Investments’ Environmental Impacts from Energy Financing

Sarah Simon

11 min Read Time | August 10th 2021

Key Takeaways

Financial institutions finance companies in the non-renewable or renewable energy sector, having a positive or negative impact on the environment and climate change. When assessing the impact of investments, make sure to focus on the amount invested and in which value chain.

Assess the negative or the positive impacts on the environment and climate to contextualise the impact (i.e. CO2 emissions, coal & oil yearly production capacity, the share of fossil fuel or renewable energy in a company’s portfolio).

Make sure the readers are able to clearly identify the scale by providing the number of funds injected in the sector, what the invested companies produce and how much, and their emissions’ weight (if available) or the renewable energy generated.

What is it?

The energy sector is an all-embracing term describing a “complex and inter-related network of companies, directly and indirectly, involved in the production and distribution of energy needed to power the economy.” These companies embark on the exploration and development of renewable and non-renewable energy.

Non-renewable energy includes oil, natural gas, diesel and coal among others. On the other hand, renewable energy includes hydropower, biofuels, wind power & solar power. The global primary energy consumption is still over-reliant on non-renewable sources, accounting for 84.3%. Whereas, around 15.7% (including nuclear) comes from renewable or low-carbon sources.

In this optic, financial firms engaging in energy financing can choose to invest in different value chains. In other words, they can finance the renewable energy sector or the non-renewable energy sector, or both. Ultimately, financing the renewable sector keeps the environment healthy, by reducing carbon dioxide (CO2) emissions, which is the leading GHG component fostering climate change. Moreover, renewable energy is infinite unlike traditional fossil fuel sources, which will run out sooner or later, i.e., oil will finish in 30 years, coal in 70 years, and gas in 40 years.

The Paris Agreements were passed to limit global warming below 2°C compared to pre-industrial rates. This is achievable by limiting the emissions from greenhouse gasses, and, for instance, further expanding the fossil fuel sector. Nonetheless, within the first five years after the Paris deals, the top 60 global banks injected over US$ 3.8 Trillion into the fossil fuel sector (2016-2020). Conversely, from 2016 to 2019 (latest available data), the global investments in the renewable sector amounted to $1.22 Trillion.


If you are unsure about debt financing and equity investments, please refer to this guide.

Sources
https://www.investopedia.com/terms/e/energy_sector.asp
https://morningconsult.com/2021/03/24/banks-fossil-fuels-financing-report/
https://buycleanenergy.org/why
https://mahb.stanford.edu/library-item/fossil-fuels-run/
https://ourworldindata.org/energy-mix
https://www.statista.com/statistics/186807/worldwide-investment-in-sustainable-energy-since-2004/

Impact assessment

Know The Difference

Renewable Energy Investments

These investments can be made through Green Bonds and regular bonds. Green bonds, specifically, are used to fund projects having a positive impact on the environment and climate change. The World bank issued the first bonds of this kind in 2009. Theyenable capital-raising and investment for new and existing projects with environmental benefits. The Green Bond Principles (GBP) seek to support issuers in financing environmentally sound and sustainable projects that foster a net-zero emissions economy and protect the environment.

Fossil Fuel Investments
They are the opposite of green bonds. Investments in this sector sponsor and facilitate the expansion of oil, coal, gas, petroleum, which are all known to have very severe effects on the climate.


Caution

The analysis should ideally tackle one aspect, either renewable energy or fossil fuel finance + their impact (i.e. from green bonds: renewable energy generated and CO2 emissions avoided yearly; from fossil fuel: CO2 emissions generated, non-renewable energy generated, amount of coal, gas, etc. produced)




Ideally, the introduction should try to capture:

  • Which value chain and impact (+/-) is the note analysing? In other words, is the financial institution funding the fossil fuel (non-renewable) or renewable energy sector?

Example:
“In 2019, fossil fuels, including coal, oil, and natural gas, represented 84.3% of the global primary energy use (173.3 Bn MWh)1.”
“In 2019, the global renewable energy investment was USD282.2 billion (Bn)1. Renewable energy helps to reduce CO2 emissions, thereby minimizing the effects of climate change2. That same year, about 184,000MW of clean energy was generated worldwide11.”

  • What is the relevance of this analysis from an environmental perspective?

Example:
The global energy system needs a fast transition towards renewable sources of energy to meet the Paris Agreement's goal of limiting the average global temperature increase below 2°C6.”
“While coal is responsible for 0.3°C of temperature change in every 1°C global temperature change, oil accounts for one-third of the world's emissions while natural gas accounts for one-fifth of world emissions4.”
“Furthermore, by 2050, renewables can cut global CO2 emissions from the energy sector by 70%3; hence the necessity for renewable energy generation is crucial.”

  • Why are we exploring this issue? Why is it relevant from a financial perspective?

Example:
“The financial institutions have an immense responsibility to support the rapid pace of energy transformation by investing in renewable energy projects7;p14. The UNEP works with over 230 financial institutions to implement measures against climate change2;p2.”


Note:
all the above depends on data availability and retrievability.


The core analysis should capture the company’s impact in relation to the broader issue by providing the following information:

  1. How much money did the company provide through funding, investment, loans, underwriting, and/or credit? (2018-onward amounts, even aggregated).

  2. Both equity and debt financing can be considered as an investment. The amount invested is considered to be relevant as long as the sum is over USD or EUR 100 million. Similarly, a 5% holding for equity investment is considered relevant.

  3. What main company(s)/projects received the funds? You may discuss the companies’ activities that received the largest sums or that have a large stake owned by the financial institution.

  4. Cover their fossil fuel production capacity & CO2 emissions stemming from their productions.

  5. Are those companies among the top recognized polluters/ leading banks in green energy financing? Do they have a relevant market share? (if relevant and applicable)

  6. What was the ultimate impact stemming from these financial investments in either green energies or fossil fuels on the environment?

  7. Try to be as specific as you can.


No matter what the company’s activities are, you may go back to the Logical Model if needed.


To help readers assess the impact scale and value, you should contextualise the impact. For instance:

  • How extensive is the bank’s funding compared to the industry it is part of? (Learn more about comparisons here.)

  • If evaluating the impact on the environment, from the fossil fuel’s perspective: what is the amount of emissions generated? On the green energy side: how much green energy was generated? How much emissions were avoided? From which projects?


Also, ask yourselves the following questions:

1/ The breadth of the impact

  • Is the impact local, national, or global?

  • How much CO2 is released or avoided?

2/ The depth of the impact

  • Is the environment deeply affected, or does the issue just marginally impact it?

  • Are the changes brought by the issue profoundly changing society or the planet?

3/ The persistence of the impact

  • How long would the impact described last for? Months? Years? Decades?

  • How reversible is the impact described in the impact analysis? Can it be easily stopped/extended?



Find more about evaluating the scale of the impact in Step 5: Assess scale and value.

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Helpful sources

BankTrack: an international organisation focused on tracking banks and their investments.

Reclaim Finance: an organisation that researches and exposes financial institutions that support the fossil fuel industry.

Coal Exit: lists companies operating along the thermal coal value chain.

Fossil Free Fund: search platform built to help people find out if their money is being used to extract and consume fossil fuels

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