The energy transition
During a lecture at the LSE on February the 26th 2025, titled, ‘Making Climate Action Investable’, led by Carmen Nuzzo, Professor at the Grantham Research Institute, I asked her a question enquiring if green bonds yield better returns than regular (‘vanilla’) bonds. According to Nuzzo, green bonds typically offer similar returns to vanilla bonds with the same credit rating and maturity. However, Nuzzo revealed that there are benefits beyond the yield to the bond buyers, which are causing the ever- increasing demand for green bonds. This is due to the huge growth in Environmental, Social and Governance (ESG), which is a framework that assesses an organization’s performance in sustainability and ethical issues (Atkins, 2020). Investors use ESG scores to decide who to invest in, and a low ESG would indicate that a company is struggling in making sustainable investments, and therefore may not be a well-run company, whereas a high ESG usually indicates if a company is doing well and probably safer to invest in. Thus, if companies want people to invest in them, it is in their best interest to prioritize having high ESG and currently there is a trend in companies aiming to achieve better ESG, and companies are increasing their assets incorporating ESG year-on-year, as seen below in Figure 4 (Atkins, 2020):
Figure 4 – annual growth trend of ESG
This upward trend indicates that, as more companies are prioritizing high ESG, a lot of bonds that these high ESG companies’ issue end up being green ones. This insight from Nuzzo proves that green bonds and ESG will play a huge role in helping businesses to have a smaller carbon footprint, in the effort to reach net-zero. Shareholders influencing businesses’ green decisions The transition to greener energy will of course be largely controlled by government decisions, but big businesses will certainly play a major part. The dilemma for business owners is whether to sacrifice short-term profits, if they want to achieve long-term sustainability goals. The two largest UK oil and gas companies, BP and Shell (Statista, 2024b), want to become greener, but the immense investment needed is not attractive to their shareholders, who have the biggest say when it comes to what direction the company is to go in. In 2019, BP promised to spend $5 billion annually on green energy spending and to expand its renewable energy operations by twenty-fold by 2030, according to the Financial Times (Moore and Millard, 2024).
However, in attempting to produce cleaner energy, companies like BP may be caught in a so called, ‘valley of death’ between the traditional pro-fossil-fuel investors and a new set of pro-climate investors.
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