Net-zero finance advocates at EIB warn against "dash for gas"

The energy crisis and resulting fossil fuel investment are causing the world to "drift" away from a net-zero path, several panelists observed at a 9 June conference in Florence organized by the European Investment Bank (EIB).

Panelists discussed the pressure to invest in fossil fuels instead of net-zero technologies following a surge in global energy prices spurred by Russia's war in Ukraine.

"I think we have been blown off course because of the Ukraine crisis, the energy price crisis, and the inflation crisis that we're currently living through," said Sonia Dunlop, public banks program leader at European thinktank E3G.

Dunlop said the only way to continue along the global net-zero path given the volatility was through a permanent greening of the financial system. "The road to climate safety is going to be a bumpy road, and we have to be prepared to be blown off course a few more times," she added.

War in Ukraine has led several European countries to reshape their energy strategies. For example, the EU policy, REPowerEU, and the UK's Energy Security Strategy both featured expanded targets for renewable energy capacity.

Eric Usher, head of the United Nations Environment Programme Finance Initiative (UNEP FI), said there were questions over whether the ambitious new targets would be backed by sufficient private finance. UNEP FI is the UN's sustainable development finance partnership.

Meanwhile, funding for fossil fuels remains a substantial barrier to getting on track for global net-zero emissions.

Last year, UNEP in its Production Gap Report found the world's governments were planning to produce 57% more oil and 71% more natural gas in 2030 than would be consistent with a Paris Agreement-aligned 1.5 degree Celsius global warming scenario.

Yet Usher believes the global financial sector "gets it" and won't finance fossil fuel development despite a "gap" in energy supply.

At the COP26 climate summit, financial institutions with assets representing "half of the global financial system" had set net-zero targets under the new Glasgow Financial Alliance on Net Zero, he pointed out.

Government guidance sought

However, "the private sector is very reluctant to put capital into this space unless governments will be giving them the certainty that there are guard-rails and their assets won't be stranded," said Usher.

"To some extent the [war] passes the puck back to the governments to basically say investors aren't going to lead on filling the gap. It's going to be up to governments to take some hard decisions. The hope is that if they need to fill it with any sort of fossil-based generation, it's going to be very short term and it is not going to lead to any stranding. If so, then the private sector is not going to be very interested," said Usher.

He added that, due to decades-long timelines for development, new fossil fuel infrastructure would not be able to meet the most pressing concern of governments facing higher energy prices: how to heat homes next winter.

Usher described the situation in Alberta, Canada, home to developments such as the Sunrise oil sands project, in which BP said on 13 June it plans to sell its 50% interest. He said that oil sands projects are "just not investable today."

Usher said he believed the finance industry should "lean in" and help design national transition plans for countries where governments' capabilities were lower.

A move to organize transition plans for poorer countries is already underway at the EIB, which will present a facility to help developing country authorities plan for the transition at the COP27 climate summit in November, according to EIB Vice-President Ambroise Fayolle, who spoke during a panel.

Dunlop urged financial institutions to provide renewable generation and adaptation finance packages in every emerging country economy by 2030-35.

But Martin Ewald, a lead portfolio manager with Allianz Global Investors, said the company had been seeking to finance renewable and adaptation projects in Africa with venture capital, and that there weren't enough projects to reach its $600-million target for fund size.

EIB as EU climate bank

In 2020, the EIB adopted a roadmap to become an "EU Climate Bank," committing to phase out fossil fuels financing by the end of 2021.

E3G praised the roadmap as "the most comprehensive and deep climate strategy of all major public development banks at the moment."

Since the start of 2021, all new EIB Group operations have been aligned with the Paris Agreement per its roadmap, according to the bank.

But in a 15 June report, a coalition of nine NGOs called Counter Balance issued a report criticizing the bank for lending €657 million ($693.76 million) for gas production, networks, LNG projects, and gas-fired power in 2020 and 2021.

The EIB in January published a two-year operational plan to get on track for climate finance which EIB Head of Environmental, Climate and Social Policy Stephen O'Driscoll, speaking on a panel, suggested could serve as a guideline for other banks.

"It's actually anchored in the EU's Corporate Sustainability Reporting Directive, and we're not asking our corporates to do much more than they would have to anyway under the EU directive," said O'Driscoll.

"It makes no sense to finance an electric vehicle charging project that is great and green, but is being financed by an oil and gas major that has no intention of turning its business around," he said.

Responding to a question from EIB moderator Shirin Wheeler, O'Driscoll agreed that the EIB has seen intense lobbying in favor of gas since the invasion of Ukraine began, observing: "I think it has blown us off course, and I think we need to work very hard to correct that. I think all of us in this room and the ministers at COP27 will have a big part to play in arresting the drift."

"We're the long-term financing arm and there's a danger that sometimes we get blown off track, but I think it's really important that we look for the long term and we don't get drawn into the short term. That we don't get drawn into the, dare I say, the 'dash for gas' that has emerged recently," continued O'Driscoll.

The bank is assisting with the financing of REPowerEU, the EC's proposed package of energy policies seeking to replace Russian gas supplies with renewables, hydrogen, and biogas. "We are now starting to look at how we operationalize this, which is fantastic," said O'Driscoll.

Last year the EIB achieved its 2025 goal of ensuring 51% of its financing is for environmental and sustainability finance. "We're on the right track, but we need to keep pushing, we need to keep scaling up," said O'Driscoll.

Posted 16 June 2022 by Cristina Brooks, Senior Journalist, Climate and Sustainability

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.