A Small But Big Step Backward

With the exit of America’s largest bank, J.P. Morgan Chase & Co., from the Net-Zero Banking Alliance (NZBA) last January 7, a definitive turn in the attitude towards energy investing was recognized by analysts at all latitudes. J.P. Morgan came remarkably as the last financial institution to leave the alliance, after Citigroup, Bank of America, Morgan Stanley, Wells Fargo, and Goldman Sachs took the same step over 2024, signaling a progressive detachment from the unrealistic carbon reduction targets that governments and companies around the world alarmingly cast upon themselves, and potentially a pivot to a more balanced view on energy, possibly characterized by the Energy Addition framework instead of a more punitive Energy Transition. Most importantly, the seemingly coordinated exodus of Wall Street players from NZBA has ushered a far-reaching debate on the prospective re-entry of investment banks in the energy financing arena after years of self-censorship, a move that could translate into fresh capitals becoming available to support existing as well as new technologies in the production, transportation and distribution of conventional energy sources.

The Net-Zero Bank Alliance is part of the United Nations Environment Programme Finance Initiative (UNEPFI), which for over 30 years “has been connecting the UN with financial institutions from around the world to shape the sustainable finance agenda” (Source: UNEPFI). In order to adhere to the NZBA, banks have to pledge to a Commitment Statement which imposes to transition investment portfolios to align with net-zero emission profiles by 2050 or sooner, making specific reference to managing exposure to industries deemed to contribute the most to GreenHouse Gas (GHG) emissions and then moving to more environmental-efficient players within a time frame of 36 months.

Despite the initial broad acceptance of the initiative, over the past 18 months the number of adhering institutions shrunk from 500, representing ca. USD 170tn assets under management, to the current figure of 135 banks for an asset consideration of ca. USD 56tn. It is thus apparent the initiative has ceased representing a reference point at the world’s largest financial institutions – possibly, because of the excessively stringent dispositions of the Commitment Statement, translating into what may have come to be estimated as a loss of business not being compensated by an increase in recognition and acceptance by the investor community at large. The attitude switch in energy investing appears even more stark upon recalling the dire predictions of the International Energy Agency (IEA) only in 2021, when the agency asserted that “no new oil and gas fields are needed on the path to net-zero emissions by 2050”. Only two years past such statement, however, the IEA was forced to concede that “some investment in oil and gas supply is needed to ensure the security of energy supply and provide fuel for sectors in which emissions are harder to abate”, while finally, in its World Energy Investment report for the year 2024, the agency completed its pivot plainly reporting that “upstream oil and gas investment is expected to increase by 7% in 2024 to reach USD 570 billion, following a 9% rise in 2023”.

While the Western world attempted to subvert rationality and logic of energy investing, the industry simply adapted. Over the past five years, as banks withdrew their support to conventional sources chasing the environmental-friendly credo, energy players relied on equity to fund existing as well as new projects. As a result, the balance sheets of companies at all latitudes are now considerably more solid as debt has been progressively repaid: for instance, the debt-to-equity ratio of Shell has plummeted from 0.70 at the end of 2020 to the current reading of 0.40; Chevron gearing fell from 0.32 in 2021 to 0.13 today, while that of ENI dropped from 0.85 as of December 2020 to 0.59 across the first quarter of 2025. Energy companies developed new financial and capital structure skills, which allowed them to tailor their tactics to the muted market sentiment and weather the combined pressures of the eruption of the COVID-19 pandemic in 2020-2021 and the heightened level of geo-political uncertainty that characterized the triennium 2022-2024.

Even more importantly, at an aggregate level the conventional energy industry is largely free from the massive subsidies received by renewable and alternative sources, and as such it can be expected to reflect asset valuations not obfuscated by exogenous financial instruments. Finally, the far-reaching industry consolidation that started over a decade ago has created a cohort of global-native players, boasting sufficiently broad capital and competence bases to independently engage in diverse projects through and across the entire energy supply chain. None of the above applies to renewable energy companies and the sector as a whole: in sheer dimensional terms, few entities can affirm to operate internationally, and market valuations seldom trade in the order of billions of dollars.

In addition, renewable energy companies heavily rely on cheap debt funding to sustain their projects: research company Eqvista estimates that the average debt-to-equity ratio of renewable electricity companies trades at 3.13 (i.e. debt in the capital of these firms is more than three times higher than equity), while that of Integrated Oil and Gas operators stands at 0.33. Finally, the tangle of subsidies that for more than two decades has inflated investment in alternative sources from slightly more than USD 1.1tn in 2015 to the ca. USD 2tn in 2024 not only has distorted the natural disposition of market dynamics, but it has groomed a generation of start-up firms with fragile business plans and economics now coming under the spotlight as incentives are progressively withdrawn. As a fact, solely over the years 2023 and 2024, more than 100 operators in solar energy declared bankruptcy just in the United States, while the downfall of Markbygden Ett, Sweden’s largest wind farm, in January 2024, led economists Christian Sandström and Christian Steinbeck to warn against a “wave of bankruptcies” in the sector, reporting that over the period from 2017 to 2022 the wind power industry destroyed investors’ capital for more than EUR 1.2bn.

Energy investing is thus at a crucial junction. From an intra-sector standpoint, the re-entry of commercial and investment banks as capital providers would definitely broaden the scope of projects that could come online, widening the portfolio of funding options to companies and allowing investors to enjoy the higher returns of the conventional energy market. In this sense, the Russian Federation has already secured an enviable competitive and strategic advantage: as confirmed by think-tank Energy Monitor, the country boasts some of the world’s most attractive energy projects, quantified in ca. 20.5 billion barrels of oil equivalent (bboe) already at the conjoint study of equity as well as debt investors. Similarly, another BRICS country, Brazil, has confirmed investments in conventional sources for more than USD 100bn over the 2024-2028 period, while Norway, to date Europe’s first supplier of natural gas and home to the world’s largest sovereign wealth fund, has begun structuring financing for oil and gas extraction even to the North of the Arctic Circle, as is the case of the ca. USD 7.2bn Johan Castberg project sponsored by the country’s energy champion, Equinor.

Savvy financial institutions have now the chance to reconstitute internal skills in energy investing and balance their asset books, at present presumably skewed towards alternative sources, by participating to selected conventional projects. It is indeed highly telling in this regard to witness the success scored by Trafigura, one of the world’s largest energy and commodity trading firms, launching its inaugural uncommitted discounted facility of credit-insured receivables and prepayments in January 2025: the facility was in fact largely oversubscribed by lenders, and ultimately raised to the size of USD 1bn from the initial amount of USD 800mln thanks to the participation of seven financial institutions.

On January 20, 2025, at the Inauguration ceremony of the 47th President of the United States, President Donald Trump declared National Energy Emergency and proclaimed the turnaround of America on environmental matters quoting the “Drill, Baby, Drill” 2008 Republican campaign slogan. Despite the  worries stirred by the U.S. President’s stated intention to “export American energy all around the world”, the community of analysts and traders has welcomed the pivot to a less ideologically-ridden approach to energy, and markets are indeed rewarding energy equities with a positive return since the beginning of the year equal to ca. 5.35%.

Sometimes, all it takes to move forward, is nothing but a step back.