The Role of Finance in the Energy Transition

Key takeaways

• Transitioning away from carbon-intensive energy sources in the next decade is crucial and finance can play a role in the decarbonization of the energy sector by 1) divesting from polluting firms, 2) engaging with them to change their behaviours, and 3) financing the development of cleantech businesses and the transition of dirtier ones.
• Divestment fails to incentivize fossil-fuel firms to transition, as alternative funding options are available, and transitioning, i.e., shifting its core business, is often more costly than the financial and reputational cost of being divested.
• Engagement with fossil-fuel firms about GHG emissions may not be as effective as with other sectors because of the cost and uncertainty of the requested shift in core activities combined with the predominance of state-owned producers.
• Pro-climate investments have a more tangible impact on firms as they directly finance clean energy and transition projects, through early-stage financing, debt, and equity.
• Overall, the best way to achieve the transition is through a massive decrease in the demand for fossil fuels. Finance can judiciously accompany the movement but it cannot be a substitute for the essential role of governments and fossil fuel users.