WEBVTT - Bank Transition Ratios Plot Route for Decarbonization 0:00:00.240 --> 0:00:02.600 This is Tom Rowland's Reese and you're listening to Switched 0:00:02.640 --> 0:00:06.240 on the BNF podcast. Every year, b ANDAF releases its 0:00:06.240 --> 0:00:10.160 annual report on Energy Supply Investment and Bank Financing Activities, 0:00:10.200 --> 0:00:13.120 where we use public and commercially available data to assess 0:00:13.119 --> 0:00:16.320 banks energy sector financing to generate a ratio of their 0:00:16.320 --> 0:00:19.720 allocation between low carbon supply and fossil fuels. This year's 0:00:19.720 --> 0:00:21.840 report takes a look at twenty twenty three, where we 0:00:21.880 --> 0:00:24.840 found the energy industry investing more capital into clean sources 0:00:24.880 --> 0:00:27.960 of supply, with bank financing for low carbon energy technologies 0:00:27.960 --> 0:00:30.680 reaching eighty nine percent of that of fossil fuels. This 0:00:30.880 --> 0:00:33.839 rising energy supply banking ratio of zero point eight nine 0:00:33.920 --> 0:00:36.040 to one may be moving in the right direction, but 0:00:36.120 --> 0:00:37.760 given that we need to hit four to one by 0:00:37.760 --> 0:00:40.440 twenty thirty to meet a one point five degree scenario, 0:00:40.479 --> 0:00:43.159 we're still a long distance from the target. Further positive 0:00:43.159 --> 0:00:44.920 momentum can be found when we look at our energy 0:00:44.920 --> 0:00:48.280 supply investment ratio, which for the first time surpassed fossil fuels. 0:00:48.320 --> 0:00:50.519 But what does all this mean in geographic context and 0:00:50.520 --> 0:00:53.680 which banks are performing best. On today's show, I'm joined 0:00:53.680 --> 0:00:56.880 by Clean finance analyst Trina White, who brings us findings 0:00:56.920 --> 0:01:00.000 from our third annual Energy Supply Investment and Banking Rate, 0:01:00.440 --> 0:01:03.040 which BNF clients can find at BNF go on the 0:01:03.080 --> 0:01:06.800 Bloomberg terminal on BNF dot com. Now onto the pod. 0:01:17.160 --> 0:01:19.959 So welcome Trina, Thank you for joining us today. 0:01:20.000 --> 0:01:21.440 Thanks for having me, tom So. 0:01:21.800 --> 0:01:25.039 Fun fact for people who are not at BNF and 0:01:25.080 --> 0:01:26.920 who would have no way of knowing this, but I 0:01:26.959 --> 0:01:29.720 actually sit next to Trina in the New York office. 0:01:29.920 --> 0:01:30.600 It's a great time. 0:01:30.840 --> 0:01:32.800 It is a great time, and we talk about cats 0:01:32.800 --> 0:01:36.560 and plants. But one of the things I have noticed 0:01:36.640 --> 0:01:41.080 lately is that Trina has often been working late. You know, 0:01:41.120 --> 0:01:43.720 as I'm leaving the office, Trina, you've still been there, 0:01:43.920 --> 0:01:46.440 So you've been working hard on something. So tell me 0:01:46.520 --> 0:01:48.800 what is it you have been working so hard on lately? 0:01:49.240 --> 0:01:50.000 Thank you, tom So. 0:01:50.160 --> 0:01:53.280 I have been working on what we call our energy 0:01:53.280 --> 0:01:57.320 supply ratios, so both our energy supply investment ratio and 0:01:57.360 --> 0:02:00.240 our energy supply bank financing ratio as well. 0:02:00.560 --> 0:02:02.840 So what are these two ratios and what is the 0:02:02.840 --> 0:02:03.720 difference between them? 0:02:03.880 --> 0:02:05.720 Yeah, so both are actually quite important. 0:02:06.120 --> 0:02:09.320 So our report analyzes both capital investment in what we 0:02:09.440 --> 0:02:11.840 call the real economy, and this is really just kind 0:02:11.880 --> 0:02:14.600 of a strange term that we tend to use in 0:02:14.639 --> 0:02:18.160 the financial world to describe actual infrastructure spending and what 0:02:18.200 --> 0:02:21.800 corporates in actual utilities or energy sector are spending. 0:02:22.040 --> 0:02:25.079 So, wait, the world of finance doesn't consider themselves to 0:02:25.160 --> 0:02:27.480 be part of the quote unquote real economy. 