Financing the transition: Energy supply investment and bank financing activity

Investment in low-carbon energy supply must scale dramatically in order to limit global temperature rise to 1.5C. At Bloomberg, research from its strategic research provider BNEF has shown a need to quadruple low-carbon financing relative to fossil fuels. How can the largest banks develop strategies to scale clean energy finance and help enable the energy transition?

At Bloomberg’s Sustainable Finance Forum, the panel “Financing the Transition,” moderated by Katrina White, Sustainable Finance Associate of BloombergNEF addressed these questions. Panelists included Rob White, Managing Director and Head of Green and Sustainable Hub at Natixis, Val Smith, Chief Sustainability Officer at Citi, and Richard Brooks, Climate Finance Director at Stand.earth.

Tackling the question of the funding shortfall, Richard Brooks noted that too much money is going into fossil fuel companies and not enough is going into low carbon solutions, including renewables. “As an advocacy group, my role is to hold banks and other financial institutions accountable,” Brooks said. “But ultimately, it’s up to financial institutions to make the decision: Do they want to be on the wrong side of the equation or on the right side of the equation?”

Speaking from the banking side, Val Smith explained, “Activist groups want us to do less financing of certain carbon intensive sectors, but when you think about what motivates a bank, apart from enabling regulation and public policy and markets, it’s the opportunity space. The idea of challenging financial institutions on the transition, but also assessing what are you doing to meet the energy and electricity demands tomorrow.”

In 2021, Citi announced a goal of putting $1 trillion into sustainable finance. “We’ve established a set of green criteria, a set of social criteria, and increasingly we see transactions that are checking both boxes,” Smith said. “So far, we have counted about $349 billion over three years and we give voluminous reporting about exactly what types of products are counting toward the goal. It shows the entire breadth of the financial services industry and how we intend to bring about the climate transition.”

Natixis has also been active on the sustainable finance front, with a focus on renewable energy.

“Each year for the past three years, between 80 and 90% of our energy generation financing is in renewables,” White said. “In our oil and gas exploration and production portfolio, we’ve got a target to reduce that by 15% by the end of 2024. We’re well on track to hit that and there are undercurrents leading to further growth in renewables, including the helpful regulatory environment we’re seeing now.”

Of course, at the further extreme, some people maintain that we do not need more fossil fuel expansion at all. “When you line these projects up, they’re going to run for 30 to 40 years,” Brooks stated. “If we’re projecting a decrease in oil and gas usage to get to net zero by 2050, to half emissions by 2030, it doesn’t make sense to build out billions of dollars in new fossil fuel projects.”

However, Smith advocates for taking a dual focus on the targets. “Looking at the IEA Net Zero Emissions (NZE) 2050 scenario, we’ve now set 2030 emissions targets for six sectors. The IEA NZE also says that we need to have 90% of our electricity generated from renewable sources by 2050, so I think about financing clean energy solutions and meeting our 2030 emissions targets at the same time.”

White agreed on the need for this duality. “We have our net zero banking alliance targets and then for certain sectors, we do have a hard ban – we will not do coal, shale oil, or gas. We also have a firm 50% reduction of our total balance sheet exposure to exploration and production from the oil and gas sector,” he said. White noted that many oil and gas bankers are now becoming hydrogen experts and Natixis has led a number of hydrogen IPOs in Europe. “So, it’s not just renewables. New energies are coming on board that will also require a lot of financing,” he said.

The role of advocacy is clear in driving change further and faster than financial opportunity  might alone. “We have more than 200 financial institutions who have established coal exclusion policies because advocacy groups are doing their work, shining spotlights on the impacts of these projects, on water, air, citizens, and indigenous communities,” Brooks stated. “They are bringing that information to the banks and saying, “What are you going to do about this?””

The dialogue also encourages banks to do more internally. “The kinds of engagements that we’ve had help our own due diligence and understanding the perceptions of what our clients are doing. Sometimes they provide information that we need in order to be good risk managers,” she said.

White concluded, “It’s that engagement between civil society, banks, and NGOs that provides a deep level of transparency in what are often very large, complex organizations. It can help focus attention on challenging topics, enhance methodologies, and provide additional data. When all of that comes together, regardless of the final outcome, you will often have a much better toolkit in the end.”