Unless investment is ramped up – significantly – the world cannot meet desired net zero targets by 2050, according to a paper jointly written by BNY Mellon Investment Management and Fathom Consulting. And this is more about redeploying capital than new investment.

The research undertaken by BNY Mellon Investment Management’s chief economist Shamik Dhar and Brian Davidson, head of climate economics at Fathom, looks at existing global spending commitments, highlighting key areas of necessary advancement. There are significant hurdles the world needs to overcome on the road to net zero. With any transition, especially one of this size and scale, comes not just risk but opportunity. Analysis of investment needs by sector and by country shows that the net zero transition should offer opportunities to informed investors. Here we outline some of the paper’s key points.

Implications for investors

Excerpts from the report: An investor’s guide to net zero.

1.The nature of around US$100 trillion worth of investment will be very different in the net zero scenario compared to business as usual – this creates opportunities and risks.

2.The firms which profit most from the transition will not necessarily be the ones making most of the green investment.

3.Mining activity is set to increase significantly as demand for metals and minerals used for transition-related technology (i.e., lithium) soars.

4.Incumbents from all sectors, but especially energy and utilities, should play a key role in making net zero a reality; but if they don’t do the green investment, new players will.

Investors can do more to ensure the funds they manage are aligned with the Paris climate goal, and that the companies in which they invest are making the investments necessary to turn these pledges into reality

Shamik Dhar

Chief Economist

Arguably one of the greatest challenges today is to reach net zero emissions by 2050, the most widely accepted way for the goal of the Paris Climate Accord to be met. Investment in ‘greening’ the world’s capital stock is anticipated to be around US$100 trillion, according to the paper. It goes on to state:

This equates to around a fifth of the total anticipated global investment over the next 30 years, or 3% of cumulative GDP.

This investment is not about the cost of stopping climate change – it’s about the transition away from economic activity which produces large amount of greenhouse gas emissions.

The longer the transition is delayed the larger the amount of spending needed will be.

As the world transfers resources from the production of polluting capital to clean, it has the potential to be the largest redeployment of capital in history, say Dhar and Davidson. It could be just as, if not more, transformational than the US Marshall Plan1 or China’s rise in the 1990s/2000s. Get it right and the payoff to society, and far-sighted investors, can be substantial, the paper’s authors assert.

Our report, An investor’s guide to net zero by 2050, shows massive capital investment in lower-carbon infrastructure is needed for the world to comply with the Paris climate goals. But there are obstacles.

BAU

Net Zero

$445
Trillion

$111
Trillion

Global investment requirements^*
USD, Trillions

Source: BNYM/Fathom Consulting. Date as of September 2022

* Cumulative investment between now and 2050 under business-as-usual (BAU) and net zero scenarios.

While most of the heavy lifting will be done by the private sector, policymakers have a vital role to play in overseeing the transition: setting clever and reliable policy can encourage private sector investment.”

Brian Davidson

Head of climate economics, Fathom Consulting

$456
Trillion

$82^**
Trillion

$18^***
Trillion

Global investment requirements^*
USD, Trillions

Source: BNYM/Fathom Consulting. Source: BNYM / Fathom Consulting. Date as of September 2022.

* Cumulative investment between now and 2050 under business-as-usual (BAU) and net zero scenarios. ** Green investment replacing naturally depreciated existing dirty capital and supporting new economic growth.
*** Green investment replacing/retrofitting stranded assets.

While most of the heavy lifting will be done by the private sector, policymakers have a vital role to play in overseeing the transition: setting clever and reliable policy can encourage private sector investment.

Brian Davidson

Head of climate economics, Fathom Consulting

For one, not everyone agrees with the capital spending estimates of what it will take to “green” the world.

It is complicated by things such as technological progress, the rate GDP growth and the fact there is no consensus on precisely what should be considered ‘green’ investment, the report’s authors say. For example, if industrial-scale lithium-ion batteries become the primary source of electricity storage, much of the gas infrastructure would be rendered useless and scrapped, resulting in a different level of investment to reach net zero than if hydrogen was part of the future energy mix and gas infrastructure could be retained and repurposed, say the report’s authors. Likewise, the report reads, the ability to use existing aircraft will depend on which low-carbon aviation technology becomes established.

