As the world is affected by Ukraine war and rivalries between China and the West over access to gas, sustainable finance is struggling. Executive Director of the Climate & Business Certificate at HEC Paris and Head of Climate Finance at consultancy Perspectives Climate Change Igor Shishlov (M.21) states that only coercive public policies can steer financial sector investments towards the energy transition.


The cost of the energy transition is estimated at $3,000 billion per year by 2050. Does the private sector have enough money to finance the decarbonization of global economy?

Igor Shishlov : Yes. Several studies show that the private sector (which includes financial markets, investment funds, banks and industrials) has enough resources to finance the transition. Why not doing it? Because investors consider the risk/return ratio. From this point of view, fossil fuels remain attractive – at least in the short term. Renewable energy projects, on the contrary, require substantial upstream investment. They are more sensitive to interest rate changes, especially in emerging countries.

Now, if we look at current economic conditions, we’re coming out of a decade of very low interest rates. The renewables industry also has to cope with the inflation of components. This is not without pain, as illustrated by the recent difficulties of Orsted [editor’s note: Orsted is the #1 global offshore wind power; the Danish group had to cancel several projects due to rising costs. Its share price plunged in recent months].

If the money is there, what should we do for it to support low carbon initiatives?

I.S. : We need public policies to direct financial flows. It is naive to believe that the industry will do this without constraints. Carbon price, a key instrument, has the potential to generate tens of billions of dollars for the transition. Whether it takes the form of a carbon tax or quota trading, this mechanism can charge emitters of negative externalities, thus making polluting projects less attractive.

But this mechanism is not enough. Some solutions, in energy efficiency for example, require a huge upfront investment whose strong return only materializes within a few years. Not everyone can afford it for they lack available cash. That’s why subsidies are so important – and indeed, they’re the reason why wind and solar technologies have finally taken off. Hence programs such as the Green Deal or the Net Zero Industry Act in Europe, or the Inflation Reduction Act (IRA) in the US. To sum up, we need a combination of diversified climate and energy policies to finance the transition.

Investments in decarbonization don’t meet the target set by the Paris Agreement. Worse still, investment in low carbon was half that in coal, oil and gas in 2022! Who is to blame, finance or governments?

I.S. : Economic agents are simply responding to incentives… which are moving in opposite directions. Take Europe. The carbon price under the Emissions Trading Scheme (ETS) sends out a signal in favor of transition. But at the same time, many governments have increased fossil fuel subsidies in response to the war in Ukraine, with mechanisms such as the tariff shield or fuel rebates. In this context, oil & gas giants continue to generate huge profits. French firm TotalEnergies, for example, has just reported record profits. No wonder that oil majors are still attracting investors and increasing their production. By the way, the latest Production Gap report from the United Nations Environment Program shows that half new fossil fuel projects come from developed countries… which have nothing to teach emerging countries.

For the first time, COP28 supported a transition away from hydrocarbons. Which impact does it have on the roadmap of major financial players?

I.S. : This is a pivotal moment: it took thirty years to come up with such a wording! It sends out a positive signal, but the impact on national policies is still very uncertain. Problem is, there still is no climate organization with power to sanction. National governments can decide how and at what pace they implement the decisions adopted at the COP.

With the so-called best in class approach, a “sustainable” investor can invest in TotalEnergies claiming that the group is less bad than other oil companies, or that it is moving in the right direction. What do you think of this method?

I.S. : It is obsolete. It made sense in the past, before countries committed to a net zero-carbon trajectory. Today, you shouldn’t invest in TotalEnergies (which is developing new fossil fuel projects) if you want your investment portfolio to be aligned with the Paris Agreement. With this “best in class” logic, one would invest in the most efficient coal-fired power plants. Obviously, that doesn’t stick to global climate objectives.

Many investors ask companies for extra-financial reporting but don’t put pressure on them to decarbonize their activities. So, what’s the point?

I.S. : Transparency is useful. Public information makes the work of researchers and NGOs easier. But investors undoubtedly need to go further and get involved. Shareholders can get companies moving. In the US, for instance, a small activist investment company called Engine N°1 has bought 0.02% of ExxonMobil’s shares. It now has three seats on the board of directors and is therefore able to put pressure on management.

Your research focuses on international public institutions. What role can they play in financing the transition?

I.S. : Multilateral banks and state-owned organizations like Agence française de développement (AFD) are involved in most energy projects in developing countries. They make investments more attractive for private investors. Export credit agencies are a bit different as they have no mandate for development. Their size may be modest compared with that of the private financial industry, but they play a key role in providing de-risking instruments: guarantees and insurance against interest-rate fluctuations or political risks (such as expropriation of assets). Yet, these agencies continue to massively support fossil fuels while they are financed or backed by public money. I am a member of the Perspectives Climate Group. One of our goals is to reform these agencies so that they serve the ecological transition.

In America, the Republicans criticizes ESG policies and the emergence of “woke capitalism”. What could happen if Donald Trump wins the next presidential elections at the end of the year?

I.S. : I’m very worried. If Trump is elected, he is likely to weaken US climate policies, as he already did during his first term. He will probably cut the Inflation Reduction Act (IRA) subsidies, the budget of the Environmental Protection Agency as well as dent climate regulations. This would send a very negative signal to the rest of the world.

There have been tensions between the United States and China for a while, but climate remains a subject of cooperation between the two countries, as we saw in the run-up to COP28. If Trump attacks China head-on on trade issues, this cooperation could shatter. That would deeply affect the multilateral climate process.


Interview by Thomas Lestavel

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