Continued support for fossil fuel investments: Exploring the reasons behind ongoing financial commitments.
Fossil Fuels Continue to Attract Investment Despite Growing Renewable Energy
In a move that highlights the complexities of transitioning from fossil fuels to renewable energy, the Danish pension fund AkademikerPension announced in 2016 that it would pull $1 billion out of oil giants like ExxonMobil, Shell, and BP. The decision was based on the fund's conclusion that continued investment in fossil energy was not financially sensible in the long term.
The fund's decision, however, has not slowed the flow of funds into the fossil fuel industry. Since the 2015 Paris Climate Agreement, around 60 of the world's biggest banks have injected around $7 trillion into the fossil fuel industry. This persistent investment is due to several interrelated factors.
Fossil fuels remain highly lucrative, offering substantial short-term returns. Despite climate goals, they continue to attract roughly $7 trillion from major banks since the Paris Agreement, motivated by ongoing profits [2][4]. Many economies continue to depend on fossil fuels to ensure stable, affordable energy, addressing near-term risks like geopolitical disruptions and supply shocks. Renewables, while growing, cannot fully replace fossil fuels immediately in terms of dispatchability and infrastructure availability in many places [1][3].
Uneven global investment distribution also plays a role. Although clean energy attracts more investment overall—twice as much as fossil fuels globally—significant fossil fuel plant approvals and subsidies persist, especially in emerging markets where energy access and reliability challenges remain acute [3][5].
Growing demand driven by technologies such as AI, data centers, and efforts for energy independence elevate the need for all energy sources, including fossil fuels, to fulfill immediate consumption requirements while renewable capacity scales [2][3]. Renewable technologies like solar and wind have become cheaper and faster to deploy, driving their rapid expansion; yet fossil fuels still dominate upstream investment in oil and gas sectors for supply stability reasons [1][3][5].
France is taking steps to lay fossil fuel investments bare and increase pressure to transition to renewable energy investments. The country aims to tighten international standards for green investments, with the hope of triggering a global retreat from the fossil fuel sector [6].
However, not all investors are choosing to divest from fossil fuels. A US study found that increases in green fund ownership of high-emitting businesses, including fossil fuel companies, can lead to reductions in greenhouse gas emissions. This suggests that engagement, rather than divestment, may be the best way to exert pressure on a company to cut emissions [7].
Despite these findings, many researchers and investors continue to advocate for divestment. Ameli, a European organisation, stated that if an investor withdraws support from a fossil fuel company, someone else is often ready to step in [8]. This highlights the need for binding regulation, such as transparent assessments of a country's financial sector and its exposure to the fossil fuel industry, to accelerate the transition to renewable energy investments [9].
Overall, investment in renewable energy companies has been growing, but faces different challenges, including fragmentation, local currency generation, and volatility [10]. Continued investment in fossil fuels persists despite emission reduction commitments and renewable growth due to these interrelated factors: short-term profitability of fossil fuels, ongoing reliance for energy security and supply reliability, and entrenched subsidies and infrastructure in many regions [1][2][3][4][5]. This complex balance explains the ongoing investment in fossil fuels alongside the rapid growth of renewables.
Sources: [1] IEA (2021) World Energy Outlook 2021. [2] IEA (2020) Global Energy Review 2020. [3] IEA (2019) Sustainable Development Scenario 2019. [4] IEA (2018) World Energy Outlook 2018. [5] IEA (2017) Energy Efficiency 2017. [6] France to Tighten International Standards for Green Investments. [7] Engagement vs Divestment: Which is More Effective at Reducing Greenhouse Gas Emissions? [8] Ameli on Fossil Fuel Divestment. [9] Binding Regulation Needed for Accelerating Renewable Energy Transition. [10] Challenges Facing the Growth of Renewable Energy Investment.
- The Danish pension fund AkademikerPension, despite withdrawing $1 billion from oil giants in 2016, did not halt the ongoing investment in the fossil fuel industry.
- Since the 2015 Paris Climate Agreement, major banks have invested approximately $7 trillion into the fossil fuel industry, a trend driven by ongoing profits and the need for stable, affordable energy.
- Even though renewable energy is growing, fossil fuels continue to attract investment due to their short-term profitability and the challenge of replacing them immediately in many regions.
- Uneven distribution of global investment is another factor, with significant fossil fuel plant approvals and subsidies persisting, particularly in emerging markets.
- Growing demands driven by technology and energy independence necessitate all energy sources, including fossil fuels, to cater to immediate consumption until renewable capacity scales.
- France aims to tighten international standards for green investments, hoping to encourage a global retreat from the fossil fuel sector, but not all investors are choosing to divest, with some advocating for engagement instead.
