Risk of moving from Fossils to Clean Energy

Risk of moving from Fossils to Clean Energy

News: Recently, a study published in the Global Environmental Change journal, which states that India’s financial sector is highly exposed to the risks of the economy transitioning from being largely dependent on fossil fuel to clean energy. 

Key Findings:

• Negative impact of Transition:
o  India’s financial sector is highly exposed to the activities related to fossil fuels and any transition from fossil fuel to clean energy will have a negative impact on this sector.
o  60% of lending to the mining sector is for oil and gas extraction.
o  20% of manufacturing sector debt is for petroleum refining and related industries.
o  Electricity production is the largest source of carbon emissions, accounting for 5.2% of outstanding credit.

• Lack of Experts:
o  There is a shortage of experts in India’s financial institutions who have the expertise to appropriately advise the institutions on transition from fossil fuel to clean energy.
o  Only four of the ten major financial institutions surveyed collect information on environmental, social and governance (ESG) risks and these firms do not systematically incorporate that data into financial planning.

• Not capable to respond to Shocks and Stresses:
o  High-carbon industries - power generation, chemicals, iron and steel, and aviation-account for 10% of outstanding debt to Indian financial institutions.
o  However, these industries are also heavily indebted, and therefore have less financial capacity to respond to shocks and stresses. This will further expose India’s financial sector to the risk associated with the transition.

• More Polluting and More Expensive Energy Supply:
o  The financial decisions of Indian banks and institutional investors are locking the country into a more polluting, more expensive energy supply. For example, only 17.5% of bank lending to the power sector has been to pure-play renewables. Consequently, India has much higher electricity from carbon-sources than the world average.

How will the transition help?
• The current lending and investment patterns reveal that India’s financial sector is heavily exposed to potential transition risks. However, the other side of risks is the tremendous opportunity to move finance towards sustainable assets and activities.
• In 2021, India committed to reach net-zero emissions by 2070.
• India has also announced plans to source half of its electricity needs (50%) from non-fossil fuel sources by 2030. This will require financing to the order of at least a trillion dollars to meet these commitments.