With the climate-and-energy-focused Inflation Reduction Act expected to be signed by President Joe Biden this week, The Wall Street Journal asked Dealogic to analyze the amount of money being loaned to “green” companies and to oil and gas companies. Investors, WSJ concludes, aren’t ready to give up on fossil fuels.
But the data suggests that they’re starting to pull back already.
Fossil fuel financing has been more or less steady since 2015, when the WSJ/Dealogic data series begins. For oil and gas companies, that should be a worrying trend given overall low rates and the amount of money that’s been sloshing around the market the past few years.
Investment-grade bond issuance surged in 2020 before dropping to still-elevated levels in 2021. Yet fossil fuel investment didn’t follow the trend, dipping slightly instead of rising along with the market.
Bonds and loans for renewable projects and companies did the opposite, ticking steadily upward from 2015 on. In 2021, they more than doubled the previous year, matching the amount invested in fossil fuels for the first time.
This year, renewable companies remain neck-and-neck with oil and gas companies.
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Rising interest rates will no doubt blunt the overall market for bonds and loans, and climate tech companies are likely to take a hit along with everyone else.
Still, greater adoption of climate tech and renewable power more broadly will drive down costs, making them even more attractive to investors. Fossil fuel extraction won’t benefit from similar efficiencies — each new barrel of oil tends to be harder to extract than the previous one. Fracking may have unlocked massive new reserves but at a higher price floor than conventional oil.
Given the impending passage of the Inflation Reduction Act, it’s likely that climate tech companies will gain an edge, becoming more attractive investments. Renewable power projects are pretty transparent investments: Most of the costs are incurred upfront, and power prices tend to be fixed in contracts, so rates of return can be easily forecasted. The IRA will likely increase the certainty of those projects, giving developers a decade-long horizon over which they can expect continued investment in climate tech.
While the Inflation Reduction Act does offer a few incentives for fossil fuels, the balance tends toward renewables and climate tech, further cementing their appeal as attractive investments.
Investors have been riding the trend for years, not just in the bond and loan market. Venture capitalists have been plowing money into climate tech startups with increasing fervor. Last quarter alone, six climate tech companies made CB Insight’s top 10 lists, representing $2.1 billion in investments. Even before the bill was passed, climate tech investors were bullish. By 2025, McKinsey expects annual investments in the space to average $1.5 trillion to $2 trillion, about double what the world invests in oil and gas.
Sure, investors may be placing equal bets on fossil fuels and renewables today. But stepping back, it’s clear which direction the trend lines are pointing.
