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Finance dries up for coal, but flows on for oil and gas

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  • Jun 2, 2020

The early months of 2020 were notable for the number of major announcements by investment managers putting the climate crisis at the forefront of their policies. Clearly, some parts of the investment industry see the danger ahead, but more and faster action is needed to avert disaster. The G7 could lead the way by putting its $100 billion a year support for fossil fuels to better use


FOSSIL FINANCE The world’s largest investment funds have provided $713.3 billion in loans, equity issuances and debt underwriting services to fossil fuel projects from 2016 to mid-2019, all of it since the 2015 Paris Agreement

MARKET SHIFT Driven by fears of stranded assets and catastrophic climate change, the investment industry is starting to step away from fossil fuels and other environmentally damaging activities. One of the most notable announcements in the first months of 2020 was a declaration by New York-based BlackRock, the world’s largest investor in fossil fuels, that it will start aligning its $7 trillion fund with the Paris Agreement

KEY QUOTE Greenhouse gas emissions will determine where capital is flowing, influenced by public opinion, pressure and government policy. As climate concern moves from the periphery of investor thinking to the mainstream it will drive the transition and associated jobs

A profound shift away from the global financing of fossil fuels is beginning, but much remains to be done. The developed world may be reaching a tipping point as governments, investment and insurance institutions flee the climate and financial risk of coal and to a lesser degree oil and gas. But in the newly developed world the trend has barely started, notably in countries such as China, home to half the world’s coal emissions, or India, another leading emitter. Turning off the spigot of fossil fuel financing will be no easy matter.

“Is it one single thing or is it many different levers none of which will do the work alone? It is like slowly turning a huge tanker 180 degrees — we may only be turning one degree a year and that is too slow. There is no one silver bullet,” says Michael Mehling of the Massachusetts Institute of Technology (MIT), who has advised the European Commission, the OECD and the World Bank on energy issues.

The first few months of 2020 saw major announcements regarding fossil fuel investments, even among US financiers, hardly known for their radical views. New York-based BlackRock, the world’s largest investor, said it will start aligning its $7 trillion fund with the Paris Agreement. As an asset manager, it will eject all companies from its actively managed portfolios that get 25% or more of their profits from coal used in power plants, stated CEO Larry Fink on the eve of the World Economic Forum in Davos, Switzerland. “Climate change has become a defining factor in companies’ long-term prospects,” he wrote.

Equally weighty were comments in Davos from Mark Carney, then governor of the UK central bank, the Bank of England, and now the UK Prime Minister’s climate advisor. Greenhouse gas emissions are no longer a niche investment issue, said Carney. “[They] will determine where capital is flowing, obviously influenced by public opinion, pressure, and government policy as well. But that moving from the periphery to absolutely the mainstream is what is going to drive transition, and might I add jobs.”

On the same theme, after meeting investors in Davos, Allianz CEO Oliver Bäte said he would try to get the Net-Zero Asset Owner Alliance, a group of insurers and pension funds seeking carbon-neutral investment portfolios by 2050, to double its commitment of $2.4 trillion by mid-century in low carbon products. Sovereign wealth funds, such as Norway’s, the world’s largest and based on oil and gas, should follow suit, said the insurance leader.

In February, BP vowed to become a net zero company by 2050, slashing emissions from its oil and gas production, halving the carbon intensity of its products, measuring methane emissions from its major oil and gas processing sites by 2023 and halving the methane intensity of its operations. Additionally, the company said it will lobby for carbon taxes globally and launch a new team to “help countries, cities and large companies decarbonise”. Until the company reveals its strategy and near-term plans to make good on this commitment in September, it is difficult to assess whether the announcement is “a watershed moment or a whitewash,” says Kathy Mulvey, from the Union of Concerned Scientists, an NGO.



