(Bloomberg) -- BNP Paribas SA, the European Union’s biggest bank, has effectively ceased underwriting bonds for oil and gas producers, representing one of the most dramatic crackdowns on fossil fuels among the world’s major financial firms.

BNP is no longer participating in conventional bond sales for the sector, according to clarifications provided by the bank in connection with its annual general meeting on Tuesday. The lender, which hasn’t formulated an official policy on the matter, told Bloomberg separately that the practice currently applies to all upstream activities.

BNP has gradually been limiting oil and gas clients’ access to financing as the bank contends with ever stricter ESG regulations in Europe, as well as a lawsuit brought by climate activists last year. At the same time, BNP has continued to step up its presence in sustainable finance, and is now the biggest underwriter of green bonds globally, according to data compiled by Bloomberg.

The development highlights the split between Europe and the US, where regional banks have recently started expanding their exposure to the fossil-fuel industry. In some cases, US banks are actively stepping in to take over contracts abandoned by European banks, Bloomberg has previously reported. 

“The transformation underway” at BNP “sets them apart from other international banks,” said Lucie Pinson, director of Reclaim Finance, a Paris-based climate nonprofit. 

In response to a request for clarification from the French office of nonprofit Friends of the Earth, BNP said it’s also “gradually reducing” the share of loans to “large integrated energy companies, attributable to the exploration and production of hydrocarbons.”

BNP’s shift away from fossil finance is unlikely to dent the oil and gas sector’s access to funding. That’s as private credit investors — as well as US banks — fill in gaps left by European lenders. At the same time, some banks are exploring capital relief instruments that would allow them to transfer the regulatory risk of holding high-carbon assets.

What’s more, oil and gas companies are flush with cash, driving down the sector’s demand for loans by 6% last year. That’s because fossil-fuel companies are generating so much money from their underlying business, says Andrew John Stevensen, a senior analyst at Bloomberg Intelligence.

Meanwhile, European banks continue to face stricter rules around their exposure to high-emitting clients, including potentially higher capital requirements.

What Bloomberg Intelligence Says:

The six transition industries most targeted in European banks’ financed emissions reductions — power, automotive, oil and gas, steel, coal and cement — account on average for 15% of lenders’ highest-quality capital (CET1) exposure. That’s as much as €200 billion, with CET1 holdings at €1.38 trillion in 4Q for banks supervised directly by the ECB. Cutting credit for these sectors would threaten a significant portion of revenue, and the cost appears too high for some banks to commit to voluntary reductions.

Click here for the full note by BI’s Grace Osborne.

ECB-Supervised Lenders’ CET1 Holdings

BNP has previously imposed a ban on financing the development of new oil and gas fields, and pledged to phase out financing for companies specialized in oil exploration and production. It said earlier this year that it hadn’t done conventional bond issuances in the oil and gas sector since February 2023. Data compiled by Bloomberg shows the bank continued to participate in mid- and downstream, as well as oil-services sector bond issuance, through 2023 and the first half of this year.

In an emailed comment to Bloomberg on Wednesday, BNP said it “refrains from participating in conventional bonds issuance to companies active in oil and gas exploration-production,” which it defined as including “diversified players and specialized players in exploration-production.”

Banks that burnish their green credentials stand to improve their chances with issuers that have made environmental, social and governance metrics part of their selection process for bond underwriting. KfW, the German development bank whose 2024 funding plans have been set at roughly $100 billion, is among major issuers that have said it takes ESG metrics into account when selecting banks.

--With assistance from Alexandre Rajbhandari, Ronan Martin and Greg Ritchie.

(Adds comment from BNP in 11th paragraph.)

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