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Debt investors retreat from funding dirty energy

Banks are coming under fire from all sides for their role in funding fossil fuel companies, even though most have pledged to pull back over the coming decades.

What's happening: Despite pressure from activists, shareholders and Democratic politicians to finally divest from carbon-spewing businesses as the planet warms, the biggest American banks are still energetically backing dirty energy.

The big picture: Withdrawing capital from fossil fuel companies is only half the story in the transition to a sustainable future. The other half is investment in developing the technology and infrastructure to support widespread adoption of renewable power.

  • Banking heavyweights like JPMorgan Chase and Bank of America have committed trillions to sustainable projects. And this year has brought a surge of private capital investment and major fund closings in the climate tech space, as Axios Generate author Ben Geman reports.

Where it stands: Until that renewable infrastructure is in place at a larger scale, there’s still a need for some level of fossil fuel power.

  • Those companies need funding — but simple supply-and-demand dynamics means fossil fuel companies increasingly have to pay up for the privilege of borrowing cash, sources tell Axios.
  • “There’s a growing number of [credit] investors who have oil and gas on their list of what they don't want to lend to," a capital markets banker tells Axios.

The impact: How much more do dirty energy companies have to pay? The cost compared to non-fossil fuel businesses can range from a half a percent premium to more than 5% for riskier endeavors.

  • And a shrinking universe of lenders means that if a company faces a bout of financial distress, there may not be anyone there to lend it money.

State of play: This scenario is most pronounced in the coal world.

  • “There’s a very small pool of alternative capital providers that are now financing these assets at low to mid-teen interest rates, whereas three or four years ago there was a wide dispersion of capital available at very competitive rates,” Chris Post, a senior managing director in FTI Consulting’s power & renewables practice, tells Axios.
  • It’s not just ESG sensibilities dragging investors away from coal. From a purely financial standpoint, the industry has become less economic over the last decade — and there’s regulatory risk, too.

Meanwhile: In the oil and gas space, the lending calculus is different.

  • Profitability in the sector depends on the prices of oil and gas. Low oil prices early last year brought a wave of bankruptcies among smaller independent U.S. producers.
  • But oil prices are up more than four-fold since the low reached in April 2020 — enabling a lot of those producers to make money.
  • Cue the debt spigot for companies willing to pay the pricing premium.

The bottom line: Investors are driven by returns. As the universe of buyers of fossil fuel debt shrinks, so too does liquidity in the market and the ability to exit a position if things go south — a risk that helps perpetuate the shrinking universe of buyers.

  • At the same time, the ability to charge higher than average interest will no doubt keep other investors hooked on lending to fossil fuel companies.

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