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Banks like ING and DNB are backing away from pipelines

Investor groups are pressuring banks to divest from financing the $3.8 billion Dakota Access Pipeline. Will this be a jumping off point for more financial activism?

In recent weeks, the large multinational Dutch bank ING and Norwegian bank DNB announced plans to sell off their stakes in loans funding the controversial Dakota Access Pipeline. The divestments came as activist investors stepped up their calls for banks and other financial institutions to stop financing projects related to fossil fuels development.

In reality, their decisions are likely to have little impact on progress: The pipeline’s owner, Energy Transfer Partners, announced in a recent court filing that oil already has been placed in the pipeline underneath Lake Oahe, North Dakota, where the project has been protested vehemently by the Standing Rock Sioux Tribe.

But whether or not this specific divestment movement is successful, the situation showcases how environmental advocates and investment groups are stepping up their pressure on banks as a way to push forward clean energy policies under the Trump administration, which has shown itself to be unsupportive of investment decisions grounded in a desire to combat global warming.

Caught between a rock and a hard place

The Dakota Access Pipeline (DAPL), a 1,172-mile underground oil pipeline extending from North Dakota to Illinois, cost approximately $3.8 billion to build. The project has been fraught with massive protests and legal challenges, primarily over the threats it poses to the Standing Rock Sioux Tribe’s water quality and burial ground sites.

The highly public nature of this opposition has caused numerous investor groups and shareholder activists to call on 17 different banks, including Wells Fargo and TD Securities, to divest from financing the pipeline.

The Seattle City Council even voted in February not renew its contract with Wells Fargo, which was worth $3 billion, because of the bank’s involvement with the pipeline.

But so far, only a few banks have completely divested from their interests in the project.

If the federal government isn’t going to block it by official action, then you’re going to have to rely upon this kind of investor pressure. I would expect you will see more efforts in this regard.

Notably, ING sold its $120 million stake in the $2.5 billion loan by banks to fund the pipeline. Meanwhile, DNB sold off its entire stake in financing the pipeline. 

Getting the rest of the banks to divest could be an uphill battle because of their contractual obligations to the pipeline company, according to Arthur Wilmarth, a George Washington University law professor who teaches banking law. “The divestment is very unattractive to the banks because they are caught between a rock and a hard place if these are loans they already committed to,” he said. “You either risk having a bad public relations problems or you risk having a major breach of contract action.”

Reroute or divest

Some of these investor-activists are seeking a middle ground. Looking outside of the divestment strategy, in February, an investing coalition led by Boston Common Asset Management and representing over $685 billion in assets under management asked banks to address or support the Standing Rock Sioux Tribe’s request to reroute the pipeline.

The coalition of over 130 investors includes the U.S.’s largest public pension, CalPERS, as well as the Comptroller of the City of New York.

The coalition targets banks financing the pipeline, but is looking to work with banks for a solution, rather than through selling off their loans financing the project.

"There's been a big reputation hit for the banks — this has been one of the largest NGO campaigns against the banking industry in recent memory," said Steven Heim, managing director of Boston Common Asset Management. 

Anne Simpson, an investment director at CalPERS, said in a statement that banks need to exercise proper oversight in their lending.

“Attention and respect for community concerns and environmental risks are fundamental to sound business practice,” Simpson said. “We’re looking for a positive response from the banks. They hold the purse strings.”

Whatever the strategy — rerouting or divestment — Wilmarth, the George Washington law professor, predicts that there will likely be more pressure from investors under the Trump administration over these types of projects.

“If the federal government isn’t going to block it by official action, then you’re going to have to rely upon this kind of investor pressure,” Wilmarth said. "I would expect you will see more efforts in this regard."

A short history of divestment

Environmental activists such as Greenpeace and founder Bill McKibben have long advocated for the divestment of fossil fuels as a way to mitigate climate change and reduce greenhouse gas emissions.

Banks and financial institutions, in particular, have become targets in these divestment campaigns because they are a substantial source of funding for fossil fuel projects such as the Dakota Access Pipeline.

According to a 2016 report by the nonprofits, Rainforest Action Network (RAN), BankTrack, Sierra Club and Oil Change International, banks are financing billions of dollars in fossil fuels projects.

The report estimated that between 2013 and 2015, banks put up $42 billion for companies active in coal mining, $154 billion for the 20 largest coal-fired power producers and $306 billion for companies that drill "extreme oil" (such as resources that lie deep under water).

Banks focus on climate change

That said, in recent years, many banks have made some improvements in their commitment to sustainability and mitigating climate change.

For example, JPMorgan Chase & Co. revised its coal financing policy in 2016 to eliminate financing to new "green" coal mines, prohibiting financing of new coal.

In addition, a recent report by Boston Common Asset Management suggested that many banks are starting to perform environmental stress tests — and more than 70 percent of the ones responding to its recent survey about this issue are undertaking them or calculating carbon footprints related to their investment portfolios.

In a previous GreenBiz article about banks and climate risk, Ceres president, Mindy Lubber, said it is no longer an option for financial institutions and banks to overlook the risks of climate change.

"It is becoming ever more real and evident that climate change is a financial issue that impacts the whole economy," she said.

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