Report publications
As economies and societies align with net zero, climate-related risks will arise through changes in policy, technology, and market preferences.
These transition risks will have implications for the cost of capital, investment decisions, and ultimately, the operations of companies.
ETRC, starting with the energy sector, and as part of the Oxford Sustainable Finance Group, will be undertaking research on these topics systematically over multiple years. Below are the latest ETRC publications.
Emission and Technology Pathways in the Shipping Sector
FEBRUARY 2024 | Thomas Eysseric-Cravinho, Research Assistant | Adrien Rose, Research Assistant | Dr. Gireesh Shrimali, Head Transition Finance Research
Global shipping accounts for about 3% of global anthropogenic CO2 emissions and, despite a recent relative decoupling of emissions from trade volumes, sustained growth in maritime transport could further increase the sector’s emissions by 90% to 130% by 2050 compared with 2008. Decarbonizing shipping to achieve the Paris Agreement therefore poses a serious challenge to a sector characterized by slow turnovers of fleets, complex port-ship interfaces, and carbon-intensive activities due to the reliance on fossil fuels to power ships. This paper compares four leading emission pathways for shipping and their underlying technology-policy mixes to identify benchmarks for the assessment of the credibility and feasibility of transition plans in the sector.
Assessing the Credibility of Climate Transition Plans in the Oil and Gas Sector
July 2023 | Lead authors: Adrien Rose & Christian Wilson | Co-authors: Thomas Bunting & Gireesh Shrimali | Discussion Paper
The oil and gas sector accounts for around half of the world’s energy-related greenhouse gas emissions. For financial institutions, it is now critical to understand which companies have credible and sufficiently ambitious net zero transition plans. This discussion paper details the crucial elements of disclosure needed in the oil and gas sector, the tools available for assessment, and the criteria determining a credible climate transition plan.
It finds that reducing Scope 3 emissions, which account for 80 to 95% of the industry’s emissions, is the biggest challenge for the sector and will require significant reduction in upstream activities and in oil and gas production, with essentially no new exploration or wells. The paper also highlights that oil and gas companies can contribute to the energy system transition by diversifying away from fossil fuels and investing in low-carbon activities.
Cost of Capital and Investment Tracking: 2024 Review
NOVEMBER 2024 | CHRISTIAN WILSON & GIREESH SHRIMALI | CHARTBOOK 2024
A new report from the Oxford Sustainable Finance Group highlights that despite challenges the evidence shows the green energy transition continues at pace.
Higher costs of capital for renewables: In North America and Europe the cost of debt for renewables was 4 times higher in 2023 than in 2020, driven by increases in base interest rates. The biggest jump was seen in Western Europe, where the cost of debt for solar and wind grew from 1.4% to 6%.
Challenges remain: The report highlights that progress on the energy transition is happening despite the number of liquified natural gas assets under development steadily increasing.
Supportive policy, to keep the transition on track: The report highlights that the Inflation Reduction Act appears to have significantly increased low-carbon investment in North America.
Corporate net zero transition and financing cost: Evidence of impact from global energy and utilities sectors
10 September 2024 | XIAOYAN ZHOU, RACHEL WILLIAMS, Gireesh Shrimali| working Paper
We study whether net zero transition (NZT) affects loan pricing in the energy and utilities sectors of the loan market. We find that firms with higher levels of overall NZT disclosure experience lower cost of debt in the loan market, controlling for loan-specific and firm financial characteristics. This association is much more pronounced in Europe than in North America and other emerging markets. We also identify relevant NZT actions contributing to such a relation. Firms disclosing clear emission reduction targets which align with the Paris Agreement enjoy lower loan spreads. Additionally, environmental R&D expenditure and improved energy efficiency policies are associated with lower loan spreads. Moreover, effective governance actions, such as environmental management training and ESG-linked executive compensation, reduce climate risks and loan spreads.
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Investment by Oil & Gas Firms in High- and Low-Carbon Energy: The Effect of Energy-Related Uncertainty and Climate Policy
2 May 2024 | Christian Wilson, Gireesh Shrimali, Ben Caldecott | working Paper
To meet climate goals, investment in low-carbon energy needs to grow rapidly, while oil & gas investment is curtailed assets. Indeed, in recent years, global investment in low-carbon energy has overtaken oil & gas. However, within the oil & gas sector itself, low-carbon investment remains a fraction of overall investment.