0:02:27.520 --> 0:02:28.839 Isn't that hilarious? Yeah? Yeah. 0:02:28.840 --> 0:02:32.160 It kind of separates financing and moving capital around and 0:02:32.200 --> 0:02:34.640 moving money around from what's sort of going on on 0:02:34.680 --> 0:02:37.639 the ground. So investment is what's being spent on infrastructure, 0:02:37.720 --> 0:02:40.920 and financing is how are those corporates actually funding that 0:02:41.200 --> 0:02:41.520 got it? 0:02:41.560 --> 0:02:44.040 So the real economy is where money is actually going 0:02:44.120 --> 0:02:46.360 into stuff in a way that is not just like 0:02:46.520 --> 0:02:49.600 being shifted around between banks and financial institutions. It's like 0:02:49.760 --> 0:02:51.440 now it's gone there and it's not coming back. 0:02:51.520 --> 0:02:52.359 That's exactly right. 0:02:52.400 --> 0:02:54.760 And they're closely linked because if you think about it, 0:02:54.840 --> 0:03:00.840 those corporates are financial institutions clients, so closely mirrored somewhat separate. 0:03:01.400 --> 0:03:03.560 So this report is our way of assessing how the 0:03:03.680 --> 0:03:07.040 energy transition is playing out in the underlying economy and 0:03:07.160 --> 0:03:11.440 also how financial institutions are facilitating the energy transition or 0:03:11.480 --> 0:03:14.280 not so on both sides of the energy system, both 0:03:14.320 --> 0:03:17.200 the low carbon or the clean and the dirty or 0:03:17.200 --> 0:03:20.120 the fossil fuels. Previously, a few years ago, a lot 0:03:20.160 --> 0:03:21.880 of the work that you would have seen on this topic, 0:03:22.000 --> 0:03:25.760 particularly on the banking side, would have come from NGOs 0:03:25.880 --> 0:03:28.920 so civil society, and it really focused heavily on fossil 0:03:28.960 --> 0:03:32.000 fuel financing, so it kind of hammered those banks on 0:03:32.040 --> 0:03:34.960 what they were still doing on the climate problem. And 0:03:35.080 --> 0:03:37.520 this sort of ended up framing a lot of banks 0:03:37.640 --> 0:03:41.880 role in climate as a shrinking problem, so cutting financed 0:03:41.920 --> 0:03:45.320 emissions for example, and cutting their support for heavy emitters. 0:03:45.480 --> 0:03:49.640 At BNF, we've long understood that addressing climate change is actually, 0:03:49.880 --> 0:03:52.560 in large part a growth problem and a transition to 0:03:53.040 --> 0:03:56.960 replace those sources of emissions with cleaner alternatives, So not 0:03:57.080 --> 0:04:00.120 operating from the assumption that we're going to shrink and 0:04:00.200 --> 0:04:03.520 really reduce energy demand, but actually meat energy demand with 0:04:03.560 --> 0:04:06.560 cleaner sources. And so this energy transition, we view it 0:04:06.600 --> 0:04:10.240 as a massive financing and investment opportunity. And what we've 0:04:10.280 --> 0:04:12.720 really come to understand is, as we've really expended our 0:04:12.720 --> 0:04:15.560 knowledge of the role of banks and financial institutions, is 0:04:15.600 --> 0:04:18.200 that while they definitely are important, and they have sway, 0:04:18.440 --> 0:04:20.960 and they definitely can be more strategic about this as well. 0:04:21.080 --> 0:04:24.320 They largely tend to reflect the underlying conditions in the 0:04:24.320 --> 0:04:27.360 economies in which they operate, so those companies that are 0:04:27.400 --> 0:04:30.120 their clients and are coming to them to raise financing. 0:04:30.320 --> 0:04:33.640 So when it comes to energy supply ratios, we're accounting 0:04:33.680 --> 0:04:36.159 for both the phase down of the climate problem or 0:04:36.160 --> 0:04:39.200 the fossil fuels, which is the denominator of both ratios, 0:04:39.240 --> 0:04:41.920 but also very very key is the scaling and the 0:04:41.920 --> 0:04:43.400 replacement of climate. 0:04:43.080 --> 0:04:44.520 Solutions in the numerator. 0:04:44.600 --> 0:04:47.400 So the low carbon energy sources is always kind of 0:04:47.400 --> 0:04:49.599 the numerator, and we're putting that in the context of 0:04:49.720 --> 0:04:50.920 continued fossil fuels. 