Three years after its introduction by BloombergNEF, the Energy Supply Ratio (ESR) is picking up steam. This mighty instrument is now crucial for assessing banks’ contributions to an equitable energy transition. The ESR’s primary emphasis is on the ways financial institutions are capitalizing on investment opportunities in low-carbon energy. It’s evolving beyond simply critiquing banks for their role in fossil fuels.
Katrina White, BloombergNEF's senior associate of sustainable finance, emphasized that the ESR is not solely about criticizing banks for their fossil fuel investments. Most importantly, it seeks to shed light on the larger context of their financing practices. Royal Bank of Canada (RBC) – you’re in the news again! It will soon join the ranks of the first global banks to publish its own ESR calculations. So the New York City pension fund system put pressure on RBC. Ultimately, this led RBC to publish its ESR numbers for the previous year.
One common way to calculate the ESR is to look at the percentage of their funding going to low-carbon versus high-carbon projects. According to BloombergNEF, for every dollar banks invest in a high-carbon project, they’re investing 89 cents in a low-carbon alternative. This further emphasizes the growing momentum of sustainability within the financial industry. Instead, the National Bank of Canada positions itself as an honest alternative to the Big Six. Its support for low-carbon energy exceeds that of fossil fuels, reaching an astonishing $1.66 to $1 in favor of low carbon finance.
BloombergNEF also recently released guidance for various institutions on how to make ESR calculations as straightforward and meaningful as possible. They model their findings on proprietary datasets, including direct loans and private credit which only banks can obtain. The Enhanced State Reporting (ESR), she explained, cuts through the confusion and complexity with straightforward, simple climate reporting.
“The ratios are becoming a focal point in part because they’re really a dollar-to-dollar comparison that allows the bank to articulate how they’re moving in the energy transition,” she stated.
As we described last November, JPMorganChase raised the bar for transparency. As a result, it was the first bank to release its discoveries on the ESR, which measures and ranks company capital expenditures as a piece of its methodology. Most recently in September, the Institute of International Finance helped refocus the conversation. To help smooth the on-boarding process, they released a white paper providing guidance to banks on calculating their own ESR ratios.
Despite this growing trend, many financial institutions are still hesitant. BMO raised a number of objections to the proposal, including that it would not yield significant information about their tactics.
“The Energy Supply Ratio sought in this proposal would not provide useful additional insight into BMO’s approach,” a spokesperson from BMO commented.
Likewise, TD criticized the absence of a consistent methodology and raised fundamental concerns about the ESR’s value.
“The ratio could help provide some transparency, but the lack of established methodology makes it of little value,” TD remarked.
Katrina White underlined the difficulties for financial institutions in accepting a contracting portfolio limited to low-carbon investments.
“Financial institutions, and private sector actors as a whole, are never going to get super excited about shrinking,” she explained.