The campaign to pull investor assets out of fossil fuels, launched by students as a moral call to climate action in 2011, has become a mainstream financial movement, mobilising trillions of dollars in support of the clean energy transition, says Arabella Advisors, a philanthropic consultancy. In September 2019, the University of California announced plans to divest its $83 billion in endowment and pension funds from fossil fuels, sending ripples throughout US higher education. At the end of 2018, nearly 1000 institutional investors in 37 countries with $6.24 trillion in assets had committed to divest, up from $52 billion four years earlier. The trend is led by insurers, pension funds and sovereign wealth funds, with the insurance sector heading the pack, having committed to divest over $3 trillion in assets.

Brian Moynihan, CEO of Bank of America, the world’s ninth largest bank as measured by assets, insists investment in oil and gas must continue to enable these companies to be part of the climate change solution. “We should lend to those companies to help them make progress faster, rather than divest from them,” he says.

Supply side policies to reduce financing are “nowhere near there” for fossil fuels, stresses MIT’s Mehling. Government support for fossil fuels from G7 members totals more than $100 billion a year, says Han Chen, international energy policy manager at the National Resources Defence Council (NRDC), a US NGO. This considerable sum is despite pledges to end such subsidies by 2025. China, the world’s largest financier of coal, is not a G7 member.

Government fossil fuel subsidies are very inefficient environmentally and fiscally, says Tyeler Matsuo, a senior associate in global finance at the Rocky Mountain Institute (RMI), a not-for-profit organisation. A coal-fired power plant producing electricity at greater cost than renewable energy may be financed instead of a renewables plant simply because of vested interests, she points out.

The world’s largest investment banks have provided $713.3 billion in loans, equity issuances and debt underwriting services to fossil fuel projects from 2016 to mid-2019, that is since the Paris Agreement, shows data published in October 2020 by the NGO Rainforest Action Network (RAN). Wall Street’s JPMorgan Chase is the worst offender with $196 billion in fossil fuel investment since Paris (to 2019).

This money has helped the global coal power fleet continue its expansion, particularly in China and the rest of Asia, reveals International Energy Agency (IEA) data released in March 2019. Driven by higher energy demand in 2018, emissions from all fossil fuels increased, with the power sector accounting for nearly two-thirds of all greenhouse gas growth that year. China, India and the US accounted for 85% of the increase, with emissions declining in the US and also Germany, UK, France, Japan and Mexico. Global emissions of CO2 from fossil fuel combustion were flat in 2019, mostly due to a sharp decline in power sector emissions in advanced economies show figures released in February 2020 by the IEA. Global coal emissions declined by 200 million tons of CO2 – a 1.3% decline, says NRDC’s Chen, but oil and natural gas emissions rose.

While the social and economic lockdown measures introduced to tackle Covid-19 caused significant falls in emissions, much more drastic, and sustainable, reductions are needed if the world is to meet the commitments of the Paris Agreement. Most scenarios, including by the UN Intergovernmental Panel on Climate Change (IPCC), show coal emissions must fall by around 80% this decade to hold warming at no more than 1.5°C above pre-industrial levels — double the reduction rate required for oil or gas. The proportion of energy coming from oil must decline by 37% by 2030 and by 87% by 2050 for most 1.5°C scenarios, with the percentage of energy from gas in 2030 declining by 25% from 2010 levels and by 74% by 2050, adds Chen.




For the last decade, G7 and G20 countries and most multilateral development banks have vowed to phase out fossil fuel subsidies and have made related commitments under the UN Sustainable Development Goals and the Paris Agreement, but progress is variable. In November 2017 at the COP23 climate summit, the UK and Canada launched the global Powering Past Coal Alliance of 100 nations, cities, regions and organisations. Missing from this group were China, India and the US — the three most populous nations and the highest consumers of coal globally. António Guterres, UN Secretary-General, in mid-2019 called for all nations to end all new coal by 2020.

