Lenders, shareholders and the courts are abandoning the conventional energy sector, increasing its cost of capital relative to clean energy

Clean energy cost of capital advantage widening

International lenders are setting goals to reduce the emissions intensity of what they are financing to meet their own net zero emissions objectives by 2050 or sooner. According to Bloomberg, more than 100 global financial institutions (including some development banks) have agreed to divest from coal. Many have also agreed to stop investing in oil sands and drilling in the Arctic.

We reflect that these restrictions on providing capital to conventional energy are occurring at the same time as others are racing to invest in a comparably much smaller clean energy industry. This is likely to cause a material difference to the cost of capital available to both industries, accelerating the vicious/virtuous cycles playing out in each industry, respectively. These are all characteristics which continue to stack the odds in clean energy’s favour.

Last month we shared examples of the increasing headwinds facing carbon emissions intensive energy. Since then, several new developments suggest these headwinds are intensifying more rapidly than expected which underscores our view that we are truly witnessing generational changes to the status quo. The world’s most powerful ‘super-major’ oil companies are finding themselves in an extraordinary position which poses significant risk to their outlook.

Courts intervene to change the path on oil production

Royal Dutch Shell lost a major climate lawsuit. A court in The Hague ruled that the company’s plan to curb greenhouse gas emissions by 20% within a decade did not go far enough, ordering it to reduce emissions by 45% by 2030 from 2019 levels. Shell plans to appeal the ruling. We observed that a similar case has been filed in French courts targeting Total. The plaintiffs, comprising environmental groups and local authorities, are seeking to force Total to immediately cease exploration and cut emissions by reducing oil production by 37% by 2030 from 2010 levels.

Shareholder backlash against oil companies

In the United States, Chevron shareholders voted in favour of the company setting an absolute reduction target for greenhouse gases emissions. More interesting, three clean energy activists were elected to the Board of Exxon Mobil following a long proxy battle.