The Stalling Energy Transition: Why Global Banks Are Failing to Finance the Green Future

The global energy transition is at a crossroads. While renewable energy investments have surged in recent years, a stark disconnect remains between current financing trends and the urgent climate goals set by the Paris Agreement. According to a report by BloombergNEF, global bank financing for low-carbon energy supply technologies reached 89% of that for fossil fuels in 2023, up from 74% in 2022Third Annual Energy Supply Investment and Banking Ratios, [https://about.bnef.com/insights/clean-energy/third-annual-energy-supply-investment-and-banking-ratios/]^[1]. Yet this progress masks a critical reality: the Energy Supply Banking Ratio (ESBR) still falls far short of the 4:1 ratio needed to align with a 1.5°C pathwayThird Annual Energy Supply Investment and Banking Ratios, [https://about.bnef.com/insights/clean-energy/third-annual-energy-supply-investment-and-banking-ratios/]^[1]. With total bank financing declining by 11% to $1.6 trillion in 2023, the gap between ambition and action is wideningThird Annual Energy Supply Investment and Banking Ratios, [https://about.bnef.com/insights/clean-energy/third-annual-energy-supply-investment-and-banking-ratios/]^[1].

Systemic Bottlenecks: Cost, Risk, and Regulatory Hurdles

The underfinancing of the energy transition is not a lack of capital but a failure to direct it effectively. A key bottleneck lies in the cost of capital, particularly in emerging and developing economies (EMDEs), where most future emissions are projected to arise. The OECD highlights that risk premiums for clean energy projects in these regions remain disproportionately high, deterring private-sector participationClean Energy: Financing the Solutions, Not the Problems, [https://www.gabv.org/long-read/clean-energy-financing-the-solutions-not-the-problems/]^[2]. For instance, in Africa—a continent representing 20% of the global population—clean energy investment accounts for just 2% of global flowsBreaking Down Barriers to Clean Energy Transition, [https://www.worldbank.org/en/news/feature/2023/05/16/breaking-down-barriers-to-clean-energy-transition]^[5]. This disparity is exacerbated by weak institutional capacity, limited access to concessional finance, and regulatory uncertainty, which together create a "vicious cycle" of high energy costs and fossil fuel dependencyBreaking Down Barriers to Clean Energy Transition, [https://www.worldbank.org/en/news/feature/2023/05/16/breaking-down-barriers-to-clean-energy-transition]^[5].

Regulatory barriers further compound the challenge. Despite the rapid growth of solar and wind power, utility-scale renewable projects saw a 13% decline in investment in early 2025 due to adverse policy environments in key marketsClean Energy: Financing the Solutions, Not the Problems, [https://www.gabv.org/long-read/clean-energy-financing-the-solutions-not-the-problems/]^[2]. Investors, while increasingly engaged in energy transition assets (72% reported heightened participation in 2025Energy transition investment outlook: 2025 and beyond, [https://kpmg.com/xx/en/our-insights/esg/energy-transition-investment-outlook-2025-and-beyond.html]^[4]), remain cautious. A 2024 study by ScienceDirect notes that private-sector risk tolerance is historically skewed toward low-risk, short-term returns, leaving novel technologies—such as advanced storage or green hydrogen—underfundedThird Annual Energy Supply Investment and Banking Ratios, [https://about.bnef.com/insights/clean-energy/third-annual-energy-supply-investment-and-banking-ratios/]^[1]. This creates a "bankability gap," where projects with high climate impact but uncertain returns struggle to secure financingThird Annual Energy Supply Investment and Banking Ratios, [https://about.bnef.com/insights/clean-energy/third-annual-energy-supply-investment-and-banking-ratios/]^[1].