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Green energy can replace Russian gas in the EU by 2028
The EU can replace Russian natural gas with green technologies by 2028, finds a new report from the Oxford Sustainable Finance Group, part of the Smith School of Enterprise and the Environment at the University of Oxford. It estimates that up to 90% of the additional investment required, on top of currently planned European Green Deal spending, could be recouped over the next thirty years by eliminating the need to buy gas.
In response to Russia’s illegal invasion of Ukraine, the EU has implemented emergency measures (RePowerEU) to eliminate its reliance on Russia as a source of natural gas by 2028. The new analysis investigates the cost of fully replacing this gas for electricity and heating with clean energy, rather than substituting supply with fossil fuels from other countries.
Given that Russian gas accounted for approximately half of the EU’s natural gas supply in 2021, this would have a significant positive impact on energy security and decarbonisation, say the authors.
“The transition from Russian gas to clean energy is not only achievable, but offers multiple benefits. Replacing natural gas with wind and solar energy eliminates the need to pay for gas in future,” says Dr Gireesh Shrimali, co-author of the report and Head of Transition Finance Research at the Oxford Sustainable Finance Group.
“By eliminating reliance on importing a fossil fuel with volatile prices and supply, the EU can alleviate energy security concerns, address the cost-of-living crisis through energy costs, and advance its goals to achieve net zero emissions and tackle the climate crisis.”
The report proposes policy changes needed to enable this transition. Crucially, public and private funds must be available to achieve large-scale deployment of renewables and heat pumps. The authors also suggest targeted policy support for investors, including through improved auctions for utility-scale solar and wind and addressing permitting challenges, deploying rooftop solar panels at speed, and increasing support for insulation and the installation of heat pumps.
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Drivers of Firm Investment in Low and High-Carbon Energy: Capital Markets and Climate Policy
14 April 2023 | Christian Wilson, Gireesh Shrimali, Ben Caldecott | working Paper
The cost of capital is a key driver of the low-carbon transition, as changes in firm-level financing costs can support or hinder low-carbon energy investment (LCI) and high-carbon energy investment (HCI). Using asset-level data from the S&P World Electric Power Plant database, we track firm-level LCI and HCI for publicly listed electric utilities firms from 2012-2021.
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An Empirical Analysis of Climate and Environmental Policy Risk, the Cost of Debt and Financial Institutions' Risk Preferences
31 March 2023 | Xiaoyan Zhou, Ben Caldecott, Gireesh Shrimali | working paper
This study investigates how regulatory risk affects the cost of debt and risk preferences across energy sources. We use the OECD environmental policy stringency (EPS), loan spreads and investment decisions as measures of climate and environmental (CE) policy risk, cost of debt and risk preferences, respectively.
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Energy Transition and the Changing Cost of Capital: 2023 Review
February 2023 | Xiaoyan Zhou, Christian Wilson, Anthony Limburg, Gireesh Shrimali, Ben Caldecott | Report
Our 2023 report extends the scope of analysis to the cost of equity as well as expanding our analysis of the cost of debt. In this process, we looked at corporate bonds and included data from other sources, including the Platts World Electric Power Plants Database (WEPP) and the Institutional Brokers’ Estimate System (IBES). We tracked the cost of capital across the global energy system in both electric utilities (renewable and fossil fuel) and energy production (oil & gas, coal mining, and renewable fuels & technology).
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Breaking the Bond: Primary Markets and Carbon-Intensive Financing
15 June 2021 | Christian Wilson, Ben Caldecott | Working Paper
Financial institutions with over $70 trillion in assets have so far pledged to achieve net zero portfolios and loanbooks by 2050, including meeting ambitious interim 2030 targets. This working paper reveals that passive corporate bond funds not only hold fossil fuel assets, but directly finance them by buying large quantities of new bonds issued by fossil fuel companies. To track and manage transactions that are channeling capital flows directly into fossil fuels, the authors propose a new metric, Primary Market Carbon Exposure (PMCE). PMCE measures the proportion of securities bought in primary market transactions, for example shares at IPO or new bond issuance, from fossil fuel companies. They find that between 2015 – 2020, 14% of the value of new bond issues bought by U.S. corporate bond Exchange Traded Funds (ETFs) were in fossil fuels.
The energy transition and changing financing costs
19 April 2021 | Xiaoyan Zhou, Christian Wilson, Ben Caldecott | Report
This report seeks to understand how the cost of debt across different energy technologies and markets has changed over the last twenty years. It forms the first output of the Energy Transition Risk and Cost of Capital Project (ETRC). While climate-related transition risks in the energy sector are sometimes viewed as distant, long-term risks, the impacts of which will not be felt for decades to come, we find this does not reflect reality.
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