HOUSTON—The global push for net-zero emissions has generated several misconceptions about the energy transition, most notably, over whether oil and gas will be exiled by investors, according to finance experts with Citi and J.P. Morgan.

“A lot of folks equate transition with divestment,” said Val Smith, chief sustainability officer at Citi, speaking on a panel at the 23rd World Petroleum Congress (WPC) held in December. However, Smith noted that when Citi announced its net-zero commitment last March, the firm was precise with the language it used to oil and gas clients.

“We intend to work relentlessly with our clients to help them transition and we’ll transition together to net zero or lower carbon,” she said on the WPC panel focused on aligning business performance and ESG reporting.

Alongside the continued focus on sustainability that has led many in the oil and gas sector to be more transparent about its ESG efforts, a working relationship with the banking sector will be just as critical as the energy transition unfolds.

“We really need to focus on identifying opportunities to decarbonize not on divesting…divesting does not really change the math on greenhouse-gas emissions in the atmosphere at all,” Smith continued. “Our job is to marry these two intentions: to be really committed to the sector and also the transition. Done right, I think there’s an opportunity for all of us.”

A report by the U.N. said the world population will reach 9.7 billion people by 2050 and the energy demand is expected to increase significantly over that time period. While renewable energy will account for a bigger piece of the energy mix to meet this demand, the U.S. Energy Information Administration said nearly 50% of the world’s energy will come from natural gas and oil in 2040.

“We are going to have a very disruptive transition if divestment is part of that conversation,” Smith said.

“We don’t think there’s a path to a successful transition that involves firing our clients,” echoed Jonathan Cox, global co-head of energy investment banking at J.P. Morgan Securities LLC.

J.P. Morgan has been active through the different eras of energy—onshore vertical drilling, offshore exploration, horizontal drilling and shale.

“I’m going to make a prediction that JP Morgan will be lending more money to the energy industry in 10 years…the energy industry won’t be limited to oil and gas,” Cox said.

Instead of divestment, J.P. Morgan is putting a higher priority on today’s transactions to demonstrate its environmental stewardship, according to Cox.

“If we think about energy narrowly in yesterday’s or today’s definition, then we’re denying ourselves the opportunity to evolve, transform and innovate,” he said. “Let’s not think in today’s fishbowl and hold that constant as the world changes around us.”

J.P. Morgan’s loan portfolio will focus on investing with winners, which Cox defined as businesses that factor in elements of environmental stewardship.

“If good companies, regardless of their carbon intensity, see a motive for their stakeholders to transition and invest in new technologies then we want to help do that. We want to help finance it and we want to help accelerate it…and I think we will need a lot of people on the boat to do that,” he said.

In Europe, green bonds—financial instruments to fund sustainable projects—have become the primary form of climate-focused finance. The issuance of green bonds reached $452.2 billion in 2021, a 46% increase from $270 billion issued in 2020, according to the Climate Bonds Initiative.

Given the pressure placed on attaining sustainability, investors are using green bonds and sustainability-linked loan principles (SLLP) to draw in the oil and gas market. Sustainability-linked loans require the borrower and lender to identify sustainability key performance indicators (KPIs).

KPIs are defined as material to the borrower’s core sustainability and business strategy that addresses relevant ESG challenges of the industry sector, and from those, the lender and borrower set and calibrate ambitious and meaningful sustainability performance targets (SPTs). Once met, the borrower is awarded with a small incremental pricing benefit.

These loans rely on the borrower to be transparent about the company’s emissions data.

Finding that less than 30% of Citi’s clients report this data, Smith said “data is your friend.” She added that disclosures can be used to reflect performance and also drive performance when the information comes back underwhelming.

“Try to get comfortable with the measurement and reporting of your direct emissions data because that is a step forward to begin to disclose and share more information with your financial institutions about where you are today and then that can open up conversations around what things look like tomorrow,” she said.

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