What does ‘transition finance’ actually mean?

Welcome back.

Global banking executives have been put in an uncomfortable position by the climate crisis. For decades, some of their most important relationships have been with leading figures in the fossil energy sector and other carbon-intensive industries. Rather than cut these clients adrift and leave them to be eaten alive by a new generation of clean tech companies, it’s far less awkward to keep the money flowing under the banner of “transition finance”.

This is a term that’s now used mainly to refer to funding for highly polluting companies, rather than for the energy transition as a whole. It raises the question of what sort of transition we are imagining here. One in which the energy system of 2060 is dominated by all the same energy giants, just without the carbon emissions? Or one in which many of these businesses have faded away, replaced by a new generation of companies ruthlessly focused on low-carbon innovation?

The “transition finance” conversation often feels heavily tilted towards the first of those visions. But is it clearly the right one to be pursuing? The debate is worth having.

That’s the focus of our first item in today’s edition. Also today, Patrick looks at what’s behind a recent dip in renewable energy stocks. See you on Friday. — Simon Mundy

Barclays coal policy highlights some urgent questions for global banks

It’s a long way from Barclays’ headquarters in London’s Canary Wharf to the soot-belching coal power station in Haywood, West Virginia. But Barclays has been the single largest bank financier of the parent companies for this and other coal stations across the US, according to a new report that raises some powerful questions about what banks mean when they talk about “transition finance”.

The report, by the non-profit Sierra Club, looked at the owners of the coal power stations estimated to have the highest rates of associated mortality from local soot pollution. (The report excluded plants with firm retirement dates before 2030, and privately or municipally owned power plants, for which financial data was not available.)

The “top” 10 parent companies — including Berkshire Hathaway Energy, First Energy and the Tennessee Valley Authority — had secured a total of $166bn in bank financing since 2016. Of this sum, half came from just six banks. Barclays was comfortably first placed — with a total of $17.7bn in loans and underwriting of bond and equity issuance — followed by JPMorgan, Bank of America, Citi, Wells Fargo and MUFG.

In a statement, Barclays said it “does not provide project finance or general corporate finance that is specified as being for new or expanded coal-fired power plant development”. (The other banks declined to comment, except Citi, which said it was “working with our clients as they seek to decarbonise their businesses, while also supporting renewable energy and electrification”, and that it expected to reduce exposure to coal power between now and 2030.)

In its climate policy document, Barclays also said that it no longer provided any general-purpose financing for companies with subsidiaries pursuing new or expanding coal projects. That is unless it is satisfied that the proceeds “will not be available to” the specific subsidiary developing the coal plant.

The Sierra Club gave Barclays some credit for its coal policy, noting that it’s tougher than those of other banks highlighted in this study. But it argues that all these banks need to move much faster, sharply restricting all types of funding for the parent companies of coal power plants.

There’s an obvious logic to the Sierra Club’s argument here. Reading Barclays’ coal funding policy, one could almost forget that money is fungible — that by extending any sort of financing to a parent company (whether or not the money is explicitly earmarked for coal), Barclays is making it that much easier for that company to support its coal subsidiary.

How can Barclays possibly determine whether the money it lends or helps to raise will be “made available” to a coal subsidiary? We are not talking about marked dollar bills here.

In its statement to me, Barclays touched on a second angle that is no less important. Barclays, it said — in an argument so common in global finance that it has become a cliché — “can make the greatest difference as a bank by working with customers and clients as they transition to a low-carbon business model”. That’s why it plans to stop funding companies running coal power plants by 2035, rather than immediately.

This raises a question that has been on my mind for a while. When we talk about “transition finance”, are we focusing on the most rapid and effective energy transition for the economy as a whole, or the transformation of individual, highly polluting (and often well-connected and influential) companies?

Much of this conversation (see, for example, the record-breaking $15bn Global Transition Fund raised by Brookfield last year) is about the latter — painting a future in which carbon-intensive corporate giants live on in a new, green form. That might sound appealing. But every dollar dished out by banks to fossil fuel companies, in the hope of somehow supporting their “transition”, is a dollar not going to ambitious, pure-play, capital-hungry green energy companies, unencumbered by the need to keep generating profit from their traditional operations in oil or gas or coal.

For banks such as Barclays — which says it wants to “facilitate $1tn in sustainable and transition financing between 2023 and 2030” — this need to define terms is increasingly urgent.

Some will argue it should keep up its financial support for fossil fuel companies as they pursue an expensive green transformation. One could just as well have made a case for financing Kodak’s transition to digital photography, or Blockbuster’s transition to the video streaming era. In both those instances, the smart money was on younger, nimbler rivals focused on chasing the new opportunities presented by their industry’s evolution — rather than struggling to salvage value from an obsolete legacy business. (Simon Mundy)

Summer has not been kind to renewable energy companies

This summer of record heat has failed to warm investors’ hearts for renewable energy companies.

In the past 12 months, BlackRock’s global clean energy fund has dropped 26 per cent, underperforming conventional energy indices dominated by oil and gas companies. In the past 30 days, the fund has dropped more than 9 per cent versus a 2 per cent decline in the S&P 500 index. Strong share price gains at Sunrun and Sunnova in July evaporated this month.

Analysts at Jefferies put the blame on China’s economy. “Renewables have exposure to China either directly or through the [supply] chain,” they wrote in an August 28 report. A day later, US commerce secretary Gina Raimondo warned that American companies were beginning to see China as “uninvestable”. This negativity forced “significant underperformance” for the renewables sector compared with both traditional energy and the S&P 500 index, Jefferies said.

Summer’s sultry suffering has also hurt hydrogen companies. In this sector, uncertainty about the hydrogen production tax credit in the Inflation Reduction Act has been a headwind for companies, Jefferies wrote. The Treasury Department is still finalising its guidance for this IRA tax credit, leaving companies in limbo until those specifics are published.

Extreme heat and global warming show no signs of slowing down. Neither are governments slowing down their spending on renewable energy stimulus as countries around the world race to catch up with the US’s IRA package. But so far these tailwinds have not propelled clean energy companies past the oil majors.

But there has been stock market success in the “social” category of ESG. The performance of funds attributed to human capital factors have traded in line with the S&P 500 index, Jefferies found. This is somewhat ironic given the headline risk to social investments amid the Republicans’ attacks on diversity, equity and inclusion efforts across corporate America. (Patrick Temple-West)

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