There’s no denying that the shift from fossil fuels toward a low-carbon economy is underway. As of year-end 2023, more than half of the world’s largest companies had established net-zero objectives, global energy transition investment in 2023 totaled $1.8 trillion and overtook fossil fuel investment, and worldwide renewable energy capacity increased over 50 percent year-over-year.
This progress can be attributed to stakeholder pressures stemming from companies, governments, asset managers, nongovernmental organizations, activists, and regulatory bodies across the globe; innovation in technologies, including abatement solutions such as carbon capture and hydrogen; cost competitiveness of renewables in certain markets when compared to carbon-emitting alternatives; and capital availability and affordability.
How do we truly avert a full climate catastrophe?
Yet much more needs to be done to achieve net zero by mid-century. The topic of energy transition takes center stage at all major global forums, including, most recently, at COP28. The narrative has shifted from why to how: How do the 123 countries that pledged to phase out fossil fuels and triple global renewable power generation by 2030 meet this multitrillion-dollar ambition? How do we truly avert a full climate catastrophe?
Challenges Persist
Inflation, rising interest rates, supply chain disruptions, geopolitical conflicts, and humanitarian crises are all challenging the path to net zero.
The energy trilemma—the need to strike a balance between energy security, affordability, and sustainability—is frequently cited as an impediment. It is difficult to fully eliminate fossil fuels, which for so long have provided reliable power and been a cheap source of energy. To ensure an orderly transition, it is critical to account for each country’s natural resources and market fundamentals to find the most appropriate transition pathway, especially in such times of uncertainty.
Further, elections in several economies driving the energy transition (including the US, UK, and EU) are set to unfold this year and could have significant implications for the global decarbonization agenda. Since low-carbon projects often face barriers such as high upfront costs, greater technology risk, and lack of access to financing, regulatory support is critical for the adoption, scale, and competitiveness of those projects in comparison with fossil-fuel alternatives. The US Inflation Reduction Act and the EU’s Green Industrial Plan have shown the benefits of such frameworks in the development and adoption of low-carbon technologies, moving these solutions from the fringe to the mainstream by incentivizing investors.
The Transition Continues
Investors must make real-time decisions that will determine the fate of their businesses. For some, the choice can include a full pivot towards cleaner technologies, potentially affecting returns and profitability in the near term to avoid stranded asset risk in the future. For others, the choice may not be so obvious, especially in the absence of robust carbon pricing or well-established business models for low-carbon technologies.
Investor preferences for low-carbon solutions are on the rise. Even as global infrastructure fundraising hit its lowest level in almost a decade, energy transition accounted for 66 percent of all sector-focused capital. Many of the largest financial sponsors and infrastructure funds continue to carve out dedicated teams and products for low carbon. Large corporates have been aggressively pursuing renewable developers with record levels of strategic partnerships and acquisitions. Even when the US briefly retreated from the Paris Accords in 2020, investments in energy transition soared to new heights.
Amid macroeconomic ebbs and flows, we at BNP Paribas see that this momentum is secular, deliberate, and, above all, here to stay. Decarbonization is a gradual and complex process—complicated by the vast interconnectedness of different industries.
As a bank supporting the full spectrum of industries and their respective value chains, BNP Paribas has made the energy transition its top strategic priority. Like our clients, we believe we have a critical role to play in the fight against climate change.
We continue to redirect our efforts away from activities supporting the production of carbon-intensive energies and towards cleaner energies. Through our policies, we have ceased support for high-emitting actors that are not pivoting quickly enough. We also do this through continuous product innovation. Green finance has unlocked many new sources of capital and ways to tie companies' sustainability goals to their financial activities.
Decarbonization is an ever-evolving challenge for business leaders yet, undeniably, the only path forward. And BNP Paribas strives to be at the forefront of that charge.