Blow for climate worriers as banks consider renewable energy to be a riskier investment than fossil fuels

Familiar sight in Texas [image credit: StateImpact Texas]

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The article here takes the climate alarm view, as usual with this source, and concludes that ‘risk assessments used by lenders are a boon for the oil and gas industry’. Oh dear! Maybe the fact that oil and gas are still in huge demand and tend to generate large profits, while renewables are expensive and require large subsidies, has something to do with it?
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The financial sector is among the world’s most heavily regulated industries – and for good reason, says The Conversation.

Financial rules, which force banks to hold capital in reserve when making riskier investments, are designed to prevent financial crises. Other financial regulations, such as accounting rules, aim to provide investors with a credible valuation of their financial assets.

However, new research I conducted with my colleagues shows that some of these rules may have unintended consequences for the low-carbon transition.

Building the renewable power sources that will replace fossil fuels will require a lot of money (Talkshop comment – and a very long time, if ever). Much of this will come from banks, among other investors. But some financial regulations affect a bank’s behaviour and lending choices.

By analysing global accounting regulations using data on European banks, our team of researchers identified a structural bias in financial models which are required to assess and report risk.

We found that these models rely on historical information about the creditworthiness of firms to assess the risk of various investments. Alarmingly, they tend to judge carbon-intensive assets as less risky than lower carbon ones.
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Low carbon v high carbon risk
We investigated whether models for assessing financial risk are inhibiting the transition from high-carbon economic activities, using data from the European Banking Authority (EBA).

We focused on the International Financial Reporting Standard accounting rules and their influence on which companies and sectors banks decide to lend to.

Risk assessments performed by banks on their investments directly affect their profitability. This in turn creates incentives for banks to lend to some activities over others.

Our analysis showed that the average estimate of risk among EU banks for high-carbon sectors of the economy was 1.8%, compared with 3.4% for low-carbon sectors (calculated as euros a bank expects to lose with each unit of lending).
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Global policymakers are now having to face up to the challenge of meeting their carbon neutrality pledges, but our research suggests that the tools, models and regulations they use are not up to the task.

Full article here.
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Image: Familiar sight in Texas [credit: StateImpact Texas]