The journey to net zero is accelerating as increasing alignment of regulation and finance drives rising levels of ‘green’ investment, but in the often-opaque world of eco-finance it can be hard for investors to identify ‘real’ sustainable assets. Now, in driving and measuring a company’s commercial resilience, a verifiable net zero transition strategy is considered a valuable asset as it plays a key role in investment decisions.
Around $3.5 trillion a year of capital investment will be needed on average between now and 2050 to build a net-zero global economy, up from $1 trillion per annum today. Of this, 70 per cent is required for low-carbon power generation, transmission and distribution that underpins decarbonisation in almost all sectors of the economy.
The big wheels of eco-finance have begun to turn but they will need to gather speed as investments in net zero clean energy must quadruple within the next two decades according to the global Energy Transitions Commission (ETC).
In its latest report “Financing the Transition: How to make the money flow for a net-zero economy” the ETC highlights the critical importance of strong government policies relating both to the real economy and to the financial system if finance is to flow on the scale required.
Green investment drivers
Green finance and investment is driven at its heart by the terms and targets of the Paris Agreement, explains Luma Saqqaf, CEO of Ajyal Sustainability Consulting. “Climate finance is about how we’re going to achieve what’s required under the Paris agreement.
“Net zero involves energy, transportation, agriculture, industry, the private sector – all of which face practical challenges in the green transition. But the bigger part is financing because we need money in order to tackle and overcome the many challenges.
“McKinsey estimates that $270 trillion will be needed by 2050 just for net zero, and that doesn’t include SDGs and other aspects of sustainability. Egypt has only committed to reducing three sectors, because that’s all they can do, and it will cost $260 billion in just those three sectors. The numbers are so big that governments cannot raise that level of investment so it has to come from the private sector.”
The private sector, driven by increasing clarity around regulation and standards, is rising to the challenge. ESG-focused investment has rebounded from last year when corporate ESG bond issuance fell by almost a quarter from the year before, according to Barclays. The bank predicts that ESG bond sales will almost equal 2021’s $461 billion in 2023, up from 2022’s $362 billion, with green bonds driving the market. The US Inflation Reduction Act, with its $369 billion of climate-related funding, is expected to drive major investment in technologies such as renewable energy, electric vehicles, heat pumps, carbon capture and storage, and hydrogen.
Regulation and investment
Regulation now plays a big part in the criteria used by financiers in their investment decisions. “Investors need clarity and they want to see direction from the board, where the company is going and how it will get there,” Saqqaf says. “They want to see transition plans with climate a key part of business strategy. They need a robust legal system of standards and regulation to know that they are protected and they need to see real quantifiable assets and outcomes.”
The need to address and comply with new standards and eco-regulation is not confined to business and industry; the challenges of transition extend throughout the economic food chain with environmental regulation driven by wider issues than climate change alone – the new rules closely linked to security and stability of the global financial system.
“It has been recognised globally that climate is one of the key threats to financial stability,” Saqqaf continues. “The Financial Stability Board has looked to incorporate climate related risks into the financial system and they are requiring banks to look at climate and how it impacts their portfolios, their business, and therefore the economy as a whole.
“Banks are now having to adapt their own business strategies, how they’re going to exit some traditional sectors and how they need to invest in new sectors, how to create the next layer of investments by spreading sustainability financing to more cleantech companies, innovations and projects.
A company’s assets can be measured and valued in a range of forms such as physical objects and intellectual property, and now verifiable ESG and net zero transition strategies can also be deemed a valuable asset.
“Investors need to know exactly what is it that they’re financing,” Saqqaf says. “The problem they have is that they would like to invest more finance but there are often no tangible assets that can be measured and valued. Now, a clear ESG strategy with all required compliance is recognised as a tangible asset as it has a core business value in terms of commercial resilience and it will increasingly be a licence to operate.
“Understanding and demonstrating with real action the steps in transition that has to happen in order to meet your net zero targets are what creates the assets and allows banks and financiers to know what they are investing in, and the likelihood of success. To attract investment an organisation must demonstrate that it is resilient with compliance, practical action and climate risks addressed and a clear strategy with targets, objectives and verifiable disclosures.”
Driving net zero investment
Well-designed real-economy policies must continue to create strong incentives for private investment in the net zero transition. Examples include carbon prices and product regulation to drive decarbonisation in heavy industry, aviation and shipping, specified date bans on the sales of internal combustion engines and “concessional/grant” payments to support early coal phase-out, end deforestation and finance carbon removals.
Other important actions include harmonizing financial regulation, targeted fiscal support for the development and initial deployment of new technologies and net-zero commitments from financial institutions.
The unifying factor that will keep all these big wheels turning is the clarity delivered by a robust net zero strategy and regulatory compliance, Saqqaf says. “For the net zero transition to succeed financiers must understand the exact nature of their investment and be confident that an organisation is resilient to future climate and economic shocks.”