Coal appears to be on the way out. More coal power plants globally were retired in 2018 than were authorised for perhaps the first time since the industrial revolution, shows the IEA’s latest world investment report, with the number of new coal plants approved for construction tumbling by 75% from 2015-2018. Insurers will increasingly not write policies for coal mines or coal-fired power stations — or will only renew existing business. Insurers and reinsurers who have made moves away from coal in power plants include major players such as Munich Re and Swiss Re. The trend does not apply to metallurgical coal used for steelmaking, but to thermal coal for power plants and heating buildings.

Coal is not only dirtier than oil and gas in terms of emissions, it is pricey and can be easily replaced by cheaper renewable energy. Phasing out coal is “a no-brainer”, says Steve Herz, a climate and energy strategist at Sierra Club, a grass roots environmental organisation. The end of coal is a given because renewables are so cheap, he says. “The question is over what time scale. Will the world transition away from coal before huge climate damage is done?” he asks.

Europe is furthest ahead in pulling out of coal, apart from laggards such as Poland. Fast-growing China is bucking the trend and propping up coal. But the latest BP Statistical Review of World Energy shows the country is not necessarily the worst offender. In 2018, China’s per head coal consumption of 1.37 million tonnes of oil equivalent (MTOE) was well behind Estonia’s 3.49 MTOE and Kazakhstan’s 2.23 MTOE.

Growth in the use of coal in developing countries is also happening, with China, South Korea and Japan sending foreign aid to fund coal projects, often with the desire to export heavy equipment. Japan’s Mitsubishi, which is easing out of owning and financing new thermal coal capacity in its home market, can sell equipment for a single coal-fired plant for as much as $0.5 billion to a developing country, says NRDC’s Chen.

Between 2008 and 2016, China, South Korea and Japan supported the building of more than 130 gigawatts of coal power capacity elsewhere in Asia and in Africa, the equivalent of France’s entire generating capacity, stated Christiana Figueres, former executive secretary of the UN Framework Convention on Climate Change, in mid-2019. Some 40% of China’s coal plants are loss-making and the country could save up to $400 billion if it phased out coal in line with the Paris Agreement, added Figueres, now with Mission 2020, a global climate action campaign.

Coal is increasingly a poor investment. The Dow Jones US Coal Index has plummeted in the last nine years, says Herz. Corporate coal-related bankruptcies are proliferating. As of October 2019 in the US, 11 coal companies had filed for bankruptcy since the pro-coal President Donald Trump took office in January 2017, including Murray Energy, the largest private US coal miner.




Replacement of oil and gas with cleaner commodities is more complicated than replacing coal, says Herz. They are cheap, remain widely used and are hard to replace in industries such as petrochemicals. Nonetheless, the oil and gas sector is not in great shape either, says Tom Sanzillo, director of finance at the Institute for Energy Economics and Financial Analysis (IEEFA). He previously oversaw a $156 billion pension fund and $200 billion municipal bond programme for New York State. The sector used to be the main contributor to corporate financial returns globally, but in the last ten to 12 years, energy in the US, consisting mainly of oil and gas, has dropped to last place in the S&P 500 Index. Declines in the stock prices of these companies are likely to continue as profits fall in the short and long-term, adds Sanzillo. In early February 2020, shares of Exxon Mobil, the world’s largest publicly listed oil and gas company by market capitalisation, slid to a nearly ten-year low because of plummeting oil prices. The coronavirus pandemic has only added to the volatility by drastically reducing oil and gas demand and consumption, in the short-term at least.

Even Norway’s $1.1 trillion sovereign wealth fund is baulking at relying too much on oil and gas revenue in its most recent 40-year outlook, says Sanzillo. In October 2019, Norway’s government announced the fund would divest from $5.92 billion of companies dedicated to oil and gas exploration and production to shield itself from a long-term fall in oil prices.

Fracking, the extraction of oil and gas compressed in rock, is also proving to be a poor prospect financially. In 2019, the US, the largest producer of shale oil and gas by far, saw 42 bankruptcy filings among shale explorers and producers involving nearly $26 billion in debt, even though production was soaring. This number was double the $13 billion in bankruptcy-related debt in the sector filed a year earlier, says the IEEFA.

