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Persistence of Fossil Fuel Investments: What's Behind the Continued Financing?

Financiers, despite vowing action against climate change, continue to pour immense funds into the oil and gas sector. A mystery arises: where did the commitment to disinvest from fossil fuels go?

Persisting Funding of Fossil Fuels by Investors: Understanding the Rationale
Persisting Funding of Fossil Fuels by Investors: Understanding the Rationale

Persistence of Fossil Fuel Investments: What's Behind the Continued Financing?

In the face of escalating global climate concerns, France has taken a proactive stance in laying bare fossil fuel investments and tightening international standards for green investments, with similar strict rules applying to investors across the European Union. However, ongoing investments in fossil fuels persist, primarily due to existing high demand, short-term profitability, and significant financial and government backing for fossil fuel projects.

Since the 2015 Paris Climate Agreement, around 60 of the world's biggest banks have invested approximately $7 trillion into the fossil fuel industry. This trend continues despite the rising global temperatures linked to emissions from burning fossil fuels and predictions suggesting more growth in the sector. The high short-term returns and profitability of fossil fuel companies attract investors who prioritize immediate financial gains over long-term climate goals.

Government subsidies and support significantly favor fossil fuels. Despite international pledges to reduce or reform these subsidies, they still total over $1.7 trillion, enabling expansion of fossil fuel extraction, mining, and infrastructure. Energy security concerns related to the geopolitical risks and price volatility of fossil fuels create a hesitation to fully transition. Fossil fuels are still viewed by some countries as reliable to meet immediate energy needs despite renewables becoming increasingly affordable and flexible.

The renewable energy sector faces different challenges, such as being more fragmented and often generating revenue in local currencies, making it more difficult to invest large sums. Despite commitments from many financial institutions, including banks, asset managers, and insurers, to align their investments with reduced emissions by 2050, these commitments have not yet led to significant reductions in investment in the fossil fuel sector.

However, some positive signs are emerging. A US study found that increased ownership of high-emitting businesses by green funds can lead to reductions in greenhouse gas emissions, implying "green investors make companies greener." European countries are leading the way in creating regulations to target the world's biggest banks, with the goal of creating a ripple effect.

In 2016, AkademikerPension, a Danish pension fund, decided to divest $1 billion from oil giants like ExxonMobil, Shell, and BP. While divestment can reduce a fossil fuel company's market value, it doesn't seem to impact its carbon emissions significantly. However, for AkademikerPension, the decision was profitable, but it has been a poor decision in the short term for some renewable energy companies.

Divestment from fossil fuels has grown in recent years, with over 1,600 organizations, including churches, universities, and large funds, committing to either wholly or partially withdrawing their investments from the industry. If the biggest investors pull out of fossil fuels, this could trigger a global retreat of banks from the sector, according to experts.

Binding regulation, such as a public, transparent assessment of a country's financial sector and its exposure to the fossil fuel industry, is needed to accelerate change, according to experts. The International Energy Agency states that to meet the targets agreed in global climate talks, the annual investment required in renewable power still needs to double. The challenge remains to balance short-term profitability with long-term climate goals and to create a level playing field for renewable energy investments.

  1. In an attempt to mitigate climate-change, France has implemented stricter standards for green investments, with similar rules applying to investors across the European Union, aiming to reduce fossil fuel investments.
  2. Ongoing investments in fossil fuels are primarily driven by high demand, short-term profitability, substantial financial and government backing, and rising global temperatures linked to emissions.
  3. Since the 2015 Paris Climate Agreement, about 60 international banks have invested approximately $7 trillion into the fossil fuel industry, despite predictions suggesting more growth in the sector.
  4. Government subsidies still total over $1.7 trillion, favoring fossil fuels and enabling expansion of extraction, mining, and infrastructure, despite international pledges to reduce or reform these subsidies.
  5. Assets managers, banks, and insurers have made commitments to align their investments with reduced emissions by 2050, but these commitments have not yet led to significant reductions in investment in the fossil fuel sector.
  6. Divestment from fossil fuels has grown in recent years, with over 1,600 organizations committing to withdrawing their investments, potentially triggering a global retreat of banks from the sector and accelerating change towards renewable energy investments.

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