Cumulative values between now and 2050	USD trillion 2020 prices
Economy-wide investment	396,6 $ – 597,0 $
Green investment	61,4 $ – 166,1 $
Stranded assets	4,2 $ – 22,4 $

Source: BNYM/Fathom Consulting. Date as of September 2022

Model output ranges following adjustments to capital stock to GDP ratio, depreciation rates, GDP growth rates and the clean capital share of total capital.

Levelised cost of energy

Median values, USD per megawatt hour, 2020

In some cases, the cost of building and operating clean capital may be cheaper than the status quo, the report reads. But in other cases, clean capital may be more expensive.

Fossil Fuels
Nuclear
Renewables

Source: BNYM/Fathom Consulting. Date as of September 2022

$82 Nuclear, $82
$56 Geothermal, $56
$48 Hydro, $48
$129 Concentrated solar, $129
$94 Gas turbine, $94
$75 Coal, $75
$67Gas combine cycle, $67
$130 Wind offshore, $130
$52 Wind onshore, $52
$81 Biomass, $81
$51 Solar PV (Utility), $51

According to the report:

Some corporates must either absorb significant losses or will need to be compensated for these necessary losses. This is the greatest challenge in meeting the Paris climate goal. Our analysis also shows the amount of assets that are stranded rises the longer the transition gets delayed.

The sectors that 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.

According to the paper, around US$20 trillion of polluting assets will likely need to be scrapped or retrofitted: these are referred to in the report as ‘stranded assets’. Energy, utilities and airline sectors face some of the most significant costs in scrapping polluting assets, say the report’s authors. They purport that half of all corporate investment required for net zero by 2050 must be spent by firms in the energy and utilities sectors – even though their combined market capitalisation is just 6% of the total.

Some highlights from the report:

1. Green investment in the energy sector should benefit firms that produce battery storage, grid infrastructure and piping. Green hydrogen seems likely to play a big part in the transition.

2.Transition-related spending by households on things like electric cars and low-carbon heating systems, such as heat pumps, are set for a huge rise in the net zero 2050 scenario.

3. Widespread adoption of hydrogen as a fuel and means of electricity storage could mean much of the existing gas power plant and pipeline infrastructure could simply be repurposed.

S&P 500 green investment by sector, in net zero scenario

View Data

Sector Name	Investment 2020 prices, USD bn¹	Investment, % of total	Market Cap, % of total	PPE, USD bn²	Market cap to PPE ratio
Energy	3,113	26.6	2.8	847	1.2
Utilities	2,408	20.6	2.5	1,161	0.8
Communication services	705	6.0	11.2	828	5.0
Capital goods	655	5.6	5.9	193	11.3
Materials	511	4.4	2.8	260	4.0
Automobiles & components	478	4.1	2.0	184	4.0
Health care	441	3.8	12.9	288	16.5
Information technology	418	3.6	25.6	354	26.7
Airlines	418	3.6	0.3	135	0.8
Retailing	390	3.3	7.4	367	7.5
Food & staples retailing	327	2.8	1.8	210	3.2
Air freight & logistics	302	2.6	0.7	90	3.0
Financials	247	2.1	11.6	378	11.3
Real estate	229	2.0	2.4	456	2.0
Road & rail	226	1.9	1.0	130	2.7
Hotels, resorts & cruise lines	212	1.8	0.7	88	2.9
Food products	172	1.5	1.1	58	6.9
Beverages	133	1.1	1.5	40	13.9
Household & personal products	123	1.1	1.5	42	13.4
Restaurants	64	0.5	1.1	67	6.2
Consumer durables & apparel	54	0.5	1.1	26	16.2
Commercial & professional services	47	0.4	0.9	35	9.6
Tobacco	24	0.2	0.7	8	29.7
Casinos & gaming	21	0.2	0.3	73	1.5
Total	11,719

¹ Total green investment required by each S&P 500 sector by 2050, net zero scenario. Constant, 2021 prices
² Property, plant and equipment.

S&P 500 transition risks by sector, z scores

The report’s authors have created a new and unique methodology and used it to score 24 stock market sectors on their transition risks. How quickly decarbonization is likely to happen in each sector and how problematic, from an economic point of view, that is likely to be.