0:04:51.040 --> 0:04:53.960 So you mentioned enumerator and denominator, So I just want 0:04:54.000 --> 0:04:56.280 to really spin it out to make sure I've understood 0:04:56.320 --> 0:05:00.159 this correctly. Ultimately, you know, all these different considerations translate 0:05:00.200 --> 0:05:03.839 themselves into a number, and that number is for a 0:05:03.880 --> 0:05:09.520 particular institution how much it has invested into clean energy activities, 0:05:09.800 --> 0:05:14.039 divided by how much it has invested into fossil fuel. 0:05:13.880 --> 0:05:19.000 Activities, exactly, both for individual institutions and then also macro level. 0:05:19.040 --> 0:05:20.000 So globally as well. 0:05:20.320 --> 0:05:24.160 So then the ratio, the energy supply investment ratio and 0:05:24.279 --> 0:05:27.080 the bank financing ratios. What's the difference between the two? 0:05:27.360 --> 0:05:30.720 Investment ratios are what we track in terms of capital 0:05:30.720 --> 0:05:34.240 expenditures on infrastructure, so think at BNF. This is very 0:05:34.240 --> 0:05:38.000 similar to our energy transition investment trends. The bank financing 0:05:38.080 --> 0:05:41.320 ratio is the total amount of capital being facilitated for 0:05:41.360 --> 0:05:44.760 companies and infrastructure through banks. So that's the sum of 0:05:45.000 --> 0:05:49.360 debt issuances so debt capital markets, bonds, loans, equity capital 0:05:49.400 --> 0:05:54.160 markets so IPOs, and additional share issuances and also entails 0:05:54.240 --> 0:05:55.680 project financing as well. 0:05:55.920 --> 0:05:58.640 So the energy supply investment ratio am I right in 0:05:58.680 --> 0:06:01.920 saying that is a sort of a macro indicator across 0:06:02.000 --> 0:06:03.919 all institutions, whereas. 0:06:03.640 --> 0:06:04.360 The banking one. 0:06:04.440 --> 0:06:06.839 I mean, you could have an average across the entire sector, 0:06:06.960 --> 0:06:08.360 but you also have it applied. 0:06:08.080 --> 0:06:09.560 To individual institutions, correct. 0:06:09.640 --> 0:06:11.960 And it makes sense actually because going back to what 0:06:11.960 --> 0:06:13.880 you're saying is if we were taking the approach of 0:06:14.160 --> 0:06:16.400 you know, let's call out all the banks by the 0:06:16.440 --> 0:06:18.800 amount of fossil fuel financing that they're doing, and then 0:06:18.839 --> 0:06:22.159 that's also congratulate banks by the amount of clean energy 0:06:22.200 --> 0:06:24.240 funding they're doing. What you'd find at the top, near 0:06:24.279 --> 0:06:26.720 the top of the both lists would just be the biggest. 0:06:26.400 --> 0:06:29.240 Institutions exactly, so like the best. 0:06:29.080 --> 0:06:30.880 And the worst, if you want to look at it. 0:06:30.800 --> 0:06:33.560 Like that, exactly, we're putting those numbers into context. And 0:06:33.600 --> 0:06:37.320 that's actually what's happening is that on the one hand, externally, 0:06:37.360 --> 0:06:39.440 a lot of banks are sort of getting hit on 0:06:39.480 --> 0:06:42.520 their fossil fuel numbers, which by an absolute volume perspective, 0:06:42.680 --> 0:06:44.840 some of the largest banks and those that operate in 0:06:44.920 --> 0:06:48.080 like oil and gas exporting markets end up looking the worst. 0:06:48.240 --> 0:06:51.760 But also internally, from the bank's perspective, they've been putting 0:06:51.760 --> 0:06:54.600 out these sort of ambitious climate financing targets on the 0:06:54.640 --> 0:06:57.479 low carbon side. But equally, it's difficult to put those 0:06:57.560 --> 0:07:00.640 numbers into context because if you've got XYZ Bank saying 0:07:00.640 --> 0:07:03.719 we're going to put one trillion dollars towards sustainable finance, 0:07:03.800 --> 0:07:06.480 it's really hard to know if that's actually meaningful compared 0:07:06.480 --> 0:07:08.279 to what they're doing on the fossil fuel side. So 0:07:08.320 --> 0:07:12.160 the ratio helps us compare across banks regardless of their size. 0:07:11.840 --> 0:07:13.840 And the thing I love about it is that one 0:07:13.920 --> 0:07:16.160 day there's going to be a bank that gets a 0:07:16.240 --> 0:07:18.560 ratio of infinity, and. 0:07:18.680 --> 0:07:19.520 There actually are some. 0:07:19.880 --> 0:07:22.640 There are there are a few banks, particularly development banks, 0:07:22.640 --> 0:07:23.760 that have no fossil fuels. 