Hydrocarbons Aren’t Disappearing

Last week’s megabankruptcy announcement from solar power generator Pine Gate Renewables is the latest sign that ESG needs an overhaul. 

Standing for “environmental, social, and governance,” ESG proponents have long advocated for channeling more capital into the renewable energy industry. One of their tools for establishing a more favorable climate for green energy investment are the criteria used by credit rating agencies — well-known firms like Moody’s, Fitch Ratings, Morningstar, and S&P Global — to analyze the financial strength of the companies that raise money by selling bonds. 

These criteria are skewed in favor of renewable energy investment. Many of these companies are now facing a “financial cliff.” Industry observers are talking about the “green bubble” bursting as renewable businesses “struggle to stay afloat.” Along with Pine Gate, numerous other big players in the sector have gone under this year, including solar giant Sunnova, lender Solar Mosaic, panel manufacturer Meyer Burger, and EV maker Canoo. Investors are already looking at billions in losses. They should be demanding that ESG-minded rating agencies become honest about the “energy transition” and stop overhyping the shift to renewables. 

Many have pointed to the Trump administration’s rollback of renewable subsidies as a key factor behind this year’s clean energy bloodbath. However, if credit rating agencies are supposed to assess financial risks, one would expect these firms to have been broadcasting the downside potential of Trump policies toward the renewable sector. The subsidy dependence of renewable firms was well known before President Trump returned to office. In 2023, California slashed financial incentives for residential solar by 75 percent. Industry-wide layoffs and bankruptcies ensued across one of the most important markets for renewable energy. 

There were also other warning signs apart from the subsidy risk. Green energy businesses were “over leveraged,” squeezed by high interest rates, and beset by supply-chain bottlenecks and global competition. Yet Moody’s overlooked these storm clouds  in its 2025 preview of key credit risks. 

The ESG bias of the rating agencies runs much deeper than their assessments of individual companies. For the rating agencies, there is a one-way ratchet toward recommending more renewable (and less fossil fuel) production. The critical term in their narrative is “transition risk,” which refers to the concept that businesses or industries that are overly reliant on fossil fuels will face financial disruption in the event of a global shift to low-carbon energy sources. 

The rating agencies have largely bought into transition risk. For example, Moody’s has developed an environmental heat map that rates industries based on their exposure to “carbon transition risk,” while Fitch’s assesses the vulnerability of industries based on  “climate-related transition risks.” Companies that don’t take the necessary steps to stay ahead of the “transition” open the door to downgraded credit ratings, raising their cost of capital for future operations. 

The upside of transition risk is that it avoids speculative predictions about future extreme weather events that could impact businesses and industries. The major problem with it is the assumption that a smooth transition from fossil fuels to renewables will occur soon. As Mark P. Mills of the National Center on Energy Analytics has pointed out, “no ‘energy transition’ is in sight” anywhere in the foreseeable future. Illustrating the point, Bjorn Lomborg of the Hoover Institution calculates that China is currently on pace to transition fully to renewables in 400 years.  

For Mills, a former energy fund manager who has authored multiple books on energy markets, the entire concept of an “energy transition,” though currently fashionable among ascendent, ESG-friendly circles in finance, non-profits, and media, is tendentious. “Humanity,” he writes, “has used the same six primary energy sources for millennia.” 

Global consumption of these energy sources — grains, animal fats, wood, water, wind, and fossil fuels — has not only persisted for thousands of years, but it’s also increased significantly over time in the case of each source. Two centuries ago, our ancestors used animal fats for illumination. Electricity has replaced candles, but we’re consuming 1,000 more energy from animal fats today than two centuries ago. 

Pulitzer-prize winning energy historian Daniel Yergin and Obama administration budget director Peter Orszag have also questioned the transition narrative. In a Foreign Affairs article this spring, they commented that no energy source in history “has declined globally in absolute terms over an extended period.” 

What about fossil fuels? Coal use dates back to the Paleolithic Era and has not been displaced. To the contrary, more energy was produced from oil and coal in 2024 than ever before. Even after $9 trillion was spent globally on renewables, energy storage, electrified heat, and power grids, fossil fuels still account for approximately the same share of aggregate energy consumption as they did 25 years ago. According to Yergin and Orszag, hydrocarbons were 85 percent of the global energy mix in 1990. Now they’re 80 percent. Don’t expect them to disappear anytime soon. 

Yergin, who’s also Vice Chairman of the credit rating agency S&P Global, is calling for “energy addition,” a long-term and layered approach to energy security that doesn’t pretend oil and gas will disappear anytime soon. Owing perhaps to Yergin’s influence, S&P Global is beginning to get the message on energy realism. 

In a September 2025 report entitled “Beyond the Energy Transition,” S&P Global acknowledged that the prevailing transition framework does not capture “trends in fossil fuel demand.” The report lays out a more realistic future scenario, which it characterizes as “energy addition,” using Yergin’s terminology. Under this scenario, fossil fuels are predicted to “maintain the majority share of global primary energy demand even in 2060.” 

The adoption of energy realism by a major ratings agency is welcome news. Elsewhere, capital markets have been liberated from peak ESG activism. Larry Fink, CEO of the world’s largest asset manager, BlackRock, was an early advocate of ESG, but has since scrapped the term in favor of “energy pragmatism.” The Securities Exchange Commission (SEC) has dropped climate change disclosure requirements and given the greenlight to the Texas Stock Exchange, a new platform for companies to list their shares to retain investors without the high fees and red tape of the New York Stock Exchange and Nasdaq.  

The credit markets have lagged behind the pivot away from ESG. Companies issuing debt and credit investors deserve better. Apart from S&P Global, the ratings agencies are still pushing aspirational narratives about energy transition. Let’s hope they follow suit so investors can avoid buying into “green bubbles” in the future.

Michael Toth is the Director of Research at the Civitas Institute at the University of Texas at Austin.