View Data

Sector Name	Overall transition risk	“Carbon tax 1”	“Carbon tax 2”	Carbon tax + transition speed	Transition speed 1	Transition speed 2	Stranded assets 1	Stranded assets 2	Stranded assets 3	Disclosure
Utilities	2,0	3,6	2,3	4,2	3,4	3,2	0,5	1,9	0,0	-0,8
Energy	1,6	0,8	3,3	4,5	0,2	-0,3	2,2	1,0	2,0	0,6
Airlines	1,2	2,5	1,1	0,1	-0,8	-0,3	1,9	1,9	4,0	0,1
Road & rail	0,3	0,0	-0,4	-0,1	-0,2	-0,3	1,3	2,9	-0,2	-0,3
Real estate	0,2	-0,5	-0,6	-0,4	2,4	3,2	-1,1	-0,1	-0,3	-0,4
Hotels, resorts & cruise Lines	0,1	0,0	0,1	0,2	-0,6	-0,3	0,4	-0,1	0,7	0,6
Materials	0,0	0,2	0,1	0,4	-0,4	-0,3	0,2	0,0	-0,2	-0,4
Food products	0,0	-0,4	0,0	0,0	-0,3	-0,3	0,9	0,2	-0,2	-0,3
Automobiles & components	-0,1	-0,4	0,8	1,3	-0,5	-0,3	-0,3	-0,6	-0,2	-0,3
Capital goods	-0,1	-0,4	0,0	0,0	-0,8	-0,3	0,4	-0,2	-0,3	0,8
Casinos & gaming	-0,1	-0,4	-0,7	-0,5	0,8	-0,3	-1,2	-0,5	-0,3	2,1
Air freight & logistics	-0,1	0,1	0,2	-0,1	-0,8	-0,3	1,0	0,5	-0,3	-1,5
Consumer durables & apparel	-0,2	-0,5	-0,5	-0,3	-0,5	-0,3	-0,5	-0,7	-0,4	1,7
Food & staples retailing	-0,3	-0,3	-0,6	-0,4	-0,4	-0,3	0,1	-0,1	-0,3	-0,3
Restaurants	-0,3	-0,4	0,0	0,1	-0,7	-0,3	-0,5	-0,3	-0,4	-0,1
Beverages	-0,3	-0,4	-0,2	0,0	-0,5	-0,3	0,2	-0,2	-0,4	-1,1
Communication services	-0,3	-0,5	-0,7	-0,5	0,6	-0,3	-1,3	-1,0	-0,4	1,0
Retailing	-0,4	-0,4	-0,6	-0,4	-0,3	-0,3	-0,8	-0,6	-0,4	0,5
Health care	-0,4	-0,5	-0,7	-0,5	-0,2	-0,3	-0,7	-0,7	-0,4	0,6
Household & personal products	-0,4	-0,4	-0,5	-0,4	-0,2	-0,3	0,5	-0,1	-0,4	-1,7
Tobacco	-0,4	-0,4	-0,4	-0,2	-0,1	-0,3	0,3	-0,1	-0,4	-2,2
Commercial & professional Services	-0,4	-0,5	-0,7	-0,5	-0,3	-0,3	-0,8	-0,9	-0,4	0,6
Financials	-0,4	-0,5	-0,7	-0,5	0,3	-0,3	-1,2	-1,0	-0,4	0,4
Information technology	-0,6	-0,5	-0,7	-0,5	-0,4	-0,3	-1,3	-1,1	-0,4	0,2

Note: all variables and ratios have been calculated and adjusted so that higher scores reflect more exposure to transition risk.
Green = relatively low transition risk; red = relatively high transition risk.
Source: BNYM / Fathom Consulting. Date as of September 2022

More than half of the US$100 trillion investment is required in emerging markets (EMs) – more investment will be needed in the BRICS (Brazil, Russia, India, China and South Africa) than in the G7, the research shows. China needs more green investment than any other country, according to the report.

it reads:

There are a few reasons for this. First, the country is large and already accounts for more than 15% of global GDP. Second, it is expected to grow faster than most economies between now and 2050 and more investment, including green investment, will be needed to support this growth. Third, a higher-than-average share of electricity production in China comes from fossil fuels and the country also has an above-average CO2 intensity of GDP.

