Trump administration targets banks divesting from fossil fuels in new anti-climate rule

The OCC’s new rule could stunt divestment campaigns by requiring major banks to justify each individual decision to regulators using “quantitative, impartial risk-based standards established by the bank in advance.”

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A new proposed regulation that would bar large banks from declining to do business with particular industries or groups of companies was released on Friday by the Treasury Department’s Office of the Comptroller of the Currency (OCC) — a move that could have major implications for a wide array of divestment and boycott campaigns nationwide, including efforts to divest from fossil fuels.

Although framed as an effort to ensure “fair access” for all businesses to major banks, the rule bars big banks from declining to do business with any particular sector or industry. The Trump administration proposal specifically cited efforts by banks to respond to climate change risks or to comply with the Paris Agreement, saying the rule would put those efforts off-limits.

For years, climate activists have been pushing banks to divest from fossil fuels — and those campaigns have begun to gain steam as major investment banks have begun to back away from oil, gas, and coal because of climate concerns. But the oil and gas industry is politically well-connected, donating heavily to Republican candidates. The OCC’s latest move also comes on the heels of a February move by the Trump administration to block new requirements that public companies disclose their climate risk and a June effort to limit ways that pension plans can consider environmental, social, and governance (ESG) factors. 

The OCC’s new rule could stunt divestment campaigns by requiring major banks to justify each individual decision to regulators using “quantitative, impartial risk-based standards established by the bank in advance” — and it could also significantly impact the ways that major financial institutions are allowed to consider or address a wide array of other structural or societal risks as well.

“It is one thing for a bank not to lend to oil companies because it lacks the expertise to value or manage the associated collateral rights,” the OCC wrote, “it is another for a bank to make that decision because it believes the United States should abide by the standards set in an international climate treaty.” 

The latter, the OCC suggested, would represent banks “using their market position to make public policy,” asserting that balancing various high-altitude risks is “the purview of Congress and Federal energy and environmental regulators.”

Officials with the outgoing Trump administration described their proposed new red tape as an effort to keep politics out of money.

“We need to stop the weaponization of banking as a political tool,” Brian Brooks, the acting comptroller of the currency, told the Wall Street Journal as the rule was announced. “It’s creating real economic dislocations.”

The OCC said the proposal came in response to a letter from Alaska’s Congressional delegation regarding a lack of lending for Arctic oil drilling. The OCC said it then contacted “several large banks” and found that banks had considered environmental and climate factors in adopting policies that affected Arctic drillers, spurring the federal agency to begin drafting its new rule.

The Institute for Energy Economics and Financial Analysis lists over 100 banks — both foreign and domestic — that have committed to reducing their exposure to coal and/or to oil and gas.

The proposal would require major banks to justify a decision not to do business with a particular person or company “by the quantified and documented failure of the person to meet quantitative, impartial risk-based standards established by the bank in advance” — a move that puts the burden on lenders to justify their business decisions to the government.

Drillers need banks, banks… not so much

Banks have many reasons that aren’t directly related to climate concerns to avoid the oil and gas industry.

In recent years, the oil and gas industry — historically capable of funding its own operations — has moved deeply into the red, leaving drilling companies heavily reliant on banks and Wall Street for capital.

And this year, Wall Street has virtually abandoned the sector, which faces constraints in the short-term from coronavirus lockdowns and the arrival of cheap renewable energy and, in the long-term, a growing expectation that energy markets will transition away from fossil fuels. In August, the Dow Jones dropped ExxonMobil — its longest-running member — from inclusion in its index of blue-chip stocks.

With Wall Street reluctant to invest, drillers have grown highly dependent on bank lending.

In 2009, equities like stocks made up the majority of capital invested in the U.S. oil patch, according to SEC filings cited by the French multinational bank Societe Generale in a September 2020 presentation. By the first quarter of 2020, 96 percent of the capital in the oil patch was debt and just 4 percent represented equities like stocks, it adds.

The OCC proposal drew praise from Republican Senators, including those from heavily-drilled states like Texas and Alaska.

“Partisan interests and political divisions should not preclude a legal, creditworthy institution from acquiring fair access to financial services,” Texas Senator Ted Cruz said in a statement. “This is particularly good news for America’s small and medium-sized energy producers, who for too long have been subject to discrimination from banks and lending facilities — under pressure from Green New Deal enthusiasts.”

It’s not clear, however, to what degree many small and medium-sized energy firms remain creditworthy. On Monday, debt ratings agency Fitch said that its “2021 Rating Outlook for North American Energy is Negative, reflecting the large number of companies with Negative Outlooks,” adding that a full 45 percent of companies they followed in this sector had negative rating outlook (and that the sector’s outlook reflected “an expected improving trend in 2021.”)

