Week 4: Green or Greed? Banking, ESG Woes, and Renewables Rock!
Dear all,
The 60 largest banks in the world have provided a staggering $5.5 trillion in fossil fuel financing since the Paris Agreement. The total spent on fossil fuel subsidies in 2022 is $7 trillion. The money needed as annual investment in renewable energy by 2030 is $4.5 trillion. In 2022, governments issued more than $1.7 trillion in public money to support fossil fuels through subsidies, investments by state-owned enterprises and lending from financial institutions.
It explains a lot, but not all of it. According to Reclaim Finance, BlackRock, Invesco, and Vanguard are among the biggest investors backing the largest fossil fuel bonds in 2023. Using Bloomberg data as of September 2023, the NGO tracked new bonds issued this year by some of the biggest fossil fuel developers to raise capital. In total, 40 bond packages were analyzed, issued by 13 fossil fuel companies that helped raise a total of $45 billion on the bond market over the course of 2023.
The five biggest fossil fuel bonds were issued by BP ($2.25 billion), ConocoPhillips ($2.7 billion), Duke Energy ($2.15 billion), Eni ($2.12 billion), and Greensaif Pipelines Bidco – linked to Saudi Aramco ($3 billion), collectively raising more than $12 billion for the oil and gas giants. Global banks’ net-zero pledges have achieved nothing so far. 49 of the 60 banks mentioned in the report has net-zero commitments, but most are not paired with rigorous policies excluding finance for fossil fuel expansion. The policies contain many loopholes that allow banks to continue financing fossil fuel clients.
It is a choice. When you look at this, you might ask yourself why banks and financial institutions still do this? The simplest answer is: Funding fossil fuels still pays. A lot. The banks haven’t even had the gentlest of slaps on the wrist from the stock markets for this. On the contrary, they get awarded for it.
Apostasy is all about money
In the last six months, launches of funds emphasizing environmental, social, or governance (ESG) factors have significantly declined due to investor hesitancy amid heightened scrutiny of sustainability claims. Only six such funds were launched in the latter half of 2023, a stark contrast to the 55 launched in the first half and the annual average of nearly 100 between 2020 and 2022, as per Morningstar Direct data. Notably, some funds have even removed ESG labels from their names.
Major asset managers, including Abrdn, have announced plans to remove ESG-related phrases from certain funds, with Abrdn dropping "sustainable leaders" from two funds in February. Morgan Stanley and UBS similarly abandoned ESG-oriented labels in the past year. This trend aligns with the increasing regulatory, political, and client scrutiny faced by ESG strategies.
While ESG broad-market funds generally outperformed traditional counterparts in 2019-2021, their performance declined in 2022 and 2023, as noted by Morningstar. The shift in investor sentiment is attributed to various factors, including performance concerns and political criticism in the US, where some financial firms have been accused of being too environmentally conscious and socially aware.
Apart from the slowdown in sustainable fund launches, over 120 other funds underwent renaming or strategy updates to incorporate ESG factors between January 2018 and late 2023, according to Morningstar data. Despite recent struggles, Alyssa Stankiewicz, Morningstar's associate director of sustainability research, highlighted that ESG funds faced significant outflows in 2023 primarily from a single ETF, BlackRock’s iShares ESG Aware MSCI USA ETF (ESGU).
Abrdn's two funds, post-label removal, will still consider significant ESG factors in their security selection, emphasizing business model durability and financial strength. Meanwhile, their other two sustainable leaders funds will retain the label.
90 percent misalignment
A recent ECB study reveals alarming statistics, shedding light on how systemic destruction is being funded. Among the 95 banks assessed, a mere 8 were found to have lending practices aligned with a 2050 net-zero pathway, indicating that a staggering 90 percent of the assessed banks are misaligned.
The ECB's assessment focused on transition risks in the credit portfolios of these banks, which collectively cover 75 percent of euro area loans. Using an 'alignment assessment' methodology, the study measured the disparity between companies' production projections and decarbonization pathway targets within the banks' portfolios.
Examining companies in six high-carbon sectors – Power, Automotive, Oil & Gas, Steel, Coal, and Cement – responsible for 70 percent of global CO2 emissions, the report revealed a significant source of transition risk. Banks tended to provide larger loans to misaligned companies, resulting in a substantial exposure difference. On average, a bank's exposure to a misaligned counterparty was more than double that of an aligned one, with misaligned counterparties having an average exposure of €94 million compared to €45 million for aligned ones.
This implies that banks are more heavily financing misaligned counterparties than those aligned with sustainability goals. The report also highlighted the potential impact on the profitability of these counterparties due to direct and indirect increases in carbon-related costs. Such pressure could stem from either a slow phase-out, leading to reduced economic value of assets, or a slow build-out, resulting in a loss of competitiveness compared to faster-progressing corporations.
It's essential to note that, regardless of their overall portfolio alignment rates, banks aligned with sustainability goals may still face heightened transition risks. This is because specific subsets of their counterparties and portfolios within certain sectors may exhibit significant misalignment, as demonstrated by variations in alignment between build-out and phase-out technologies in some corporations. You can find more on this here.
Swedish staggering and “hidden CO2” emissions
Sweden is considered a "leader" in climate transition, but a recent report by the Nature Conservation Association and Fair Finance Guide shows that Swedish banks' climate emissions are double the country's national emissions.
Shockingly, the five largest Swedish banks' operations cause carbon emissions equivalent to 100 million tonnes of CO2 per year. A significant portion of these emissions is attributed to the banks' lending to oil and gas industries.
