Many consider net zero 2050 an immense investment opportunity, but there are few comprehensive analyses of exactly its size. New research suggests that institutions well prepared to embark on net zero pathways will be able to take full advantage of decarbonisation-focused policy shifts and avoid being stuck with stranded assets.
- A new study attempted a comprehensive estimate of the scale of the net zero investment opportunity – or the size of the financing gap between spending already committed and the investment needed to achieve net zero by 2050.
- While the sums involved in decarbonisation are substantial, the benefits to the global economy are even larger.
- The public and private sectors need to work together to address the finance gap because the longer we wait to address the problem, the more complex, and expensive, the solutions are likely to prove.
The Climate Policy Initiative and international law firm Allen & Overy have released the results of a study intended to quantify the finance needed to achieve the net zero transition, shed light on the current funds available, and outline the roles different stakeholders can play in closing the climate finance gap.
Climate finance flows have grown consistently over the past decade, but they still lag far behind what is needed to meet the goals of the Paris Agreement. The study estimates that $6.2 trillion of climate finance is required annually between now and 2030, and $7.3 trillion by 2050, to deliver net zero – a total of almost $200 trillion.
While the sums involved in decarbonisation are substantial, the benefits are even larger. Some studies suggest that concerted climate action and investment could add a net $43 trillion to the global economy – equivalent to a rise of up to 3.8% in global GDP by 2070.
Yet the Climate Policy Initiative, which tracks climate finance spending, says that estimated funds for 2022 (which will take some time to be collated) are only expected to reach $1 trillion for the first time.
Transport and energy require the greatest investment
The sectors with the greatest climate finance needs are transport (requiring 50% of the total estimated finance needs, or at least $3.2 trillion annually through 2050) and energy systems (requiring 32%, or at least $2.1 trillion annually through 2050).
Huge increases in climate investment are also required to deliver building energy efficiency (to reach $731 billion annually through 2050); decarbonise industrial processes ($320.2 billion); and develop clean energy storage solutions ($251.3 billion) and carbon capture, use, and storage ($145.3 billion).
Finance for climate adaptation and resilience is also far below the estimated $254 billion needed on average per year through 2050. Further adaptation finance may also be needed given that the rate of global warming is accelerating faster than many scientists expected.
Both public and private investment is necessary
To bridge that gap, Allen & Overy said that both public and private actors will need to increase their ambition, efficacy, and coordination. Public climate finance has grown faster than private climate finance over the past decade, but this may change; multilateral development banks have publicly committed to increase their annual climate finance by just 32% annually to 2030, and only six of the 27 largest national and bilateral development finance institutions have set climate investment targets.
Given the scarcity of public capital, effective deployment of funding, policies, and frameworks will be crucial to mobilising private investment at the scale required. This is more urgent in regions where public money makes up a larger share of total climate finance; for example, public funding comprised 86% of total climate finance in Africa over the past decade, but just 4% in North America.
To scale private finance globally, public finance should be deployed to lower the cost of capital for private investors who, due to the respective risks, require a rate of return that is three to ten times higher in developing economies than in the EU or the US.
Private climate finance expected to grow in future
Research indicates larger future growth in private climate finance than public finance, given the amount of private capital in the global financial system and the fact that public finance will continue to remain scarce. For example, the 30 largest global banks have committed $870 billion annually to finance climate solutions, although asset owners and managers have been slower to set public climate investment targets.
Venture capital (VC) investment in businesses providing climate solutions reached $70.1 billion in 2022, 89% higher than the previous year, with climate-focused VC investors holding $37 billion in unallocated capital as of late 2022.
Climate solutions businesses have been able to raise equity and debt capital relatively easily, though these companies’ equity raising in 2022 was 40% lower than in 2021, in line with the general reduced availability of capital in the second half of 2022.
Funding for mining of critical minerals – and manufacturing capacity – needs to increase
Investments in supply chain and manufacturing facilities for climate solutions rose to $79 billion in 2022, 44% higher than in 2021. This figure, however, needs to increase by a further 58% to stay on a net zero pathway. Similarly, investment in the mining and processing of critical minerals must triple by 2050 to $331.5 billion annually to achieve this goal.
Neither public nor private finance can bridge the investment gap alone; collaboration and more effective use of financial resources will be vital to achieving net zero.
The reality is that new finance instruments, government policy and public money must be integrated in order to create an environment within which climate finance can accelerate. The real challenge is that the scale and complexity of the financing needed to decarbonise the global economy will only grow if adequate funds are not deployed now.
Steps that might help narrow the finance gap
The study from Allen & Overy and CPI argues that we need stakeholder alignment on policies to accelerate private investment that transcends short-term economic and political cycles and is designed to avoid investment in stranded assets.
At the same time, public financial institutions need to channel their funding towards the mobilisation of private finance and achieving higher impact. This can be done in a variety of ways, including by providing political risk support, guarantees to reduce foreign exchange risk, and liquidity to increase funding for less commercially viable sectors and regions.
One of the more obvious steps is to align policy and financial support to boost critical decarbonisation technologies that are not currently commercially viable, as well as for regions that receive less private investment.
Another is to implement emissions policies that recognise the role of negative externalities – which would have a significant impact on the demand for fossil fuels. And, of course, there is the need for support for a just transition for communities reliant on fossil fuels or that will be impacted by a transition to low-carbon solutions, including through measures such as Just Energy Transition Partnerships.
SGV TAKE
Addressing climate change is a long-term problem which needs to be addressed immediately to have any hope of changing the trajectory of global emissions. Yet it is clear that the short-term perspective of both politicians, and corporations whose goal is to ensure immediate financial return, is not a good fit with the thinking – or the strategy – necessary to address such a complex challenge.
Perhaps what is of most concern is that the impacts that might lead to that change in the short term are going to, of necessity, be dramatic. And that’s not good for people or the planet.
