Fossil Fuel Financing Round 3: MUFG and Mizuho Financial Group

This is the third of my blog series on Fossil Fuel Financing

Bloomberg has reported that Japanese banks have reported an increase in lending to the oil and gas industry:

“Mitsubishi UFJ Financial Group Inc., Japan’s largest bank, disclosed last month it has become one of the biggest oil and gas lenders with 9.2 trillion yen, or about $85 billion, in exposure — $45 billion more than it had reported at the end of the year. Sumitomo Mitsui Financial Group Inc. is not far behind with about $77 billion and Mizuho Financial Group Inc. has about $48 billion, calculations based on the companies’ websites show.”

What this implies is the two banks have also expanded their exposure to the environmental and social risks associated with this industry. In addition to credit risks noted by Bloomberg as a consequence of market forces, both banks are indirectly responsible for environmental and social impacts of companies and projects they finance, and face additional risks if E&S risks are left unmanaged by their borrowers. The majority of project financing of these two banks are notably in Asia where such projects are likely to have significant development impacts. However, environmental regulations are also less stringent while opposition against the extractive industry is escalating.

So how do these two banks manage its exposure to the fossil fuel industry?

MUFG adheres to the Equator Principles and reports that it its Social & Environmental Risk Assessment Office conducts the risk assessment for all development projects. It trains its bankers on the EP and engages with external stakeholders regarding its lending activities.

Mizuho Financial Group also adheres to the Equator Principles, but notably also conducts carbon accounting to determine the GHG contribution of a power plant financed by the bank.  Details of its carbon accounting methodology are disclosed here.

The Equator Principles is a risk management tool for project financing. It allows banks to gauge the level of risk associated with each project. It does not require banks to drop financing projects with potentially irreversible environmental and social impacts. Thus, it always remains unclear how banks manage their exposure should the risks associated with the projects materialize.

 

Without doubt, both banks consider climate change mitigation an important consideration in their business and indeed, both also have a substantial portfolio of renewable energy projects and services. But the increase in financing to the fossil fuel industry also raises questions not only about the decision to do so, as well as how they would manage material risks should environmental and social impacts of these projects become too big.

 

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