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.
