Sustainability financing: Clean energy vs fossil fuels

Sustainability financing: Clean energy vs fossil fuels “match” result is 81:100

According to research released on Tuesday, banks supplied 81 cents in financial support to low-carbon, clean energy supply for every dollar they provided to fossil fuels in 2021. However, if the world is to meet its climate targets, banks will need to significantly increase their pledges.

The world must invest $4 in renewable energy for every $1 in fossil fuels by 2030, according to several climate scenarios, in order to keep global temperature increases to 1.5 degrees Celsius above the pre-industrial normal.

Energy Supply Banking Ratio: Do banks finance clean energy enough?

BloombergNEF researchers have developed an “Energy Supply Banking Ratio” to analyze whether banks are financing energy projects that align with the global goal of limiting global warming to 1.5 degrees Celsius. The research involved analyzing data from 1,142 banks to understand how their financing aligns with the actual economy and climate targets.

The findings revealed that in 2021, banks provided a total of $1.9 trillion in funding for the energy sector, with $842 billion of this going to low-carbon energy projects and businesses, while just over $1 trillion went to fossil fuels. The ratio of financing between low-carbon and fossil fuel energy sources was 81 cents to $1, which is an improvement from the 2011-2015 ratio of 0.45:1.

Despite the progress, the report notes that the bank financing ratio falls short of the worldwide energy supply investment ratio, which is 90 cents to $1. This indicates that while low-carbon energy sources are growing in importance, there is still significant financing going toward fossil fuel projects.

The report highlights the need for increased investment in low-carbon energy projects to meet the global goal of limiting warming to 1.5 degrees Celsius. It also emphasizes the important role banks can play in driving the transition to a low-carbon economy by aligning their financing with climate goals.

Growth in the supply of low-carbon energy will continue

BloombergNEF CEO Jon Moore has stated that the underlying economics of the low-carbon energy supply means that its growth will continue to be sustained. Moore’s comments come as BloombergNEF reports a 15% increase in low-carbon energy supply investment in 2022. However, the report also notes that a rebound in fossil fuel investment is expected to counter the disruption caused by Russia’s invasion of Ukraine.

The report also highlights that financing ratios differed significantly between banks. For example, the Royal Bank of Canada had a financing ratio of 0.4, while JP Morgan had a ratio of 0.7. In contrast, BNP Paribas had a ratio of 1.7, and Deutsche Bank had a ratio of 2.2. These discrepancies are due to factors such as geographic focus, client bases, and business strategies.

Despite the differences in financing ratios, the overall trend toward low-carbon energy investment is positive. The report highlights that the growth of the low-carbon energy supply is likely to sustain due to the economics of renewable energy. The cost of renewable energy technologies continues to fall, making them increasingly competitive with fossil fuels. In addition, governments around the world try to set targets for renewable energy deployment. This should drive demand for low-carbon energy investment.

The report’s conclusions differ from those of another study, released last month by environmental organizations, which claimed that the proportion of bank finance going to clean energy had plateaued.

According to BloombergNEF, its investigation included financing from a far larger number of banks than prior studies.