Green/Brown ratio: Focus on the Energy Supply Ratio (ESR)

Green/Brown Ratio: a financial compass for the energy transition

How can we effectively measure the greening of financial flows?

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

The Paris Agreement, which aims to limit temperature rise to 1.5°C, has crystallized the Parties' determination to align global financial flows with low-carbon trajectories. But to achieve this, it is essential to keep a clear track of the financing earmarked for green and fossil energies. The “green to brown ratio” is thus emerging as a key indicator, enabling investments in “green” activities to be compared with those devoted to “brown” activities.

The article provides an in-depth analysis of this ratio and its construction process, focusing on its application in the energy sector. It introduces the concept of the Energy Supply Ratio (ESR), an indicator for better tracking financial flows directed towards “sustainable” activities versus those allocated to fossil fuel activities. This ratio is crucial for assessing the decarbonization strategy of financial institutions and its impact 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 leading and most mature indicators in use today. On this basis, it makes recommendations for strengthening the robustness and relevance of an ESR ratio.

With the emergence of new regulatory guidelines and rising stakeholder expectations, the implementation of this ratio represents an opportunity for financial institutions, especially banks, to structure financing strategies better aligned with climate objectives.

This work is part of a series of analyses designed to help financial institutions better understand and implement responsible financial practices for the energy transition.

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