The eventual death of oil and thermal coal won't come from environmentalists or even directly from renewable energy—it will come when big banks decide to stop financing it, rendering it 'unbankable'.
Two years ago, one of the biggest financiers of fossil fuels, Goldman Sachs (NYSE:GS), made history after becoming the first big U.S. bank to rule out financing new oil exploration or drilling in the Arctic, as well as new thermal coal mines anywhere in the world.
GS' environmental policy declared climate change as one of the "most significant environmental challenges of the 21st century" and pledged to help its clients manage climate impacts more effectively, including through the sale of weather-related catastrophe bonds. The giant Wall Street bank also committed to invest $750 billion over the next decade into areas that focus on climate transition.
Months later, the world's largest asset manager, BlackRock Inc. (NYSE:BLK), declared its intention to increase its ESG (Environmental, Social and Governance) investments more than tenfold from $90 billion to a trillion dollars in the space of a decade.
BlackRock followed that up last year, issuing a chilling update on its approach to engaging with companies, essentially saying it will abandon its traditional modus operandi of siding with boards of directors at companies but will instead start favoring shareholder resolutions.
But just in case investors thought these companies were playing their usual renewable energy lip service, there's now solid evidence that they actually mean business.
For the first time ever, the world's largest investment banks are backing renewable energy investments more than their fossil fuel brethren.
According to Bloomberg data covering almost 140 financial-service institutions worldwide, at least $203 billion in bonds and loans have gone into renewable projects through May 14, compared with $189 billion to businesses focused on hydrocarbons.
That marks the first time in the history of modern fossil fuels that such a shift is occurring.
A Powerful Tipping Point
How significant is this development?
Consider that in 2019, banks invested $737B in fossil fuels but only $238B in clean energy. The trend remained unchanged in 2020 at the height of the pandemic, with banks pumping $688B into fossil fuels but only $323B in renewables.
Since 2015 when the world agreed to limit warming temperatures in the Paris Climate Accord, banks have poured more than $3.6 trillion into fossil fuel investments, nearly 3x more than total bonds and loans that have gone into green projects as per Bloomberg data.
Cumulatively, investment banks have pocketed ~$16.6 billion from arranging bonds and loans for energy companies since the Paris agreement compared to just $7.4 billion garnered from green bonds and loans.
The latest development could very well be a new trend in the making, with some clean energy buffs declaring that we have reached 'a powerful tipping point' in the clean energy transition.
Early this year, U.S. oil giant Exxon Mobil Corp. (NYSE:XOM) was targeted by angry activist investors as well as CalSTRS (California State Teachers' Retirement System), one of the country's largest pension funds.
But it did not stop there.
New York State's $226 billion pension fund recently announced plans to divest from oil and gas stocks in the coming years.
Exxon has been slammed for its half-hearted commitment to lowering its carbon and greenhouse gas emissions.
Exxon has joined the rapidly growing number of U.S. oil and gas producers that have promised to cut greenhouse gas emissions. Unfortunately, activists and analysts have mostly lambasted Exxon's announcement as "underwhelming," "inadequate," and "baby steps."
"A 15%-20% reduction in greenhouse gas emissions intensity over nine years is not an ambitious target - it's essentially business as usual," said Raymond James energy analyst Pavel Molchanov.
"What's really lacking from [Exxon's] announcement is there's nothing about capex or strategy or investment. It's all sort of tinkering around the edges," said Andrew Logan, director of oil and gas at Ceres, a sustainability nonprofit that works with investors on climate change.
Meanwhile, Engine No. 1, one of the shareholder groups engaged in an activist campaign to shake up the company, has concurred, saying, "...while reducing emissions intensity is important, nothing in Exxon Mobil's stated plans better positions it for long-term success in a world seeking to reduce total greenhouse gas emissions."
Also, Ceres has announced a consortium of investors managing $9 trillion in assets that has fully committed to investing along net-zero carbon goals.
Indeed, there's no denying that ESG investments are rapidly gaining momentum, with investors actively demanding environmentally and socially responsible choices.
Indeed, over the past half-decade, ESG (Environmental, Social, and Governance) investing has emerged as the single biggest global megatrend. Even the Big Banks are feeling the ethical squeeze keenly.
ESG inflows have been killing it this year, hastened exponentially by the COVID-19 pandemic, and showing no sign of backing off even once we have a vaccine. Life will not return to normal in the world of finance, and this is shaping up to be the biggest transfer of wealth we've ever seen.
Sustainable investing assets now total $17.1 trillion. That's up 50% just from 2018.
Within a year, 77% of institutional investors will completely stop buying products that aren't in some way sustainable, according to PwC.
Blackrock itself says its clients will double their ESG assets in just five years.
In fact, money managers say climate change is their No. 1 concern and the "leading criteria" determining where they put their money to work.
And this isn't about morals or ethics. It's about the free market.
By Alex Kimani for Oilprice.com
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