Debt investors pull out of dirty energy finance

Banks are criticized from all quarters for their role in financing fossil fuel companies, although most have pledged to pull out over the next few decades.

What is happening: Despite pressure from activists, shareholders and Democratic politicians to finally pull out of carbon-emitting companies as the planet heats up, America’s biggest banks are always energetically support dirty energy.

The big picture: Withdrawing capital from fossil fuel companies is only half the story of the transition to a sustainable future. The other half is an investment in the development of technology and infrastructure to support the widespread adoption of renewable energy.

  • bank heavyweights like JPMorgan Chase and Bank of America have committed billions of dollars to sustainable projects. And this year has brought an increase in private capital investment and major fund closures in climate technology, as Ben Geman, author of Axios Generate, reports.

Where he is : Until this renewable infrastructure is in place on a larger scale, there is still a need for some level of fossil fuel.

  • These companies need financing – but the sheer dynamics of supply and demand mean that fossil fuel companies increasingly have to pay for the privilege of borrowing money, sources at Axios say.
  • “There is a growing number of [credit] investors who have oil and gas on their list of what they don’t want to lend, ”a capital markets banker told Axios.

The impact: How much more do polluting energy companies have to pay? The cost relative to non-fossil fuel companies can range from a half percent premium to over 5% for riskier companies.

  • And a shrinking world of lenders means that if a business faces a financial crisis, there may be no one to lend it money.

Inventory: This scenario is most pronounced in the world of coal.

  • “There are a very small number of alternative capital providers who are now funding these assets at low to medium interest rates, whereas three or four years ago there was a large dispersion of the capital available at low to medium interest rates. very competitive, ”Chris Post, a senior executive and general manager of the energy and renewable energy practice of FTI Consulting, said Axios.
  • It’s not just ESG sensitivities that keep investors away from coal. From a purely financial point of view, the industry has become less economical over the past decade – and there is regulatory risk as well.

During this time: In the field of oil and gas, the calculation of loans is different.

  • The profitability of the sector depends on the prices of oil and gas. Low oil prices early last year sparked bankruptcies among small independent US producers.
  • But oil prices have more than quadrupled since their April 2020 low, allowing many of these producers to earn money.
  • Locate the debt tap for companies willing to pay the price premium.

The bottom line: Investors are motivated by returns. As the universe of buyers of fossil fuel debt shrinks, market liquidity and the ability to exit a position if things go wrong also shrink, a risk that helps perpetuate the shrinking universe of debt. buyers.

  • At the same time, the ability to charge higher than average interest will undoubtedly keep other investors obligated to lend to fossil fuel companies.

Carol M. Barragan

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