Banks shying away from fossil fuels bolster private credits

Private credit managers are doing significantly more fossil-fuel deals now than just a few years ago, as they step into a void left by banks exiting assets they worry pose too big a climate risk.

The value of private credit deals in the oil and gas industry topped Us$9bil in the 24 months through 2023.

This was up from Us$450mil arranged in the preceding two years, according to data provided by Preqin, an analytics company that tracks the alternative investment industry.

That’s based on the limited pool of deals reported publicly or disclosed directly to Preqin.

The figures offer the clearest signal yet that fossil-fuel exclusion policies among banks – driven by regulatory and reputational concerns – are shifting some oil, gas and coal assets to less transparent corners of the market.

It’s a trend that investors say is only going to increase in the coming years.

The expectation is that some banks “will just exit” the loans market for coal, oil and even gas, said Ryan Dunfield, chief executive officer of SAF Group, one of the largest alternative lenders in Canada’s energy sector.

The shift is particularly pronounced among banks based in Europe, where climate regulations are stricter than in other jurisdictions.

Lenders stepping up restrictions on fossil-fuel loans include BNP Paribas SA and ING Group NV.

The trend is hardest felt by less diversified mid-sized companies with weaker environmental, social and governance policies (ESG), according to Dunfield.

European banks that used to be involved in financing oil and gas in SAF’S home market of Canada “have backed out over the past five years,” Dunfield said.

Combined with a partial retreat by some US banks, the development has left a financing gap, he said.