Rewiring the financial system to accelerate the energy transition

  • We need a major shift in how countries think about their energy resilience in the context of a multi-decade, but equally urgent, energy transition.
  • The harsh truth is that investing in the energy transition is not happening fast enough; the objective of banks must be to break the pattern of underinvestment in green assets.
  • A rewiring of the financial system is underway, which should significantly improve our ability to reach net zero in time – however, this is only the beginning.

The war in Ukraine, a huge human tragedy, has highlighted the need for a secure and reliable energy supply. During this time, the latest reports of the Intergovernmental Panel on Climate Change (IPCC) are a grim reminder that we are likely to reach 1.5°C of global warming in the 2030s.

With the current global twin crises of energy security and climate change, it is human nature to confront the one that is right in front of us. How is it possible to get out of Russian oil and gas without investing in new fossil fuel capacity elsewhere; and how do you marry that with the International Energy Agency’s (IEA) 2021 call not to develop new oil and gas reserves to make net zero possible by mid-century?

We are in new territory here – a major overnight shift in how countries think about their energy resilience in the context of a multi-decade, but equally urgent, energy transition.

Even before the war, we were witnessing an “unsynchronized transition”. Renewables have not grown fast enough to match the required reduction in the use of fossil fuels, particularly coal, in a decade when energy production must increase by 40% to meet the request. Now the challenge is over.

There are two indisputable outcomes of the current crisis: first, we need to rapidly accelerate the energy transition – unlocking capital globally for clean energy and storage, electrification and energy efficiency; and second, we need to integrate resilience and better understand the role of fossil fuels in the transition. The latter includes the carbon intensity of different fossil fuel sources and producers, and the evolution of carbon removal technologies, as well as resolving the gray areas of what constitutes new oil and gas vs. maintenance to maximize production from existing reserves. The financial sector will be a key player in both cases and will need to work in partnership with government, industry and the scientific community to achieve the right outcome.

Rewiring of finance to energetic transition

The emergence of the Glasgow Financial Alliance for Net Zero (GFANZ) last year was a seismic shift for the financial industry. GFANZ includes more than 100 banks with “net zero by 2050” commitments and science-based targets for 2030 that cover the funded emissions of the customers they serve. Finance may be one of the most competitive sectors in the world, but here the case for cooperation is undeniable: as banks, we all face the same systemic risk, and we have a clientele and a common community that must make the transition. Now we all need to completely rewire our business decision-making and inject new skills. “Funded Emissions” is a new metric we need to reduce, and a customer’s transition plan will be key to customer engagement and decision-making.

Unsurprisingly, the thorny issue of fossil fuel financing is making headlines as stakeholders seek evidence of the reliability of banks’ net zero commitments. This is not a black and white subject. Some incumbent oil and gas companies are looking to pivot their skills and market strengths to become key players in the transition as integrated energy companies. And let’s not forget that according to the IEA, a net zero energy system by 2050 still has oil (at 25% of current levels) and gas (at 50% of current levels) production. Maintenance investments will be needed in this transition: the IEA says this will require “upstream oil and gas investments averaging $350 billion per year from 2021 to 2030, similar to 2020 levels,” and then declining. to about half past 2030. That said, the IEA and IPCC present a very clear red line of no new oil and gas reserves or coal mining if the world is to reach net zero by 2050 .

At HSBC, we made an explicit commitment last March to “gradually reduce our fossil fuel funding to what is needed to limit global temperature rise to 1.5°C”. This includes our policy to phase out thermal coal funding in the EU/OECD by 2030 and globally by 2040, as well as the release of a broader energy transition policy later this year. It also means meeting our near-term funded emissions targets for the energy sector and engaging with each large oil and gas customer and large power and utility customer on their transition plan over the next two years, and on an ongoing basis thereafter.

According to current trends, emissions linked to mobility will double by 2050. Passenger vehicles represent 70% of the greenhouse gas emissions of these types of mobility and are the source of more than 50% of the pollution of the air in town. With 60% of the population expected to reside in cities by 2030, we need new solutions fostered by public-private collaboration now to ensure healthier cities for tomorrow.

The Forum’s Global New Mobility Coalition (GNMC) seeks to accelerate a synchronized transition to shared, electric, connected and autonomous mobility (SEAM) solutions. Zero-emission urban mobility can help reduce carbon emissions, improve mobility efficiency and free up public space while improving access to sustainable mobility and creating new business opportunities.

GNMC advances industry-led actions and policy change through multi-stakeholder engagement, outreach and action. GNMC’s current efforts focus on: accelerating the electrification of city fleets, aiming for 100% by 2030; develop strategies for rapid pilot deployment of electric vehicle fleets and infrastructure through funding; and fostering the global transition to sustainable mobility.

The Science Based Targets Initiative (SBTi) recently launched the Net-Zero Foundations for Financial Institutions Report, including guidance to financial institutions on how to approach fossil fuel financing in the context of net zero goals. The SBTi recommends “engagement with fossil fuel companies to adopt net zero goals and action plans”, as “the priority for financial institutions to influence fossil fuel company GHG emissions”, with “a divestment (only) for companies unable and unwilling to decarbonise”. This is the approach we take: we will assess whether to continue funding a client if no transition plan is in place, or if, after repeated engagement, the transition plan is not compatible with a trajectory 1.5°C.

Unlocking trillions a year for the energy transition

HSBC has a huge footprint and over 150 years of history in Asia – a region that will make or break the world’s ability to reach net zero in time. Here, the cost of transitioning the energy system to net zero by 2050 is estimated at $37 trillion between 2020 and 2050.

However, the hard truth is that investments in the energy transition are not happening fast enough, in Asia as elsewhere. Our goal, working through GFANZ and other organisations, must be to break the pattern of underinvestment in green assets. There are three main ingredients to this:

1. The current energy crisis should catalyze the development of better and more coherent policies to reduce the risks of investing in renewable energy and clean energy more broadly. – whether consistent large-scale carbon pricing, long-term auctions with trusted counterparties, or a favorable and consistent balance of feed-in tariffs, subsidies and other incentives through the costs.

2. We need to unlock the pipeline of sustainable investment projects. Investors often struggle to determine if a project is truly green; disclosure standards are low and uneven across jurisdictions. Where appropriate, public finance should de-risk projects to attract new private investment – ​​known as ‘blended finance’ – whether providing a development guarantee or taking a first loss. Through GFANZ, we can build new partnerships to help overcome these issues. We need new creative solutions to accelerate investments in clean infrastructure, but also for the early retirement of legacy coal assets.

3. Regulators can better align prudential capital rules with a net zero program and thus address systemic risks in the sector. The transition risks of “brown assets” identified in the current rounds of prudential climate stress tests need to be considered in conjunction with the risk of underinvestment in “green” (such as the deployment of renewable energy, fuels or electrification infrastructure) that could prevent an orderly transition. The current treatment of capital prevents financial institutions from supporting critical nascent climate technologies on the balance sheet or financing large-scale, long-term projects essential to building clean, equitable and resilient energy, mobility, infrastructure and industrial systems. of the future.

A rewiring of the financial system towards the energy transition is underway, which should significantly improve our ability to reach net zero in time. It is still in its infancy and there is still much to be done that will require radical collaboration – between banks and their customers, their investors and, above all, with regulators and scientific bodies. But business-as-usual has changed: the financial world now understands that it must be at the heart of the transition to net zero.


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Don F. Davis