Net zero could lead to ‘the largest redeployment of capital in history’: BNY Mellon

(YF) The global net-zero goals set out by the Paris Agreement are still within reach — but achieving them will require a $100 trillion investment, according to a new report by BNY Mellon Investment Management and Fathom Consulting.

That amount equates to around 15% of all global investment or 3% of global GDP over the next 30 years in order to achieve net zero emissions by 2050 and limit warming to 2 degrees Celsius or below, per the Paris Agreement Accord established in 2015. And the more governments, asset managers, and corporations delay, the steeper the overall price tag will be.

“Achieving the goal of the Paris Climate Accord and ‘greening’ the world’s capital stock is arguably humanity’s greatest challenge,” Shamik Dhar, chief economist at BNY Mellon Investment Management, and Brian Davidson, head of climate economics at Fathom Consulting, wrote in the report. “The transition has the potential to be the largest redeployment of capital in history and it could be just as, if not more, transformational than the Marshall Plan or China’s rise in the 1990s/2000s. Get it right, and the payoff to society and far-sighted investors can be enormous.”

As companies and governments look to invest in economic growth with climate change in mind, there are costs to replacing fossil fuel infrastructure with low-carbon alternatives. In other words, an energy company that might otherwise renew investment in oil production would instead put that capital to work toward renewables or hydrogen fuel.

“Most of this investment would have happened anyway in a counterfactual, business-as-usual scenario – but with a key difference: in the net-zero scenario, the investment is in clean capital, not ‘dirty’ capital,” Dhar and Davidson wrote.

The ‘low-hanging fruit’

The report estimated that S&P 500 companies will need to spend about $11.7 trillion between now and 2050.

Half of this investment would need to flow into the most critical sectors for decarbonization, namely utilities and energy. However, climate-conscious investors have shown some reticence in investing in these sectors, in part because of their outsized role in contributing to climate change as well as the significant transition risks companies in these sectors face.

The report also noted that roughly $20 trillion worth of polluting assets — called “stranded assets” — will ultimately need to be abandoned or retrofitted as the world transitions to net zero.

This creates a problem, the authors wrote, as “the sectors that may need most of the investment to achieve net zero by 2050, are, it seems, at least in part, being shunned by some investors for the very same reasons. If the transition is to be achieved, these sectors will need capital and investors will play an important role in providing this capital; for maximum effectiveness in minimising transition risk and facilitating decarbonisation investors will need to identify those companies with the most credible decarbonisation and green investment plans.”

In other words, the authors assert, utility and energy companies need capital to meet the goals set out in the Paris Agreement. However, that capital must be used toward green investment and not furthering the extraction of fossil fuels.

That may be a hard pill to swallow for some climate-conscious investors given the oil and gas industry’s history of denying and obfuscating the dangers of climate change. To date, nonprofit and for-profit institutions have divested more than $40 trillion from fossil fuels, according to the Global Divestment Commitments Database.

At the same time, Dhar and Davidson maintained that there are clear areas of opportunity to usher in the transition.

“Some of the low-hanging fruit has not yet been picked,” the authors explained. “One example is the switch from coal-powered generation to renewables: financing this switch can provide a wide-ranging impact, including cost savings for households on their electricity bills, leading to wider social benefits. Such investment doesn’t just make sense for the climate — it makes business sense too.”

$25 trillion to China

The prominence of emerging markets is another key trend that will shape green investment over the next several decades.

Dollars spent in the five largest emerging markets, known as the BRICS nations (Brazil, Russia, India, China, and South Africa), will go farther toward reducing carbon emissions than those spent in advanced economies, such as those in the G7, the report found.

As a result, more than half of the $100 trillion of green investments will need to be invested in emerging markets, with nearly a quarter of that amount going to China. Around a third of the investment will need to be spent in the U.S. and EU combined.

There are two primary reasons for the emphasis on emerging markets. First, these economies — particularly India, China, South Korea, and Indonesia — are set to grow at a faster pace than the global average over the next decade, and part of this growth will likely be powered by coal.

The second reason is that many emerging markets are lagging behind in their transitions and will require more investment than their share of global GDP.

Still, this roadmap for financing a net zero world may undergo changes based on new technologies, investor appetite, and government policies.

“In some cases, the cost of building and operating clean capital is cheaper than the status quo,” the authors wrote. “But in other cases, clean capital is more expensive. Investors should try to monitor how the price of buying and operating low carbon capital evolves, and how readily it can be deployed at scale.”

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