Danish lender Danske Bank has said it will not offer refinancing or new long-term financing to any oil and gas E&P company that does not set a credible transition plan in line with the Paris Agreement. Could this mark the beginning of more lenders to fossil fuel groups dictating terms via covenants in loan agreements that direct the use of proceeds?

Danske Bank, Denmark’s biggest bank, says it will not offer refinancing or new long-term financing to oil and gas exploration and production (E&P) companies that do not set a credible transition plan in line with the Paris Agreement. The Danish lender’s latest Position Statement on Fossil Fuels sets out its new priorities, making it one of the first banks to introduce restraints on corporate lending to fossil fuel groups, a profitable corner of bank business.

Although banks will continue to finance OPEX and the maintenance of oil and gas operations in the short term, James Vaccaro, Executive Director of the Climate Safe Lending Network, believes Danske’s decision is indicative of the start of a wider move amongst lenders to wind down financing of new operations, and begin to dictate terms via covenants in loan agreements that direct the use of proceeds. “This is leadership that many have been calling for and others will follow. Danske has shown that they can put in covenants and lend money but on the condition that it funds net zero infrastructure which aligns the company with the Paris Agreement. This is the direction of travel, and other banks will follow,” he says, predicting UK, French and Dutch banks could be next.

Elsewhere French bank BNP Paribas has pledged to reduce the money it has outstanding with oil extraction and production industries to less than €1bn by 2030, an 80% decline from its current balance of €5bn. BNP Paribas says its latest commitment will accelerate the pace at which it reduces outstanding financing for oil extraction and production as part of its efforts to curb carbon emission and meet climate goals. The bank has also hiked its target for outstanding financing for the production of “low-carbon, primarily renewable, energies.”

Still, according to the latest analysis by the Rainforest Action Network, global banks provided US$742bn in financing to coal, oil and gas companies in 2021, despite the fanfare of climate pledges by lenders that signed up to former Bank of England governor Mark Carney’s industry alliance. The research finds fossil fuel financing remains dominated by the same four US banks.

Important role

The financial system has an important role to support the decarbonisation of economies, said Danske in a statement. The sector is uniquely positioned to effect change in the real economy through its ability to mobilise capital, direct funds and price risks. “Being the second-largest bank in the Nordic region with close to 3.3 million customers and DKK2,800bn (US$409bn) in invested capital and lending, we are in a unique position to contribute to solving the climate challenge,” said CEO Carsten Egeriis. “We make the greatest impact for the individual and for society by owning our role in society and by offering our customers advisory services and financial solutions to support their transition.”

The position statement says Danske Bank will not:

• Provide long-term financing or refinancing to E&P companies that generate more than 5% of their revenues from unconventional (tar sands, shale) or frontier (arctic and ultra-deep sea) oil & gas.
• Provide long-term financing or refinancing to E&P companies engaging in activities related to oil or gas expansion (applies to conventional, unconventional and frontier O&G expansion).
• Directly finance, through eg project finance, expansion of oil & gas exploration and production (applies to conventional, unconventional and frontier O&G expansion).
• Invest in E&P companies that generate more than 5% of their revenues from tar sands.
• Offer refinancing or new long-term financing to any oil & gas E&P company that does not set a credible transition plan in line with the Paris Agreement. This includes a long-term 2050 net zero goal, ambitious short and medium term reduction targets on scope 1 and 2 emissions as well as a material scope 3 emission reduction target.