0:07:23.960 --> 0:07:26.320 Okay, oh well we can hear about who's that infinity. 0:07:26.520 --> 0:07:28.320 That must be a pretty they must be pretty happy 0:07:28.360 --> 0:07:32.960 about that. So obviously infinity if from an energy transition perspective, 0:07:33.320 --> 0:07:36.360 from a environmental perspective, infinity is the ideal. I'm assuming 0:07:36.440 --> 0:07:40.080 that not everyone can be at infinity. So what does 0:07:40.120 --> 0:07:42.960 good look like? You know, what does the ratio across 0:07:43.000 --> 0:07:45.800 the whole economy need to look like? And where are 0:07:45.800 --> 0:07:46.480 we right now? 0:07:46.560 --> 0:07:50.000 So actually, interestingly, we're not looking for infinity. We are 0:07:50.040 --> 0:07:53.680 actually putting this in grounded in climate scenario analysis, which 0:07:53.760 --> 0:07:56.520 is not necessarily say that in the near term fossil 0:07:56.520 --> 0:07:58.600 fuel investment needs to go to zero, it needs to 0:07:58.680 --> 0:08:02.120 approach zero. In reality, there will be some lingering fossil 0:08:02.120 --> 0:08:04.440 fuel investment for the things that are very very difficult 0:08:04.440 --> 0:08:07.200 to decarbonize. But in fact, when we look at seven 0:08:07.240 --> 0:08:10.840 of the most commonly cited one point five degree consistent scenarios, 0:08:10.880 --> 0:08:13.840 So these are put together by organizations like the IBCC 0:08:14.240 --> 0:08:17.400 or the IA or the network for greening the financial system. 0:08:17.520 --> 0:08:20.520 These scenarios, which are all consistent with limiting warming to 0:08:20.560 --> 0:08:23.600 one point five, but they take into account very different assumptions, 0:08:23.960 --> 0:08:27.720 so about the level of investment required, the energy demand, 0:08:27.920 --> 0:08:30.840 the price of renewables, et cetera. They sort of on 0:08:31.120 --> 0:08:34.760 average tend to converge in terms of the energy supply 0:08:34.880 --> 0:08:38.360 ratio that is consistent with these scenarios this decade at 0:08:38.400 --> 0:08:40.920 four to one, so four times as much low carbon 0:08:41.000 --> 0:08:44.560 investment as fossil fuels to be consistent with decarbonizing in 0:08:44.600 --> 0:08:47.120 line with one point five degrees. That increases over time 0:08:47.160 --> 0:08:49.679 as fossil fuels shrenth so six to one in the 0:08:49.720 --> 0:08:52.280 twenty thirties and ten to one in the twenty forties. 0:08:52.600 --> 0:08:54.880 And that of course is an average, So there's quite 0:08:54.880 --> 0:08:57.920 a range by which scenario you tend to take as 0:08:57.960 --> 0:08:58.600 most realistic. 0:08:58.679 --> 0:09:01.720 Got it okay, but one this decade that seems like 0:09:02.080 --> 0:09:05.240 a not crazy number. So given that we've got that 0:09:05.480 --> 0:09:08.040 as our north star, four to one is. 0:09:08.480 --> 0:09:11.040 Where ideally we would be, where are we actually? 0:09:11.440 --> 0:09:14.000 We've seen quite a bit of movement in this energy 0:09:14.040 --> 0:09:18.199 supply investment ratio globally, particularly over the past ten years. 0:09:18.280 --> 0:09:21.320 We've seen the ratio double, so from just under half 0:09:21.360 --> 0:09:23.959 as much low carbon investment as fossil fuels in the 0:09:24.000 --> 0:09:27.800 late twenty tens to actually reaching more clean investment than 0:09:27.920 --> 0:09:30.680 fossil fuels for the very first time in twenty twenty three. 0:09:30.800 --> 0:09:33.280 So the ratio is about one point one point one 0:09:33.280 --> 0:09:35.000 times as much low carbon. 0:09:34.720 --> 0:09:35.720 As fossil fuels. 