‘Labour should close the gaps in how investors finance fossil fuel expansion’

If the past two years have taught us anything, it is that there is still a lot of money to be made in fossil fuel energy. Companies, like Britain’s BP and Shell, and their shareholders have reaped the rewards.

In this context, it is perhaps fitting that COP28 has seen a worrying theme from the chair: the suggestion fossil fuels can continue to be major feature of our energy mix far into the future, despite the clear climate risks.

A crucial source of financing for this coal, oil and gas expansion are corporate bonds which link financial actors to the fossil fuel industry.

At the Common Wealth think tank, our research into corporate bonds has found that since the Paris Climate Agreement became statutory in November 2016, the fossil fuel industry issued $1.8 trillion in bonds, according to Urgewald’s Global Coal Exit List and Global Oil and Gas Exit List.

In 2020, bonds were the largest source of financing for the fossil fuel industry, rising from 14% in 2000 to 52% in 2020. Corporate bonds are also a more ubiquitous form of financing than shares – the biggest 100 emitting coal, oil and gas companies are dependent on the bond market for their financing, while only 30 are listed on stock markets.

Our new report explores how corporate bond markets and investors, like asset manager giants, are becoming funders of last resort for the fossil fuel industry.

In this microsite, we illustrate who the top bond holders are for specific fossil fuel companies and which fossil fuel companies the top asset managers invest in the most through bonds. In order to decarbonise, we need to understand bond markets and the role they play in the ongoing expansion of fossil fuels.

The largest twenty asset managers, by assets under management, held at least $149 billion in bonds. It is clear from freak weather events becoming the norm that the era of climate breakdown is upon us.

Despite this, the majority of banks and investors have not aligned their investment strategies with net zero or Paris climate targets and continue to underwrite and invest in bonds issued by the biggest global polluters.

To better understand the approach of asset managers, let us take them at their own word. In their letter to CEOs, BlackRock CEO Larry Fink states “[w]e focus on sustainability not because we’re environmentalists, but because we are capitalists”. Ensuring that BlackRock is able to make a profitable investment is more important than decarbonisation, net zero or internationally agreed climate targets.

What, then, happens when renewable energy generation sustains dwindling profits?

As the IEA’s recent report on net zero states, fossil fuels will be needed, even in a net zero policy scenario. However, every company believes that they will be the last company standing. Our explainer shows that the bond between financial markets and fossil fuel companies needs to be broken.

Reforms like calls for investors to deny debt to coal, oil and gas companies who are not committed to scaling down their polluting activities or aligning their operations with a global plan for net zero are welcome. However, there is a better, more powerful antidote.

Public investment and ownership of a renewable energy generation firm, not unlike Labour’s plans for ‘Great British Energy’, would decrease the UK’s reliance on the fossil fuel sector.

While the initial capital investment in renewable infrastructure would dent the state’s balance sheet, an ambitious policy to create a publicly owned renewable energy firm could save up to £20.8 billion a year in national energy bills, providing returns to the public for generations.

A drop in the demand for fossil fuel generated energy would also make energy companies less profitable, and, crucially, investments through bonds issued by these firms less attractive.

It makes sense for Labour to centre the role of public renewables in spurring on the clean energy transition, delivering lower energy costs, and insulating homes and businesses from future shocks in oil and gas prices.

There should be no excuse for including fossil fuel bonds in financial portfolios when the business they finance is fundamentally at odds with a sustainable planet. However, this ideal does not match the reality of fossil fuel bond markets. Perhaps bold political intervention is required to reach net zero instead.