Rising pressure on fossil finance to bring a strong new leg to the climate theme

In 2020 we saw a new focus on climate themes from the European oil majors as they embraced renewables and set new targets for clean growth. This year, we expect a similar increase in intensity from the global banks: some may announce a significant reduction in fossil fuel finance while others, perhaps, may exit completely. As a result, we see more capital flowing to the clean sector, reducing WACC and increasing investment, the two ingredients needed for further multiple expansion.

Three possible reasons:

1. traditional risks have increased in the fossil industry as 2020 brought unprecedented demand and supply shocks;
2. new risks are emerging including the real risk of future climate-driven tax or policy changes; legal or reputational risks; and the risk of regulatory intervention to address financial system risk linked to the energy transition;
3. to reposition themselves for growth in clean energy finance, where we could see a 2-6x increase in market size during the 2020s, on UBSe.

Perhaps not much for the banks themselves: they are so levered to the economic outlook this dominates the investment case, as discussed in our banks outlook. And perhaps not much for limiting temperature increases since we may already have a 24% chance of exceeding 1.5 degrees in the next 5 years. But on the other hand, a step-up in clean finance could make a big difference for clean energy names: since finance can grow faster than capex can expand, this implies lower capital costs today and higher growth tomorrow, a powerful combination that leads mathematically to higher multiples.