The decarbonization of the power sector relies on a dual dynamic from banks: reducing financial support for fossil fuels and providing massive support for sustainable alternatives to replace them. The energy financing ratio, which captures these two trends through a single metric, is increasingly cited within the financial sphere, including by regulators. It is now the Institut Louis Bachelier (ILB) that is contributing to the discussion: a recently published article [1] provides an in-depth analysis of the energy supply ratio (ESR) and details the key aspects of a calculation methodology.<\/p>\n<\/div>
What is the Institut Louis Bachelier (ILB)?<\/p>\n
The ILB [2] is a private research network in economics and finance, bringing together academics, professionals, and public authorities. As a reference organization in the academic landscape, it funds, develops, and promotes scientific research, particularly on major transition challenges: environmental, digital, demographic, and financial. With over 400 researchers, the ILB aims to equip financial institutions with tools to implement practices that support the energy transition.<\/p>\n<\/div><\/div><\/div><\/div>
Derived from the \u00ab\u00a0Net Zero Emissions by 2050\u00a0\u00bb (NZE) scenario of the International Energy Agency (IEA), the energy financing ratio synthesizes the dual trajectory of global investments in the energy sector by 2030. On the one hand, annual investments in renewable energies, power grids, and batteries must double compared to 2024 levels, reaching $2,500 billion USD by 2030. On the other hand, investments in fossil fuels must decrease to $400 billion USD by 2030\u2014resulting in a ratio of 6:1 [3].<\/p>\n
Since the IEA clearly indicated that this ratio constitutes \u00ab\u00a0an important guide for financial actors looking to assess their equity and lending portfolios against net zero targets\u00a0\u00bb [4], other voices have joined in.<\/p>\n
As a result of this growing momentum, financial actors themselves are beginning to adopt this ratio. The most significant example is the negotiation initiated by the New York City pension fund manager with major North American banks in 2024 [9]. This led to JPMorgan Chase publishing such a ratio in December 2024 [10] and commitments from Citi and the Royal Bank of Canada to publish their ratios later this year. Across the Atlantic, three banks have published their ratio: Santander\u2014which adopted the ratio calculated by BNEF\u2014Cr\u00e9dit Agricole, and BNP Paribas. Only the latter has extended the publication of its ratio with a target for 2030.<\/p>\n
This totals four published ratios, each with different methodologies, making comparison impossible. While some are more advanced than others, none can be considered robust, and two major limitations stand out. The first concerns the scope of reported activities. Numerous omissions are noted in the fossil fuel value chain, particularly midstream and downstream, which are largely ignored by BNP Paribas and Cr\u00e9dit Agricole. The second concerns the financial services taken into account. While a credible ratio should consider all types of financing (including bond issuances), Cr\u00e9dit Agricole and BNP Paribas limit their ratio to loans\u2014which represent 69% and 60% of their support for fossil fuels between 2016 and 2023, respectively [11].<\/p>\n<\/div>
In this context, the ILB’s publication establishes robust methodological bases and addresses the proliferation of bespoke methodologies by banks. This methodology, from a reference organization, can guide both banks reluctant to develop their own methodologies and those that need to strengthen their ratios, to ensure a credible climate strategy.<\/p>\n
Notably, three key points must be urgently considered in the methodology proposed by the ILB:<\/p>\n
The absence of an independent and clear methodology was both an obstacle and a risk. It was an obstacle for banks unwilling to expose themselves to the risk of producing their own ratios and a risk of seeing the few pioneering banks generate a proliferation of incomparable methodologies. With this publication, the ILB provides a robust tool that banks eager to demonstrate the credibility of their climate strategies can adopt. Meanwhile, pioneering banks, like BNP Paribas and Cr\u00e9dit Agricole, should immediately seize this publication to strengthen their ratios.<\/strong><\/p>\n<\/div><\/div><\/div>Notes:<\/h3><\/span>
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