The Role of Banks: Values vs. Volume

Global banks, despite their pivotal role in capital allocation, have yet to fully align their portfolios with climate objectives. While values-based institutions like Triodos Bank and Sunrise Banks are pioneering green loans and sustainability bondsClean Energy: Financing the Solutions, Not the Problems, [https://www.gabv.org/long-read/clean-energy-financing-the-solutions-not-the-problems/]^[2], the broader banking sector remains entangled in fossil fuels. As of 2025, 75% of investors are still involved in fossil fuel projects, particularly natural gas, citing energy security concernsEnergy transition investment outlook: 2025 and beyond, [https://kpmg.com/xx/en/our-insights/esg/energy-transition-investment-outlook-2025-and-beyond.html]^[4]. This duality reflects a systemic misalignment: banks prioritize short-term profitability over long-term decarbonization, even as the International Energy Agency (IEA) projects that clean energy investments will outpace fossil fuels by 2:1 in 2025Breaking Down Barriers to Clean Energy Transition, [https://www.worldbank.org/en/news/feature/2023/05/16/breaking-down-barriers-to-clean-energy-transition]^[5].

The disconnect is most evident in coal financing. Despite global efforts to phase out coal, Chinese banks underwrote 66% of the $94 billion directed to coal projects in 2023Third Annual Energy Supply Investment and Banking Ratios, [https://about.bnef.com/insights/clean-energy/third-annual-energy-supply-investment-and-banking-ratios/]^[1]. This underscores a critical failure in aligning capital with climate science—a problem compounded by the lack of enforceable international standards for bank disclosures on energy transition progressThird Annual Energy Supply Investment and Banking Ratios, [https://about.bnef.com/insights/clean-energy/third-annual-energy-supply-investment-and-banking-ratios/]^[1].

A Path Forward: Policy, Innovation, and Collaboration

Bridging the financing gap requires a multifaceted approach. The World Bank's six-step "virtuous cycle" for clean energy investment offers a roadmap: governments must lead by creating stable regulatory frameworks, transparent project allocation systems, and blended finance mechanisms to de-risk private-sector participationBreaking Down Barriers to Clean Energy Transition, [https://www.worldbank.org/en/news/feature/2023/05/16/breaking-down-barriers-to-clean-energy-transition]^[5]. For example, the U.S. Inflation Reduction Act has already demonstrated how policy can catalyze capital by offering tax credits and grants for decarbonization projectsClean Energy: Financing the Solutions, Not the Problems, [https://www.gabv.org/long-read/clean-energy-financing-the-solutions-not-the-problems/]^[2].

Innovation in financial instruments is equally critical. Green bonds, sustainability-linked loans, and carbon pricing mechanisms can help internalize the externalities of fossil fuels while rewarding clean energy investmentsClean Energy: Financing the Solutions, Not the Problems, [https://www.gabv.org/long-read/clean-energy-financing-the-solutions-not-the-problems/]^[2]. However, as the IEA emphasizes, these tools must be scaled rapidly. Annual clean energy investment must reach $4 trillion by 2030 to meet net-zero targetsClean Energy: Financing the Solutions, Not the Problems, [https://www.gabv.org/long-read/clean-energy-financing-the-solutions-not-the-problems/]^[2], yet current flows cover less than 20% of this needClimate investment is rising fast – but the financing gap to deliver ..., [https://www.aoshearman.com/en/insights/how-big-is-the-net-zero-financing-gap-2024]^[3].

Conclusion

The energy transition is not stalling due to a lack of technology or capital—it is stalling because of systemic failures in how those resources are allocated. Global banks, as gatekeepers of capital, must confront their role in perpetuating fossil fuel dependency while underinvesting in the innovations needed for a green future. Without urgent policy intervention, regulatory reform, and a reorientation of financial incentives, the world will remain off track for its 2050 net-zero goals. As the OECD warns, the cost of inaction far exceeds the cost of capitalClean Energy: Financing the Solutions, Not the Problems, [https://www.gabv.org/long-read/clean-energy-financing-the-solutions-not-the-problems/]^[2].