The oil and gas industry went into the pandemic in unusually financially shaky condition. As lockdowns began, the industry was confronted not only with the unprecedented drop-off in demand for transportation fuels but also a brutal international trade war that caused oil prices, for the first time in history, to briefly dip below $0 a barrel and turn negative.

Investors have faulted poor management at drilling companies and incentive structures that let bosses personally profit from a costs-be-damned approach to oil production that promoted drilling even when it cost more to drill than the oil itself was worth.

Lenders also have their own financial reasons to be wary of oil and gas.

This year, as the pandemic has hammered the economy, oil and gas companies have declared bankruptcy at a rate far higher than other industries. Nearly a third of U.S. bankruptcies in September were filed by oil and gas companies, Mark D. Holmes, an energy finance attorney with the law firm White & Case wrote earlier this month, “more than any other sector by some margin.”

Twice a year, many (but not all) oil and gas companies face scrutiny of their reserves-based loans from lenders, in part because the price of oil can sway so rapidly, causing firms’ financial prospects and their creditworthiness to shift.

As this fall’s redetermination period loomed, corporate law firm Haynes and Boone surveyed oil borrowers and lenders. They found that 17 percent of producers still planned to borrow from banks this coming year (and just 25 percent said they’d source capital from “cash flow from operations” in 2021). A full 82 percent of respondents said that they expected the structure of reserves-based lending to include modified terms after this crisis, like banks declining to lend based on the value of so-called “proved undeveloped reserves” (see DeSmog’s coverage here) or more frequent scrutiny of reserves figures.

“Despite the current stress on the reserve-based loan [RBL] structure, a substantial percentage of respondents expect it to survive in some form,” Haynes and Boone wrote. “However, the RBL of the next few years will look much different than the RBL producers previously knew. It will have tighter terms and provide less capital.”

“Banks have backed away from fossil fuel lending mostly for reasons that are very easy to quantify: they’ve proven to be terrible investments,” Clark Williams-Derry, an analyst with The Institute for Energy Economics and Financial Analysis, told DeSmog. “Just look at the $170 billion in debt swept into bankruptcy over the past 5 years, at the major write-downs of oil assets that secure bank debt, or at the ongoing chaos in reserve-based lending as companies are forced to downgrade their reserves.”

“In some ways, some banks are getting environmental kudos for doing things that they would have done anyway on purely financial grounds,” Williams-Derry added.

Lame duck effort by Trump administration

The public comment period for the OCC’s proposed rule runs just 45 days and ends on January 4. That pre-inauguration deadline means that there’s a small window in which it might be feasible for the OCC to finalize its rule before the Biden administration arrives.

Federal law generally requires regulators to respond to public comments before finalizing new regulations.

The OCC’s proposed rule is expected to draw public comment from a wide array of interests. The proposal cited ways that the regulation could cast a very wide net, affecting a large range of businesses. “Organizations involved in politically controversial but lawful businesses — whether family planning organizations, energy companies, or otherwise,” the proposal said, “are entitled to fair access to financial services under the law.”

The proposal also specifically references what it called the “now-discredited Operation Choke Point,” an Obama-era effort to curb predatory lending, saying that “the OCC believes these criteria are not, and cannot serve as, a legitimate basis for refusing to grant a person or entity access to financial services.”

Brooks has previous professional ties to those sorts of lenders, observers say. “Before serving as the [acting] comptroller of the OCC, Brooks was the former chief legal officer and vice chair of OneWest Bank, a predatory mortgage lender that was described as a foreclosure machine,” Jacobin Magazine noted.

Framed as an effort to prevent discrimination, the OCC’s proposal cites landmark civil rights laws like the Fair Housing Act, the Community Reinvestment Act and the Equal Credit Opportunity Act (which prohibits credit discrimination on the basis of “race, color, religion, national origin, sex, marital status, age, or because you get public assistance,” according to the Federal Trade Commission.)

The reference to civil rights laws has drawn strong pushback from environmental advocates, who noted that the Supreme Court has for decades upheld laws that protect people from discrimination based on gender or race specifically because those groups faced long histories of organized legal discrimination in the U.S.

“We’re not talking about a protected class of people … we’re talking about fossil fuel corporations,” said Ben Cushing, a Sierra Club senior campaign representative told The Hill.

Others argued that the rule would just be poor public policy.

“There are huge risks that are difficult to pin a number on — political risks, policy risks, technology risks, reputational risks,” Williams-Derry said. “If financial managers don’t continually keep an eye on these risks, they’ll put their institutions in peril. But this proposal essentially tells banks: forget judgment, forget prudence. If you can’t quantify a risk – or if you didn’t happen to quantify a risk before a new customer comes in through the door — it doesn’t count.”

“These rules,” he added, “seem to outlaw good judgement.”

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