0:09:35.920 --> 0:09:37.960 When we chatted last year, we looked at the twenty 0:09:38.000 --> 0:09:41.040 twenty two ratio and had just reached parity at one 0:09:41.080 --> 0:09:42.920 to one for the first time. So it's great that 0:09:42.920 --> 0:09:45.160 we're seeing this continue to move in the right direction. 0:09:45.360 --> 0:09:48.199 But if we remember that sort of north star or 0:09:48.320 --> 0:09:51.720 one point five degree consistent benchmark, that's an average of 0:09:51.840 --> 0:09:55.160 four times as much low carbon this decade, and we're now, 0:09:55.240 --> 0:09:57.960 of course already in twenty twenty five. If we just 0:09:58.040 --> 0:10:02.280 assumed a really simple linear trajectory, we would need an 0:10:02.320 --> 0:10:04.439 average of eight to one by twenty. 0:10:04.160 --> 0:10:06.320 Thirty, or a minimum of four to. 0:10:06.240 --> 0:10:08.400 One by the end of the decade, so at least 0:10:08.520 --> 0:10:11.640 quadrupling in just a few years, and every year of 0:10:11.679 --> 0:10:15.679 course that goes by without seeing significant growth in this metric. Intuitively, 0:10:15.760 --> 0:10:18.040 the more steep the trajectory would need to be in 0:10:18.160 --> 0:10:19.360 order to get us on track. 0:10:19.640 --> 0:10:21.920 This is so interesting because it's like, this is a 0:10:22.040 --> 0:10:24.960 narrative that I think is the narrative right now in 0:10:25.000 --> 0:10:29.280 the energy transition is that everything is getting better, Opportunities 0:10:29.280 --> 0:10:32.320 are growing, the industries behind the energy transition are all 0:10:32.360 --> 0:10:35.640 expanding at you know, really remarkable rates, but there's still 0:10:35.640 --> 0:10:38.560 a big gap to goal. It's like, from an environmental perspective, 0:10:38.640 --> 0:10:40.400 it's not nearly enough. 0:10:40.600 --> 0:10:44.960 Right, and some might start to feel like that's becoming 0:10:45.040 --> 0:10:48.240 less and less achievable each year that goes by. We're 0:10:48.240 --> 0:10:51.640 actually starting to hear as we discuss this with a 0:10:51.679 --> 0:10:54.560 lot of different stakeholders and in particular banks, we begin 0:10:54.600 --> 0:10:58.439 to hear rumblings of one point five degrees being perhaps 0:10:58.720 --> 0:11:01.840 a little bit too ambitious and not necessarily credible. And 0:11:01.920 --> 0:11:05.520 so this then becomes a discussion of of balancing ambition, 0:11:05.880 --> 0:11:08.480 because clearly we know the consequences of climate change are 0:11:08.480 --> 0:11:13.200 extremely severe, but balancing that with achievability and realisticness. So 0:11:13.280 --> 0:11:16.880 actually translating this to something that's practical for institutions, and 0:11:16.920 --> 0:11:20.960 so this framework is scenario neutral, and when we think 0:11:20.960 --> 0:11:24.160 about a quote unquote nor star, we really can substitute 0:11:24.200 --> 0:11:27.240 what we might think is believable. So, just as an example, 0:11:27.440 --> 0:11:30.320 at BNF, our new Energy Outlook modeling and our net 0:11:30.400 --> 0:11:33.240 zero scenario could only really credibly get to about one 0:11:33.240 --> 0:11:36.199 point seventy five degrees given what we know about projects 0:11:36.200 --> 0:11:39.160 in the pipeline and cost curves for various technologies. And 0:11:39.200 --> 0:11:41.760 if we were to use that BNF net zero scenario 0:11:42.400 --> 0:11:44.880 instead of the ones that I just cited, the comparable 0:11:44.960 --> 0:11:47.160 ratio would be an average of three to one for 0:11:47.280 --> 0:11:49.959 the remainder of the decade. So depending on the kind 0:11:50.000 --> 0:11:52.520 of world in which you believe in, you can substitute 0:11:52.559 --> 0:11:55.200 in a scenario that you think best matches your view 0:11:55.200 --> 0:11:55.680 of the world. 0:11:56.000 --> 0:11:56.800 Yeah, and I suppose. 0:11:56.840 --> 0:12:01.160 I mean, obviously, this ratio is a metric which we invented, 0:12:01.440 --> 0:12:04.280 so I don't want to sort of overly weight this point. 