SEB is highlighted as the bank with the most significant climate impact due to its comparatively large lending for oil and gas extraction, including in Norway.
Coal AI
AI's voracious energy consumption is yielding unexpected consequences in the energy sector. Forecasts predict a threefold increase in electricity usage at US data centers by the decade's end, leading to the retention of coal plants slated for retirement. Despite the preference of numerous tech and clean tech entities for renewable energy, the actual energy demands of AI are proving to be more substantial than initially envisioned.
Sam Altman, CEO of OpenAI, emphasized the underestimated energy needs of AI technology at the World Economic Forum, acknowledging the complexity of balancing AI demands with sustainability objectives. Power companies are grappling to meet the escalating requirements of data centers and new factories, exacerbating the strain on an already stressed national grid. The surge isn't solely attributed to the proliferation of data centers; the Biden administration's push to establish factories for electric cars, batteries, and semiconductors further burdens the electricity grid.
The intricate network often dubbed the world's largest machine comprises regional grids with insufficient transmission lines, hindering the seamless integration of power from wind and solar farms. To address this surge in demand, some power companies are reconsidering plans to decommission fossil fuel-burning plants. Some have even sought regulatory approval to construct new gas-powered facilities.
Consequently, President Joe Biden's initiative to support eco-friendly industries may inadvertently contribute to short-term emissions increases. Without increased generation and improved connectivity for independent renewable farms, the situation could escalate, warns Ari Peskoe, director of the Electricity Law Initiative at Harvard Law School, potentially stalling economic growth and retaining outdated fossil-fuel capacity.
Nuclear Future
Global nuclear power generation is anticipated to reach a historic peak next year, marking a resurgence in the technology and a significant contribution to reducing carbon dioxide emissions, as per the latest projections from the International Energy Agency (IEA). The IEA forecasts a roughly 3 percent increase in output from nuclear power plants this year and the next, reaching 2,915 TWh, surpassing the prior peak of 2,809 TWh in 2021. Additionally, a further 1.5 percent growth is predicted in 2026.
This upswing is attributed to the development of new reactors in China and India, alongside the reactivation of plants in France, which were temporarily closed for maintenance last year. The IEA's report on global electricity markets emphasizes that the expansion of nuclear power, coupled with the rapid growth of renewables like wind and solar, is contributing to the displacement of fossil fuels from the electricity system.
The IEA anticipates that the rising demand for electricity in the coming years will be met predominantly by low-emission sources. It projects the share of global supply from fossil fuel generators to decline to a record low of 54 percent in 2026. IEA Executive Director Fatih Birol highlighted the power sector's current status as the leading emitter of carbon dioxide and expressed optimism about these trends.
The growth in nuclear power until 2026 is expected to be concentrated in China and India, collectively accounting for over half of the projected 29 GW of new capacity. China, in particular, has experienced rapid growth in nuclear technology, increasing its global share to 16 percent from 5 percent in 2014. The country aims to further boost its installed capacity from approximately 56 GW to 70 GW by 2025. The IEA also notes the increasing influence of China and Russia in the nuclear sector, with the two countries providing technology for 70 percent of reactors currently under construction.
Albert Einstein & Symbolic Doomsday Clock
Founded in 1945 by Albert Einstein and other pioneers of the first atomic weapons, the Bulletin of the Atomic Scientists serves the mission of educating the public on potential global threats. Each year, the Bulletin updates the symbolic Doomsday Clock to symbolize human-created dangers it deems existential, covering areas such as nuclear war, biothreats (e.g., Covid-19), artificial intelligence, and the climate crisis.
The setting of the clock's hands, with midnight signifying the apocalypse, is determined annually by the Bulletin's science and security board, with support from its board of sponsors, which includes 10 Nobel laureates.
In their 2024 announcement, the Bulletin cited various global threats that influenced their decision, encompassing the Russia-Ukraine war, the deterioration of nuclear arms reduction agreements, the climate crisis (underscored by 2023 being officially recognized as the hottest year on record), the heightened sophistication of genetic engineering technologies, and the significant advancement of generative AI. The latter, in particular, is identified as a potential amplifier of disinformation, posing challenges to resolving larger existential issues by corrupting the global information environment.
The Empire of Sun and Coal
In 2023, China surpassed a remarkable milestone by installing more solar panels than the entire historical deployment of the United States. The nation added a substantial 217 GW of solar capacity and 76 GW of wind energy, reinforcing its position as a global leader in renewable energy. Specifically, China's solar additions amounted to 216.9 GW, surpassing the 2022 record of 87.4 GW, as reported by the National Energy Administration. This figure eclipses the entire US solar fleet, estimated at 175.2 GW by BloombergNEF.
The surge in clean energy adoption in China, despite being a major polluter, played a pivotal role in driving global renewable energy adoption to a record-breaking 510 GW in the preceding year, according to the International Energy Agency. This positive trend aligns with the trajectory needed to achieve the targets set at the COP28 climate summit, aiming to triple renewable power by the end of this decade.
China likely accounted for a substantial 58 percent of global solar installations and 60 percent of global wind installations in the same period. However, it is noteworthy that China continues to expand its extensive network of coal-fired power stations, constituting around 59 percent of the country's electricity generation. Authorities argue that these new coal plants are essential as backups for intermittent solar and wind generation, asserting that coal consumption will decrease starting in 2025.
Despite the ongoing reliance on coal, there was a significant increase in thermal generation capacity by 57.93 GW in the past year. The surge in solar and wind installations was partly fueled by substantial cost declines, driven by intense competition among manufacturers, resulting in record-low prices for panels and turbines in China.
That’s all for this week!
Best regards,
Sasja