An ocean of financing keeps the world’s fossil fuel companies afloat. The European Investment Bank’s decision last week to phase out fossil fuel lending by the end of 2021 — although widely applauded by environmentalists — hardly changes that.
Between 2013 and 2017, the European Investment Bank (EIB) lent €11.8 billion to fossil fuel projects, according to the non-governmental organization (NGO) Bankwatch. That seems like a lot. But more than a dozen banks lent a larger amount last year alone, according to another NGO, BankTrack. JP Morgan Chase extended $62.7 billion in fossil fuel financing in 2018 alone. The second-biggest lender, Wells Fargo, lent $61.4 billion.
Next to these private sector behemoths, the EIB is a bit player.
As Bill Gates, the billionaire philanthropist who has invested in low-carbon technology, told the Financial Times in September, addressing fossil fuel divestment campaigns: “It’s not like you’ve capital-starved [the] people making steel and gasoline.”
Yet the landmark policy change still deals a blow to borrowers in search of money for coal, gas or oil projects. If state-sponsored lenders like the EIB are pulling out of fossil fuels, that makes investors think: will other state entities begin to withdraw their support from this sector, or, perhaps, levy new penalties against it? As insurance against that possibility, lenders are likely to demand higher interest rates from fossil fuel companies, thereby increasing the costs of raising capital and making renewable energy or low-carbon alternatives look more attractive.
“Given the signal it sends to the market, the real squeeze on developers may come on the equity side,” said Dr Charles Donovan, director of the Centre for Climate Finance and Investment at Imperial College Business School, and the co-author of a briefing on the topic.
The decision by the EIB and others — such as the 2018 commitments by the World Bank or the European Bank for Reconstruction and Development to cut back on fossil fuel lending — will also free up money to lend instead to low-carbon and renewable energy sources. The EIB’s new policy will unlock €1 trillion in financing for climate action and environmentally sustainably investment in the next decade, the bank says. (It was not clear if that figure included only capital extended by the bank itself.) That is a not insignificant fraction of the some $1 trillion or more that climate groups say is needed to limit warming to 2°C above preindustrial levels.