0:12:04.320 --> 0:12:06.760 But there's two ways it can change. One is more 0:12:06.760 --> 0:12:09.840 investment into the energy transition, which is really kind of 0:12:09.880 --> 0:12:12.680 getting a lot more money flowing. And then there's the 0:12:12.760 --> 0:12:16.960 denominator shrinking a bit less investment in fossil fuels, and 0:12:16.960 --> 0:12:20.760 that ratio shoots right up yep. So it's not like 0:12:21.160 --> 0:12:24.360 it's getting from one point one one to three. I 0:12:24.360 --> 0:12:26.720 could see it happening in a way because there's two 0:12:26.800 --> 0:12:28.720 things that can change to make it happen that can 0:12:28.760 --> 0:12:29.600 be complementary. 0:12:29.840 --> 0:12:30.720 That's exactly right. 0:12:30.720 --> 0:12:33.880 And even within those two things, there's so many things 0:12:33.920 --> 0:12:36.960 that can happen with individual technologies. And one thing that's 0:12:37.040 --> 0:12:39.439 really important to remember is that the ratio is an 0:12:39.480 --> 0:12:44.000 interesting tool and it helps us standardize and compare across institutions, 0:12:44.000 --> 0:12:47.600 but the actual volume of that numerator and denominator do matter. 0:12:47.800 --> 0:12:49.599 And what we really find when we look at the 0:12:49.640 --> 0:12:53.280 actual volumes is that actually limiting warming and being consistent 0:12:53.320 --> 0:12:57.439 with these scenarios. It hinges really critically on scaling clean 0:12:57.520 --> 0:13:02.160 energy extremely rapidly in order to stateably enable the phase. 0:13:01.880 --> 0:13:02.880 Out of fossil fuels. 0:13:02.920 --> 0:13:06.040 So if we're just divesting from fossil fuels and or 0:13:06.080 --> 0:13:09.760 withdrawing financing from fossil fuels, but we're not scaling that replacement, 0:13:09.800 --> 0:13:12.680 we end up in a really severe energy security issue. 0:13:12.720 --> 0:13:15.440 And so actually in the short term, it really is 0:13:15.520 --> 0:13:19.360 scaling that numerator in order to overtime phase down that 0:13:19.440 --> 0:13:21.520 denominator that really gets us where we need to be. 0:13:21.640 --> 0:13:25.560 So let's talk about banks, you know, because to use 0:13:25.600 --> 0:13:27.800 the terminology that we've established we've been talking about the 0:13:27.800 --> 0:13:30.360 real economy. So far, we're one point one one in 0:13:30.440 --> 0:13:33.760 the real economy in twenty twenty three versus four or three, 0:13:34.040 --> 0:13:35.840 depending on how ambitious we want to be. 0:13:36.040 --> 0:13:38.040 But how do they fit into all of this? 0:13:38.440 --> 0:13:38.680 Yeah? 0:13:38.720 --> 0:13:42.280 Great, We really have barely mentioned banks so far, and 0:13:42.360 --> 0:13:44.960 so what we wanted to do after we developed this 0:13:45.040 --> 0:13:47.480 kind of energy supply investment ratio is to take this 0:13:47.600 --> 0:13:50.880 concept and then apply it to financial institutions. So really 0:13:50.920 --> 0:13:53.960 we wanted a better metric than just shrinking our way 0:13:53.960 --> 0:13:57.079 through financed emissions or net zero targets, to actually look 0:13:57.080 --> 0:13:59.840 at the role that banks play and enabling and capital 0:14:00.240 --> 0:14:02.320 on the transition, So really thinking in the way that 0:14:02.400 --> 0:14:05.560 banks think, which is through growth, right and opportunity. And 0:14:05.640 --> 0:14:08.600 so first we looked at banks through the energy supplied 0:14:08.600 --> 0:14:09.360 banking ratio. 0:14:09.760 --> 0:14:11.880 I say first because. 0:14:11.679 --> 0:14:13.560 We've always envisioned this as a way to look at 0:14:13.600 --> 0:14:16.880 different types of financial institutions, and we are also actively 0:14:16.880 --> 0:14:19.920 working on asset managers and funds, but for now let's 0:14:19.920 --> 0:14:22.560 really focus in on banks. And so for banks, that 0:14:22.720 --> 0:14:25.400 ratio is comprised of the capital that they're facilitating for 0:14:25.560 --> 0:14:29.720 energy sector companies and infrastructure primarily through debt, so mostly 0:14:29.720 --> 0:14:32.920 through bonds and loans, to smaller extent through IBOs and 0:14:32.960 --> 0:14:36.440 equity issuance, project finance and tax equity here in the US, 0:14:36.800 --> 0:14:39.920 so low carbon financing relative to the finance that these 0:14:39.920 --> 0:14:42.240 banks are facilitating for fossil fuels. 