Changing the way Asia’s oil and gas companies raise capital

The energy crisis has put bankers in a bind. War in Ukraine has provided a stark reminder that the world remains dependent on hydrocarbons and that supply and demand must move in tandem. To ensure this, companies need access to capital to support new production. As Blackrock CEO Larry Fink put it in his 2022 letter to shareholders, efforts to limit investment in new oil and gas supply will only result in “greater polarisation around climate change” and erode progress towards net zero.

At the same time, a growing number of the world’s major banks, asset managers, and insurers are signatories to the Glasgow Financial Alliance for Net Zero (GFANZ), aligning behind the goals of the Paris Agreement. To access capital, oil and gas companies must meet tightening climate criteria adopted by many of the world’s leading financial institutions.

But the GFANZ has been clear from the outset that members can continue to finance oil and gas companies, though only when these companies are taking appropriate steps to support the transition. And more looks set to come. In the run up to COP27, we expect the alliance will look to further accelerate its commitment to decarbonisation. The GFANZ’s recent opening of its Asian headquarters in Singapore signals the importance of the region to achieving its goals.

To understand more about what the GFANZ means for investment across the sector, how oil and gas companies are responding and the likely impact on Asia Pacific, I spoke to Andrew Harwood from our Corporate Research team.

What is the GFANZ and is Asia Pacific playing its part?

In our recent Insight, we noted that the GFANZ covers six independent, sector-specific alliances which include banks, insurers, asset managers, financial advisors, and service providers. Membership currently represents 40% of global financial assets and continues to grow.

The alliance’s primary goal is to drive investment from the financial system towards the energy transition. Hydrocarbons will still be financed, and producers will remain investable, but GFANZ members will look to redirect capital only towards companies with robust and credible plans to reduce emissions.

A key challenge for the GFANZ is to expand membership across the remaining 60% of the financial sector that is not yet aligned. Several of the world’s largest banks, asset managers, private equity groups and pension funds remain outside the alliance, with Asia Pacific notably under-represented: only 19 of the 113 signatory banks are from the region, for example. And of these, none are headquartered in China, India or Southeast Asia. Might the GFANZ’s recently established Asian headquarters in Singapore help change this?

How is the GFANZ impacting oil and gas companies?

Given the breadth of its membership, the GFANZ is already impacting which companies and which projects can raise finance. The world’s largest asset managers have immense leverage through their interests in listed companies, for example Blackrock, Vanguard and State Street – all signatories to the Net Zero Asset Managers Initiative under the GFANZ - have holdings of 7% to 20% across Big Oil. The GFANZ can also influence private companies and NOCs through lending, insurance, and policy work.

What is the GFANZ asking of oil and gas companies?

To stay investable, oil and gas companies must demonstrate that they are taking steps to align with net zero criteria: science-based targets, interim 2030 emission reduction targets, a net zero strategy, transparent reporting and accounting and, adhering to restrictions on offsets.

Oil and gas companies are also coming under increasing pressure from the GFANZ to address how they will tackle Scope 3 emissions. At present only a handful of companies in the sector – including PetroChina in Asia – consider Scope 3 emissions within their targets.

To assess whether companies are aligning with a net zero pathway, GFANZ members look for evidence that an oil and gas company is following one or a combination of three decarbonisation pathways:

• Reduction in emissions intensity: For existing assets, companies should reduce emissions intensity through decarbonisation, though some may simply exit or wind down high-emitting assets such as oil sands.
• Investment in negative emissions technologies: New developments will require technologies such as carbon capture and storage, particularly as the emphasis on Scope 3 emissions rises.
• Replacement with zero-emission energy sources: We see rising investment in wind and solar from European Majors and some others. The GFANZ has included renewables and hydrogen in its investment priorities through to 2025, with US$370 billion to be invested per year.

Can oil and companies simply bypass the GFANZ to access capital?

An obvious flaw in the GFANZ’s ambition remains the 60% of financial institutions outside the alliance. Sidestepping GFANZ climate criteria could be an option for NOCs able to access government funding, as well as for companies with balance sheets to self-fund projects. But these are the exceptions, and funding for others will likely become more complicated and more expensive as the list of lenders and investors without climate criteria shrinks.

Founded only in 2021, the GFANZ has got off to a flyer and membership continues to grow. As its members increasingly help shape government policies around the world, the pressure on companies to align will only increase. Financing with no climate strings attached increasingly looks a thing of the past.

APAC Energy Buzz is a weekly blog by Wood Mackenzie Asia Pacific Vice Chair, Gavin Thompson. In his blog, Gavin shares the sights and sounds of what’s trending in the region and what’s weighing on business leaders’ minds.