Financiers are finding that Arctic exploration for oil and gas has been an unexpectedly pricey proposition despite vast reserves. In the US, because of tight environmental regulations from former US President Barack Obama, vociferous opposition from NGOs and the public, bad weather and a remote location, Royal Dutch Shell pulled the plug on its Arctic venture in the region in 2015. JPMorgan Chase remains the biggest banker of Arctic oil and gas, followed by Deutsche Bank and Japan’s SMBC Group. Others are pulling out as the pressure mounts. In December 2019, Goldman Sachs said it would halt future financing of Arctic oil drilling or exploration. Nonetheless, financing for this sub-sector increased from 2017 to 2018, says RAN.




The financial exodus from coal is no passing fad. In the first six weeks of 2020, 126 significant money institutions around the world — banks, insurers and asset managers — announced new restrictions or exclusions for coal mining and/or power generation.

“We have had lots of success in getting financial institutions out of coal — that could be replicated for oil and gas,” says NRDC’s Chen. But even a more modest exit from oil and fossil gas financing will take longer and be far more complicated than for coal given that major oil and gas companies are so powerful politically and are among the largest firms globally in terms of capital investment.

Energy emissions can be reduced by the electrification of oil and gas heating and oil-driven transport, as well as reducing energy wastage. But all countries need to act and this is still far from being the case. “Tell that to Alberta, the Dakotas and the Gulf countries,” says Mehling, referring to the oil and gas industry in Canada, a major US shale producing region in the US, and the Middle East oil economies.


Pressure on three levers is needed to turn off the finance spigot to oil and gas, says György Dallos, an economist with Greenpeace.

First, regulation, incentives and subsidies to limit fossil fuel use must be imposed or improved, voluntary agreements are inadequate, he says. And this change is starting. In late 2019, the Bank of England unveiled plans for a mandatory across-the-board climate risk “stress test” for major UK banks and insurers starting in 2021. France’s financial regulator also in 2019 announced it would require banks and insurers to carry out climate change stress tests starting in 2020, having been legally required to report climate risks since 2016. The European Central Bank is considering doing the same.

But even in Europe, where the will to take climate action is strongest, challenges to legislation are widespread, as demonstrated by the “yellow vest” riots that rocked France in late 2018 when petrol taxes were hiked. Even when implemented without popular dissent, policy change may not have the intended impact. Despite Sweden’s high carbon price for the transport sector of around $130 a tonne, vehicle emissions have only decreased modestly, says Mehling, in part because of the trend for gas guzzling SUVs.

Other regulatory solutions could include allowing the securitisation of coal plant retirements with low-cost publicly backed bonds, allowing owners to pay off debt more quickly and cheaply when a plant is retired. Owners could also receive public compensation through a system of “pay to close” coal plants, says RMI’s Matsuo. Likewise, renewable energy projects could be derisked by development finance institutions providing a full or partial guarantee that a utility will honour power purchase agreements. These institutions could likewise provide capacity building and training or help create technology quality standards, she says.

A second lever that must be pushed requires entire financial sectors to face up to the risks posed by fossil fuel investments and transition away from them. Banks, insurers, and asset owners and managers are getting the message, but credit rating agencies, auditors and proxy advisors that vote at shareholders meetings are especially wary of major change, says Dallos, adding that divestment discussions are also crucial for the transition. Acknowledgement of climate risk in financial markets must be followed by disclosure of the risk, agrees Mehling.

Third, financial players must be pressured to divest by civil society, a potentially effective tack because just a handful of companies are linked to a large proportion of all emissions, meaning successful campaigns could ensure vast emissions reductions.


TEXT Ros Davidson

This article comes from the spring 2020 edition of the FORESIGHT Climate & Energy magazine: Getting the finance to flow
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