0:14:42.720 --> 0:14:46.080 So overall, the energy supplied banking ratios that moving in 0:14:46.120 --> 0:14:46.840 the wrong direction. 0:14:47.160 --> 0:14:49.240 We actually saw it move in the right direction in 0:14:49.280 --> 0:14:52.080 twenty twenty three. So in twenty twenty two we were 0:14:52.080 --> 0:14:54.960 at about zero point seven four to one. In twenty 0:14:54.960 --> 0:14:57.440 twenty three we're at zero point eight nine to one. 0:14:57.640 --> 0:15:00.560 So for every dollar that was facilitated for fossil fuel 0:15:00.600 --> 0:15:04.200 companies and projects, banks enabled about eighty nine cents for 0:15:04.440 --> 0:15:05.600 low carbon solutions. 0:15:05.720 --> 0:15:07.440 It's important to note, though. 0:15:07.280 --> 0:15:09.600 Because we just touched on, you know, that volume of 0:15:09.600 --> 0:15:12.640 the numertor versus the denominator, the increase in the banking 0:15:12.760 --> 0:15:15.960 ratio actually came not from a dramatic increase in low 0:15:15.960 --> 0:15:19.120 carbon financing, which actually fell about just one percent, but 0:15:19.280 --> 0:15:22.880 instead by a drop in fossil fuel financing, so about 0:15:22.880 --> 0:15:25.400 an eighteen percent drop that we measured, and that's kind 0:15:25.400 --> 0:15:27.800 of the opposite of what we're saying needs to happen 0:15:27.920 --> 0:15:31.120 in order to scale climate solutions really rapidly in the 0:15:31.120 --> 0:15:34.240 short term, and to put some numbers around this. In total, 0:15:34.280 --> 0:15:37.040 in twenty twenty three, banks underwrote about one point six 0:15:37.120 --> 0:15:40.360 trillion of energy supply activity, and that broke down in 0:15:40.520 --> 0:15:43.160 seven hundred and seventy six billion for low carbon and 0:15:43.200 --> 0:15:45.680 about eight hundred and seventy billion for fossil fuels. 0:15:45.760 --> 0:15:48.840 I'm slightly curious because obviously it's great. 0:15:48.640 --> 0:15:51.320 That it increased in twenty twenty three, but we know 0:15:51.400 --> 0:15:54.120 that the ratio in the real economy was one point 0:15:54.200 --> 0:15:57.320 one one, So there has to be money coming from 0:15:57.360 --> 0:16:01.040 somewhere else that is at a much higher ratio. So 0:16:01.080 --> 0:16:04.680 where is this sort of higher ratio finance coming from. 0:16:04.960 --> 0:16:07.760 Yeah, that's a really great point, and we spend quite 0:16:07.800 --> 0:16:10.360 a bit of time as a team, and then portions 0:16:10.360 --> 0:16:14.760 of the report discussing the difference between capital investment and 0:16:14.840 --> 0:16:18.960 bank financing. So broadly speaking, banks tend to mirror trends 0:16:19.080 --> 0:16:20.360 in the underlying economy. 0:16:20.480 --> 0:16:22.000 Again that's their client base. 0:16:22.120 --> 0:16:25.040 But as we might expect, these are actually different measures, 0:16:25.080 --> 0:16:28.040 and there's a few factors that differentiate bank financing from 0:16:28.080 --> 0:16:30.480 real investment, and it can get a little bit confusing, 0:16:30.480 --> 0:16:31.680 So maybe let's break it down. 0:16:31.960 --> 0:16:35.160 One huge factor is interest rates. 0:16:35.240 --> 0:16:37.600 So of course interest rates is a very direct input 0:16:37.760 --> 0:16:41.040 into whether or not companies are looking to raise financing, 0:16:41.080 --> 0:16:43.680 whether or not it's more expensive or more costly to borrow. 