNP Paribas in 2020 compared to 14% for oil and gas projects.
"As mentioned in the report, the major part of BNP Paribas’ support to the oil and gas sector concerned large companies that made a critical shift in 2020. The net-zero 2050 commitments made last year by these groups may still be considered insufficient, but they are an unprecedented step in the right direction.
"In 2020, our work on aligning the credit portfolio with the targets of the Paris Agreement has entered a new operational phase. The energy sector is our priority when measuring the trajectory of our credit portfolio. This is why we are actively working on it, and will publicly report on its climate alignment in the coming months."