Decarbonising the global economy will require a financing shift of historic proportions. Vivienne Russell assesses the scale of the challenge, the barriers and the opportunities
Setting out his strategy for the UK’s transition to a net-zero economy by 2050, then prime minister Boris Johnson painted a picture of a green and sustainable future, with all the pleasures and conveniences of our current way of life and no “hair shirts”.
With typical optimism, Johnson wrote in the 2021 strategy: “We will still be driving cars, flying planes and heating our homes, but our cars will be electric gliding silently around our cities, our planes will be zero emission, allowing us to fly guilt-free, and our homes will be heated by cheap, reliable power drawn from the winds of the North Sea.”
The UK aims to position itself as a global leader on net zero. Even with some of the policy dilutions sanctioned by current PM Rishi Sunak, there’s been no resiling from the headline target of hitting net zero in 2050. Sunak said he was “absolutely unequivocal” about that.
But moving to net zero will be a global effort and require every country and all sectors of the world economy to play their part. There is some good news in that the global consensus about the need to transition away from fossil fuels is strengthening. There was a breakthrough of sorts at the COP28 summit in Dubai when, for the first time, all countries agreed to a text that backed a just, equitable and orderly transition.
Paying for transition
With the political consensus for net zero solidifying comes the hard work of making it happen – and, importantly, paying for it.
Energy transition, which requires the construction of new infrastructure to generate, distribute and store power alongside technologies to remove and store carbon from the atmosphere, will consume huge amounts of money.
“Energy transition is extremely capital-intensive. Maybe the most capital-intensive economic shift that
the modern human history has [undertaken],” says Dr Ruggero Gramatica, an honorary research associate at the University of Oxford’s Institute for New Economic Thinking.
He tells Transform that it will require “a huge amount of money” that must come from both public and private sources. “One of the big recommendations across the board has been to make sure that public and private money will come into play.”
So what will it cost? The figures involved can be difficult to forecast and tricky to grasp. For the UK, the Climate Change Committee (CCC), which advises the government on emissions targets, has put total net costs across all sectors of the economy at £321bn. This will involve £1,312bn of investment costs, largely offset by £991bn of operating savings.
Despite these large numbers, net-zero transition is affordable, says Laura Cunliffe-Hall, policy manager at the Institution of Civil Engineers.
There is a need to step up the financing, however. Just £10bn of public and private investment was directed towards low-carbon projects in the UK in 2020, she says. “The CCC has calculated that this needs to rise to about £50bn per year by the late 2020s – mostly on transport, renewables and buildings – and stay around that level until 2050. We need to act. Delay will only increase the cost.”
Globally, the requirement is something like $3.5trn in investment in technology, infrastructure and assets every year between now and 2050. To put that in context, that’s around one-seventh of the US economy, by far the world’s largest, funding net zero every year.
For those looking closely at the financing challenge, the message is blunt. Accounting for Sustainability (A4S), a charity founded in 2004 by King Charles, brings together the global finance community to help shift policy and practice in a direction that supports sustainable environmental outcomes. According to Kerry King, head of capital markets and fundraising at A4S, things are not moving quickly enough and, on current numbers, nothing is adding up.
“We have had a flurry over the past two or three years of corporations in the financial sector committing to net zero, but the transition is not moving to the scale and to the pace that we need to be able to align to [limit the global temperature rise to] 1.5 degrees,” she says.
Of course, the challenge cannot only be viewed through a UK or western lens. Transition to net zero is also dependent on the developing world transitioning. Emerging markets – those in the developing world – need $95trn alone.
Much hope is invested in the role played by so-called concessional finance, provided by multilateral development banks (MDBs). These are government-backed non-profit banks, such as the World Bank, the Asian Development Bank and the African Development Bank, which support economic advancement in poorer nations and regions. They provide grants and loans for infrastructure and business expansion, alongside technical support and training.
Green projects are an important part of MDBs’ mission. For instance, the Asian Development Bank has approved a £50m loan package for Cambodia to help the country transition away from fossil fuels. In November 2023, the bank agreed a $200m deal to help Bangladesh, which is heavily reliant on natural gas and has decaying infrastructure, to shift to a system of smart metering, reducing leakages and emissions.
But concessional finance accounts for just $2trn, according to King, and can’t do all the heavy lifting alone. She agrees with Gramatica that the private sector must play its part, but warns finance isn’t flowing in this direction fast enough.
Private investors can be deterred from funding projects in the developing world because of the associated risks – actual and perceived. Countries that are politically unstable, vulnerable to conflict or prone to corruption are not attractive destinations for private finance. Connected to this are stricter finance regulations and higher capital requirements around emerging market investment, which can act as a disincentive. There’s also the view – mistaken, says King – that there is a lack of bankable projects to invest in. Getting investors and those devising and developing energy transition schemes on the front line to connect and talk to each other can be a challenge.
A4S is calling for change in both attitudes and the language used about financing net zero. “We need to change the rhetoric from development to investment,” King argues. “To give an example, 60% of renewable energy assets are in Africa, so this is an incredible investment opportunity. But we still talk about the need to plug the investment gap in emerging and developing markets as a developmental thing as opposed to an investment market.”
Reasons to be cheerful
Despite frustrations with the slow and stuttering start, there are some reasons to be optimistic. There are many good-practice examples to learn from and we’re beginning to see real success stories.
Many point to blended finance as a promising investment model. This sees the public and private sectors pool funds and has the benefit of giving investors confidence, as their government partners act as a buffer, allowing them to take on risks they might not otherwise be able to.
According to Cunliffe-Hall: “One innovative blended finance scheme is the Dutch Fund for Climate and Development – a consortium that enables private sector investment in climate adaptation and mitigation in developing countries, including through nature-based solutions.”
The Treasury-backed UK Infrastructure Bank, established in 2021, has £22bn to invest in UK-based projects that advance the journey towards net zero and crowd in private finance. Of the £1.9bn in investments it has made to date, it has supported a lithium mine in Cornwall and a rewilding project in Scotland.
There are other success stories. “In early October 2022, the London Stock Exchange became the first major stock exchange to set listing rules for companies that finance carbon-reduction projects, as part of efforts to grow the market and make it more transparent,” Cunliffe-Hall observes.
Both she and King highlight transition plans, which set out how businesses are going to align their operations towards net zero and are “hugely important”, says King. They are effectively strategic exercises that chart a business’s path to net zero, scope out where the additional finance is coming from or how their capital model might have to change. All this works to give their investors and other stakeholders confidence.
Transition plans also illustrate how finance’s role isn’t just about coming up with the funding for net zero but in deploying its thinking, rigour and processes towards this goal inside businesses. King highlights an interesting evolution in the potential for finance teams to grasp and own the corporate net-zero agenda.
“Organisations should leverage their CFO, their finance team and the skill set they have to ensure the processes they use for gathering and reporting financial information are also used for gathering and reporting transition plan information,” she says.
Investing in a carbon-neutral future is everybody’s business. Returning from COP28, King highlights a “marked change” in the delegates representing the investment sector. This time, chief sustainability officers were joined by CEOs, chairs, heads of equity, insurance representatives and others.
“It’s becoming so mainstream. That’s one element I would say is a real positive.”
Vivienne Russell is a freelance journalist
