/ 12 June 2021

Standard Bank ‘risks its reputation over East African oil pipeline

Pressures: Standard Bank Group chief executive Sim Tshabalala believes environmental and social governance concerns regarding projects are a priority. (Freddy Mavunda/Gallo Images/Business Day)

Standard Bank says it is using its “influence and potential leverage” of funding to ensure due diligence in the planned construction of the world’s longest heated crude oil pipeline in East Africa.

The proposed East African Crude Oil Pipeline (Eacop) is a 1 445km pipeline stretching from Uganda to Tanzania and is being planned by Total, the China National Offshore Oil Corporation, the Uganda National Oil Company and the Tanzania Petroleum Development Corporation.

In an open letter in March, 263 civil society organisations called on the chief executives of 25 banks, including Standard Bank, not to be involved in the $2.5-billion project finance loan to construct the pipeline. 

The Eacop will run through 178 villages in Uganda and 231 in Tanzania. “The risks of this project to people and nature in the affected countries, and to the world’s climate, have been extensively documented,” according to the letter. 

“These include significant human rights impacts to local people through physical displacement and threats to incomes and livelihoods; unacceptable risks to water, biodiversity and natural habitats; as well as unlocking a new source of carbon emissions that will either prove financially unviable or produce unacceptable climate harm.”

At plateau production, the Eacop will carry 216 000 barrels of crude oil a day. “The emissions from burning this oil will release an estimated 34.3 million metric tonnes of CO2 equivalent [CO2e] per year, dwarfing the current annual emissions of Uganda and Tanzania combined,” it reads.

Kenny Fihla, Standard Bank’s chief executive for wholesale clients, said: “We have insisted on proper environmental impact assessments, on a proper resettlement plan, proper consultation with the communities and on fair compensation.” 

The bank’s role is as a financial adviser, and it has yet to decide whether it will fund the project. 

“We are not at that point. We are trying to use our influence and potential leverage of funding to insist on all of these things to be attended to adequately,” he said.

“This is a very complex matter that needs to be dealt with due diligence and care, and we are applying that and ensuring that ultimately we make the right call based on the balance of facts that have been objectively and professionally assessed.” 

Robyn Hugo, the director of climate change engagement at Just Share, a shareholder activism organisation, said: “Irrespective of how much due diligence Standard Bank says it is doing, or how responsible it may be, the impacts of a project like this simply cannot be mitigated in a way that acceptably limits its most severe impacts on human rights and on the environment, including the climate.”

She said Eacop is an example of a decision to invest in a new fossil fuel project, which is neither least cost nor required for energy security. “The bank does not seem to recognise the significant reputational risks of being associated with this enormously harmful project.”

In its recent Net-Zero by 2050 analysis, the International Energy Agency confirmed that there is no need for investment in new fossil fuel supply and that beyond projects already committed as of 2021, there are no new oil and gas fields approved for development in this pathway. 

Hugo said: “It is glaringly clear that, if banks and other financial institutions continue to provide funding for coal, oil and gas, it will become increasingly unlikely that the Paris Agreement’s goals can be met.” 

Standard Bank chief executive Sim Tshabalala said environmental, social, and governance (ESG) concerns had become even more of a priority than in the past. 

“But I think that here in South Africa, and on the continent, you have to do all three. E is important. S is important. G is important. And, in fact, we would argue that the G is actually the cornerstone of all of this.”

A study by Risk Insights and Instinctif Partners analysed the ESG disclosures of South Africa’s banks based on their public statements in 2019. Standard Bank was ranked fourth. The study, published in December last year, found that about 84% of disclosures were related to governance.

Tshabalala later added: “It has jumped up in the agenda of everybody. Different parts of the world have different pressures on them. Our shareholders are putting pressure on us, as are NGOs. But it’s part of the corporate dialectic.”

The South African Reserve Bank and the treasury have flagged the risks posed by climate change to the financial sector. 

In its most recent financial stability review, the reserve bank noted that financial institutions that have invested in industries exposed to transition risks could incur losses if global demand for fossil fuels declined sharply.

On top of climate concerns, banks have had to manage the risks associated with an economy pummelling pandemic.

David Hodnett, Standard Bank’s chief risk officer, noted that the industry had shown resilience during the period, which saw South Africa’s big five banks record drops in their earnings in 2020. Standard Bank’s annual headline earnings were down 43% compared to 2019.

“The entire banking industry came out really well and in a position to support economic growth. So that’s what we have seen with Standard Bank; a hugely strong capital position despite a tough 2020,” he said. “And even the scenarios that we look at and plan for — be it specific industry issues, macroeconomic issues — we believe we’re in a very strong position to support this wave of growth.”

Standard bank’s recent trading statement indicates that its fortunes are improving. For the six months ending 30 June, the bank has forecast that headline earnings per share are expected to be more than 40% higher than in the same period last year.

Tshabalala said the recovery in the bank’s earnings signals improving economic conditions and sentiment. “We look at the various scenarios … We don’t believe that there is evidence to support a bearish view. But we are ready to confront it if it were to occur.

“There have been 4 000 years of pandemics. They all follow a similar pattern. And there’s no reason to believe this pandemic is going to be any different. And all the evidence supports an assumption that there will be recovery … There will continue to be waves, but we will conquer this.”