0:16:43.880 --> 0:16:47.040 So you'll recall that interest rates rose really steeply around 0:16:47.040 --> 0:16:49.280 the world in twenty twenty two as we addressed post 0:16:49.360 --> 0:16:52.600 pandemic inflation. Those stabilized quite a bit in twenty twenty three, 0:16:52.680 --> 0:16:55.960 but remained very high. At the same time that borrowing 0:16:56.040 --> 0:16:59.600 costs remained high, we also had really high energy prices, 0:17:00.120 --> 0:17:03.880 continued record cash flows, particularly for oil and gas companies, 0:17:04.000 --> 0:17:06.359 and so we saw oil and gas companies continue to 0:17:06.400 --> 0:17:08.920 pay down their debts and reduce the amount of financing 0:17:08.920 --> 0:17:11.720 that they were raising. But that doesn't mean that both 0:17:11.760 --> 0:17:15.280 fossil fuel companies and low carbon companies stopped spending money 0:17:15.359 --> 0:17:18.399 stopped investing. It can come from their balance sheets or 0:17:18.400 --> 0:17:21.240 their cash flows and their own books, as opposed to 0:17:22.080 --> 0:17:24.520 raising financing through the capital markets. 0:17:24.720 --> 0:17:26.520 So wait, let me just just clariff make sure I've 0:17:26.560 --> 0:17:30.320 understood this correctly. So what you're saying is the organizations themselves. 0:17:30.600 --> 0:17:33.360 If you are a clean energy supplier of some sort 0:17:33.640 --> 0:17:36.359 you were probably you know, across the whole economy investing 0:17:36.520 --> 0:17:39.639 at a higher rate than your counterparts in the fossil world, 0:17:39.760 --> 0:17:44.280 like the companies themselves, like fossil fuel, if you're an 0:17:44.280 --> 0:17:47.080 oil and gas expiration company in twenty twenty three, you 0:17:47.119 --> 0:17:49.639 were investing less than maybe you usually do. Not just 0:17:49.680 --> 0:17:52.040 banks for investing lessons your sex, but you yourself were 0:17:52.040 --> 0:17:53.000 holding back more. 0:17:53.680 --> 0:17:57.159 Actually, I think I would say it's the opposite on 0:17:57.240 --> 0:17:59.800 both the low carbon and the fossil fuel sides these 0:18:00.080 --> 0:18:02.480 but he's had really high cash flows, which means that 0:18:02.640 --> 0:18:06.600 they're not necessarily scaling back their investment. They're spending, but 0:18:06.920 --> 0:18:10.520 they're spending from their own financing, from their own balance sheet, 0:18:10.520 --> 0:18:12.960 as opposed to raising a bond or taking out a 0:18:13.000 --> 0:18:14.520 loan in order to spend capital. 0:18:14.560 --> 0:18:16.200 Does that make sense, Yeah, it makes sense. 0:18:16.400 --> 0:18:17.879 I guess it kind of comes back to the question 0:18:17.960 --> 0:18:21.040 of there must have been some segment that was investing 0:18:21.119 --> 0:18:24.320 at a higher ratio than the banks, because if we've 0:18:24.320 --> 0:18:26.919 got one point one one across the entire economy and 0:18:27.000 --> 0:18:30.560 banks are at a zero point eight something, so someone 0:18:30.560 --> 0:18:32.399 else has must have been at like, I don't know, 0:18:32.440 --> 0:18:33.720 one point five, you know. 0:18:33.800 --> 0:18:37.080 Yeah, there's other actors that contribute to the energy supply 0:18:37.119 --> 0:18:37.960 investment ratio. 0:18:38.080 --> 0:18:39.200 So this is a good point. 0:18:39.320 --> 0:18:43.120 In addition to just energy sector companies spending money, we've 0:18:43.160 --> 0:18:47.640 also got households and consumers, and so another important factor 0:18:47.720 --> 0:18:50.760 in the investment number is small scale solar. Small scale 0:18:50.760 --> 0:18:53.919 solar grew sixty six percent between twenty twenty two and 0:18:53.960 --> 0:18:56.480 twenty twenty three and is also growing as a share 0:18:56.520 --> 0:18:59.400 of the total low carbon investment. Small scale solar tends 0:18:59.440 --> 0:19:03.119 to be financed either by households or if banks are involved, 0:19:03.359 --> 0:19:07.320 typically through their retail arms, so through their consumer lending arms, 0:19:07.359 --> 0:19:09.520 and that's not what we're tracking here, So we have 0:19:09.600 --> 0:19:13.800 very little visibility into what's going on between households and banks, 0:19:13.800 --> 0:19:17.200 and we're really looking at corporate financing and investment banking, 0:19:17.359 --> 0:19:19.880 and so we do miss quite a bit of what's 0:19:19.880 --> 0:19:22.800 really important on the low carbon side of investment. One 0:19:22.840 --> 0:19:26.119