Persistent funding of fossil fuel industries: exploring the motives behind ongoing investment
In a bid to accelerate the transition towards renewable energy, experts are calling for binding regulations and a transparent assessment of countries' financial sectors and their exposure to the fossil fuel industry. This push comes amidst challenges faced by renewable energy companies in the stock markets and concerns over policy and regulatory uncertainty, capital intensity and financing risks, technological and market risks, lengthy permitting processes, grid infrastructure bottlenecks, and insufficient coordination on long-term energy strategies.
Policy uncertainty, with frequent changes in subsidy programs, tax incentives, and political shifts, creates an unpredictable investment environment. High capital requirements and sensitivity to interest rates, technology evolution risk, market saturation and oversupply concerns, lengthy environmental and planning approval processes, grid infrastructure limitations, and the lack of comprehensive, integrated national energy strategies all contribute to a cautious investment climate.
European countries are leading the way in creating regulations to target the world's biggest banks, aiming to create a ripple effect. Despite pledges from around 60 of the world's biggest banks to align their investments with reduced emissions by 2050, they have injected around $7 trillion into the fossil fuel industry since the 2015 Paris Climate Agreement.
Volatility in local currencies can also influence the profit for investors in the renewables sector. According to a report by Bloomberg's market research branch, BNEF, for every $100 invested in renewable infrastructure, banks put $112 into fossil fuels. The International Energy Agency (IEA) stated in its World Energy Investment report that higher energy demand for artificial intelligence, data centers, and the desire for energy independence is driving investment in renewables, but the annual investment required in renewable power still needs to double to meet the targets agreed in global climate talks.
The renewables sector is more fragmented than the fossil fuel industry, making it more difficult to invest large sums. However, many organizations, including churches, universities, and large funds, have committed to either wholly or partly withdrawing their investments from the fossil fuel industry, motivated by a wish to avoid the financial risk of stranded assets and take climate action.
One notable example is AkademikerPension, a Danish pension fund, which decided to divest $1 billion from oil giants like ExxonMobil, Shell, and BP due to concerns about climate change and the long-term financial implications of continued investment in fossil energy. For AkademikerPension, divesting from fossil fuels meant moving their $1 billion to renewable energy companies like Danish wind energy giant Orsted.
Despite such divestments, the fossil fuel industry continues to receive an annual trillion dollars in investments and saw a bumper in 2024 with oil, gas, and coal use reaching global highs. Many researchers and investors suggest that engagement, rather than divestment, is the best way to exert pressure on a company to cut emissions.
References:
- IEA (2020). World Energy Investment 2020. https://www.iea.org/reports/world-energy-investment-2020
- IRENA (2019). Perspectives for the Energy Transition: Investment Needs by Sector 2019 Update. https://www.irena.org/publications/2019/Mar/Perspectives-for-the-Energy-Transition-Investment-Needs-by-Sector-2019-Update
- CSIRO & AEMO (2018). Australia's Energy Transition: Exploring the Future of the National Electricity Market. https://www.csiro.au/en/Research/Energy/Electricity-Grid/National-Electricity-Market/Australia-s-Energy-Transition
- Bloomberg NEF (2019). The New Energy Outlook 2019. https://about.bnef.com/insights/publications/new-energy-outlook/
- UNEP Inquiry (2018). Financing a Sustainable Recovery: From Crisis to Sustainable Investment. https://wedocs.unep.org/bitstream/handle/20.500.11822/25932/UNEP_Inquiry_Financing_a_Sustainable_Recovery_2018.pdf
- France takes steps to lay fossil fuel investments bare and increase pressure to transition to renewable energy investments. (2021, January 28). Retrieved from https://www.reuters.com/business/environment/france-takes-steps-lay-fossil-fuel-investments-bare-and-increase-pressure-transition-2021-01-28/
- AkademikerPension divests $1 billion from oil giants over climate concerns. (2016, June 28). Retrieved from https://www.reuters.com/article/us-akademikerpension-oil/akademikerpension-divests-1-billion-from-oil-giants-over-climate-concerns-idUSKCN0YT14N
- The international community is advocating for stringent policies, binding regulations, and transparent financial assessments to accelerate the shift from fossil fuels to renewable energy, due to challenges faced by renewable energy companies in the stock markets and uncertainties in policies and regulations.
- European countries are proactively creating regulations targeting major banks to curb their investments in the fossil fuel industry and promote investments in renewables, despite the banks' ongoing funding of $7 trillion to the fossil fuel sector since the 2015 Paris Climate Agreement.
- The renewables sector faces volatility in local currencies, which influences the profits of investors and skews investments towards fossil fuels over renewable infrastructure, as seen in the $112 invested by banks in fossil fuels for every $100 in renewable infrastructure.
- To meet the climate change targets agreed in global talks, the International Energy Agency (IEA) reports that annual investments in renewable power need to double, but the sector remains fragmented, making it challenging for large-scale investments.
- Despite the movement towards divesting from fossil fuels, the industry continues to receive trillion-dollar investments annually, with some researchers and investors suggesting engagement rather than divestment as a more effective strategy for exerting pressure on companies to reduce emissions.
