Climate pledges may bring rising prices

Some warn that switching to net-zero won’t come cheap

GLASGOW, SCOTLAND >> Big business finally seems to be taking the climate crisis seriously. After years spent lurking on the sidelines, CEOs of the world’s largest banks, companies and investment firms this week took a spot at the center of the debate at COP26.

Banks, asset managers and insurers in recent days pledged to use trillions of dollars to achieve net-zero emissions targets as pension funds and other big investors move to divest trillions more from the fossil fuel industry.

Yet some leaders of the world’s biggest financial firms including some who were part of pledges made at the climate summit in Glasgow are warning that the rush to rapidly transition away from a carbon-intensive energy system could unleash unintended consequences that would jeopardize the world’s economic recovery in the near term.

While some of their concerns are so far largely speculative, they suggest that less investment in fossil fuel production could send energy prices soaring and that divestment could make it harder to monitor dirty energy production.

Speaking at a conference in Saudi Arabia last week, Stephen Schwarzman, CEO of private equity firm Blackstone, said the growing number of institutional investors pledging to divest their holdings from fossil fuel companies was making it harder for oil and gas producers to finance production.

“If you try and raise money to drill holes, it’s almost impossible to get that money,” Schwarzman said, adding that an energy shortage could lead to “real unrest” around the world. It is a sentiment that has been echoed by other executives in recent weeks, as U.S. oil prices hit $85 a barrel, a seven-year high.

Jamie Dimon, CEO of JPMorgan Chase, said in an interview that the world should be transitioning to a decarbonized economy “right now.” But he cautioned that while less money was being invested in fossil fuels, therefore tightening the supply, it was important for banks to keep funding conventional energy production.

“You’re not going to get rid of oil and gas consumption tomorrow,” he said.

And Larry Fink, CEO of BlackRock, said that if fossil fuel production was reduced too quickly before

clean energy was abundant it could cause energy prices to spike, disproportionately harming developing economies. “That’s going to create a more polarized, divergent world, and the emerging world can’t afford it,” he said in an interview.

“Divestitures are not getting us to a net-zero world,” Fink added. “It’s just making it worse.”

Despite the chieftains’ concerns, there is still ample money available to fossil fuel companies. In the six years since the Paris Agreement, banks have facilitated almost $4 trillion of financing for fossil fuel

companies, including $459 billion worth of bonds and loans for oil, gas and coal companies this year alone, according to Bloomberg.

At the same time, it is also true that more and more pension funds, university endowments and philanthropies are pledging to divest their holdings from dirty energy production. Last year, New York state’s $226 billion pension fund became among the largest to make such an announcement. Entities worth some $40 trillion have now committed to divest their holdings from fossil fuel production.

There is little to suggest that the pledges to withdraw investment from fossil fuel businesses are affecting short-term energy prices. And with oil prices

high once more, more investment could be on the way.

“Just because some foundations and universities are divesting, that’s not why these companies don’t have capital,” said Raj Shah, president of the Rockefeller Foundation, which last year committed to divest its $6 billion endowment from fossil fuels.

Shah pointed to a confluence of other factors that were roiling the energy market. The sudden rebound in global economic activity during the second year of the COVID-19 pandemic created a spike in demand for energy. Years of underinvestment in conventional power while prices were low left oil and gas producers with short supply.