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Experts are calling for increased scrutiny of so-called “green” financial products created by the US-based lender Citi and France’s BNP Paribas after it was revealed that a Scottish business dramatically ramped up its activities in the fossil fuels sector after receiving a “green transition loan” orchestrated by the two lenders.
The incident has increased concerns that loans and bonds worth billions of dollars that have been labelled as environmentally friendly by the two lenders could potentially be funding polluting activities.
The $600m (£430m) loan was 80 per cent guaranteed by the government export credit agency UK Export Finance (UKEF).
On 19 August 2021, UKEF announced that the Aberdeen-based engineering company Wood Group had received the “green transition loan” and that the facility was coordinated jointly by Citi and BNP Paribas with Citi acting as facility agent.
BNP acted as joint global coordinator, book runner and mandated lead arranger for the facility and, at the time, said the five-year loan would “help Wood continue to transition away from fossil fuels and to capitalise on opportunities linked to clean energy, hydrogen and decarbonisation”.
After the loan was announced, Yasser Henda, who was BNP’s global head of export finance, said: “Having pioneered ECA-backed green loans, we are delighted to continue leading the charge with this debut Transition Export Development Guarantee, a game changer in meeting the financing needs of our clients along their transition journey to net-zero”.
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While BNP touted the loan to Wood Group as a green innovation that would help the engineering firm transition away from fossil fuels over the coming years, the opposite occurred.
After receiving the $600m loan, Wood Group grew its upstream oil and gas business by 17% so that it accounted for more than $3bn in revenue in 2022, up from $2.6bn in 2021, according to an analysis of the company’s financial results by the investigative journalism organisation Point Source.
This included increasing revenue from oil and gas projects by 22 per cent to $704.7m over the time period and increasing the revenue from oil and gas operational activities by 21 per cent to $2.0bn.
Over the same period, the company reduced the size of its renewable, hydrogen, and carbon capture business units by 35% so that they only accounted for revenues of $222.8m in 2022, down from $344.6m in 2021.
After receiving the loan, Wood announced a series of at least 20 contract awards from oil and gas companies including deals with Saudi Aramco, Shell, BP, Chevron, and Equinor.
Greenwashing and Global Loans
James Vaccaro is part of the Climate Safe Lending Network and is a member of the Transition Plan Taskforce (TPT), a group launched by the UK Treasury at COP26 in Glasgow to develop standards for transition plans and tackle greenwashing.
He said: “This is a flagrant abuse of the fact that the green finance space is inadequately regulated. As things are, there are no meaningful sanctions for this kind of abuse and that is negligence.
“The systems in place obviously don’t work and it raises serious questions about how many other green bonds and loans are also failing to do what they say they do,” Vaccaro told Byline Times. Vaccaro believes that regulators have failed to keep up with an explosion of activity within the green finance space.
Global borrowing by issuing green bonds and loans, and equity funding through initial public offerings targeting green projects, expanded to $540.6bn in 2021 from $5.2bn in 2012, according to the research published by TheCityUK and BNP last year. TheCityUK is an industry-led body representing UK-based financial and related professional services.
The report showed that green bonds accounted for 93.1 per cent of total green finance globally between 2012 and 2021. In 2021, global green bond issuance stood at $511.5bn, compared with $2.3bn in 2012.
Both Citi and BNP have set targets for huge expansions within the green finance space. In April 2021, Citi announced plans to commit $1 trillion to sustainable finance by 2030, including a $500bn commitment to environmental finance.
BNP has said that one of its key objectives is positioning itself “as a leader in the energy transition” and that it is aiming to issue €350bn ($377m) in sustainable loans and bonds covering environmental and social issues for corporate clients by 2025.
BNP issued $19.5bn in green bonds in 2022, more than any other financial institution in the world. It was also the number one green bond issuer worldwide over the first quarter of 2023, when it issued $9bn in bonds.
In order to be eligible for a UKEF transition export development guarantee, such as the one awarded to Wood, a company must demonstrate that it is “actively transitioning away from fossil fuels” and, if the company does not hit specific environmental targets, it will be required to pay a higher interest rate on the loan.
This kind of loan, where interest rate margins ratchet up or down in line with performance against preset key performance indicators, is called a sustainability-linked loan (SLL).
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Lack of Transparency
UKEF, Wood, Citi and BNP all declined to say what Wood’s loan targets were, how they were measured, or whether the engineering company was on course to hit them.
Maaike Beenes, a spokesperson for the environmental campaign group BankTrack, told Byline Times: “The lack of transparency here is a really big problem – because if the terms of the deal aren’t public it’s very hard to understand why the loan failed to incentivise the company to transition away from fossil fuels.
“If Wood and its bank financiers, Citi and BNP Paribas, really believe that they have designed an effective ‘green’ loan then there should be no reason for them to refuse to disclose the terms of the agreement,” Beenes said.
“It looks like, in this case, the penalties for not hitting the targets weren’t severe enough and ultimately Wood decided that it would be more profitable to expand its oil and gas business and pay the higher interest rate on the loan.”
James Vaccaro of the Climate Safe Lending Network told Byline Times: “There needs to be a proper examination of BNP and Citi’s business practices in the green finance sector.
“The fact that there is no transparency on this is totally shocking – especially given the fact that this loan has gone wrong in such a spectacular fashion. We need to find out what went wrong here. The regulators and the people that are classifying that as a ‘green transition loan’ need to put in place measures that will ensure that this kind of thing cannot happen again. Everyone is carrying on like nothing has happened and it isn’t even really clear which regulator is responsible for policing this kind of green financial instrument.”
In a statement, Citi told Byline Times: “We recognise the importance of transitioning to a low-carbon economy. Citi is investing in clean energy solutions through our net zero commitments and our $1 trillion commitment to sustainable finance, while working with all our clients, to support their efforts to decarbonise their businesses.”
A spokesperson for BNP said: “BNP Paribas is heavily committed to the energy transition. We have already allocated significant capital and capabilities, with plans to do more, to facilitate the required investment, including via the development of a credible sustainable finance sector with targets verified by independent third parties.
They added: “We constantly review our lending obligations and monitor our client portfolio to ensure our clients’ sustainable finance commitments are being actively maintained as the credibility of the sustainable finance market is critical for all stakeholders.”
In a statement, Wood said it “remains committed to playing a critical role in the energy transition, in the short, medium and long term,” and added: “A significant part of our role is also supporting our oil and gas and wider industry clients to decarbonise their operations”
“The KPI measures of the loan centre on reducing our own scope one and two emissions and growing our sustainable revenues. We are pleased that we achieved a 65% reduction in our scope one and two emissions,” the Wood spokesperson told Byline Times
A spokesperson for UK Export Finance said: “We are firmly committed to supporting the UK’s transition towards a low-carbon economy as part of our 2050 net-zero target. Our transition export development guarantee requires firms to report progress against a climate transition plan to deliver their commitments.”