Report: Focus on ESR

Green/Brown Ratio: a financial compass for the energy transition
How to effectively measure the greening of financial flows?

By Stéphane Voisin, Julie Raynaud, Nestor Toroman, Adrien Ferrand

The Paris Agreement, in the desire to limit the rise in temperature to 1.5°C, crystallized the will of the Parties to align global financial flows with low-carbon trajectories. But to achieve this, clear monitoring of financing for green and fossil energies is essential. The “green to brown ratio” is thus emerging as a key indicator, making it possible to compare investments in “green” activities with those devoted to “brown” activities.

The article offers an in-depth analysis of this ratio and its construction process, focusing on its application in the energy sector. It introduces the concept of Energy Supply Ratio (ESR), an indicator to better monitor financial flows directed to “sustainable” activities compared to those allocated to fossil activities. This ratio is crucial for evaluating the decarbonization strategy of financial institutions and its effects on the energy transition of the real economy.

The article also provides a critical review of BloombergNEF's Energy Supply Banking Ratio (ESBR), one of the main indicators used to date and one of the most successful. On this basis, it makes recommendations to strengthen the robustness and relevance of an ESR ratio.

With the emergence of new regulatory guidelines and the rise of stakeholder expectations, the implementation of this ratio represents an opportunity for financial institutions, in particular banks, to structure financing strategies that are better aligned with climate goals.

This work is part of a series of analyses aimed at helping financial institutions better understand and implement responsible financial practices for the energy transition.

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English version available hither : https://cdn.prod.website-files.com/672cea0ae7889396005b1e87/681de1073ff25ea28fa9d034_green-brown-ratio-a-zoom-on-the-energy-supply-ratio-esr-english.pdf