The report states:

Each dollar of green investment in an EM may achieve more decarbonization than the equivalent amount spent in an advanced economy.

2. India, China, South Korea and Indonesia are expected to grow faster than the global average and currently use a lot of coal for electricity generation. Consequently, they require a larger share of green investment than their current share of global GDP.

Around a third of investment will need to be spent in the US and EU combined.

Investment required

Investment breakdown

EMs green investment
required* vs CO₂ emissions

CO₂ emissions, percent
of global, log scale

4.8%

0.9%

0.1%

0.3%

0.2%

1.2%

30.7%

0.3%

1.9%

0.7%

0.6%

--%

1.5%

7.3%

1.4%

0.8%

0.4%

0.7%

1.7%

1.3%

0.2%

0.3%

1.3%

0.5%

Source: Source: Penn World Table / Refinitiv Datastream / BNYM / Fathom Consultiong
*In net zero by 2050 scenario

View data

Global green investment breakdown*

Percent of total

1.7%

32.4% Rest of the world

1.7%

17%

3.5%

2.6%

6.9%

3.9%

0.4%

2.5%

1.4%

2.1%

23.8%

Source: BNYM/Fathom Consulting. Date as of September 2022
*Net zero 2050 scenario G7, BRICS and others

View Data

Source: BNYM/Fathom Consulting.

Firms that supply green capital goods to households are also set to benefit. The bottom line is that not all of the $100 trillion is green investment will be done by the listed equities or the corporate sector,

the report argues:

They may do a lot of the heavy lifting but much of it will probably need to be done by households and governments, by, for example, purchasing electric cars, buying new, green heating systems and insulating their homes and buildings. Funding for this should come from a range of sources including earnings, tax revenues and bank loans.

Clever and clear-sighted policy can facilitate this process, the authors note. Investment in new technologies and green capital can help reduce costs, the authors discuss.

Global greenhouse gas emission breakdown by activity

Percent of total, 2019

32.8% Electricity/heat, 32.8%
13% Manufacturing/
construction, 13%
12.2%Agriculture, 12.2%
6.1% Fugitive emissions, 6.1%
6.1% Buildings, 6.1%
6.1% Industrial processes, 6.1%
3.4%Waste, 3.4%
17.4%Transportation, 17.4%
3.1% Other fuel combustion, 3.1%

Source: CAIT/IPCC/BNYM/Fathom Consulting. Accessed as of September 2022

Some of the low-hanging fruit has not yet been picked. 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.

Shamik Dhar

Chief Economist, BNYM

BNY Mellon Global Economics
and Investment Analysis team

View our team biographies to learn more.

Shamik Dhar

Chief Economist BNY Mellon Investment Management

Shamik Dhar has 36 years’ experience as an economist. Starting his career in H.M. Treasury as an economist assistant in the mid-1980s, he moved to Oxford Forecasting and then spent most of the 1990s as a senior economist in the Bank of England, where he worked on the UK economic forecast in the early days of inflation targeting and on monetary policy analysis in the early days of the Monetary Policy Committee.

Shamik moved to Aviva Investors (formerly Morley Fund Management) in 2000 and spent the next 14 years in the City of London, ending up as Head of Investment Strategy. Un 2014 he became the chief economist at the Foreign and Commonwealth Office in a period of rapid geopolitical and economic change, advising ministers and senior officials on the economics of Brexit. Shamik joined BNY Mellon Investment Management as global chief economist in October 2018.

Shamik has a degree in Philosophy, Politics and Economics from Oxford University and a master’s in economics from Queen Mary College, University of London. He also spend a year as a visiting scholar at the University of Pennsylvania in the mid-1990s.

Lale Akoner

Market Strategist BNY Mellon Investment Management

Lale is a joint portfolio manager on the Future Legacy team. Prior to joining Newton, Lale worked at BNY Mellon Investment Management for over a decade as a senior investment strategist where she was one of the firm’s leading voices on market analysis, multi-asset investment strategy and macroeconomic outlook supporting all client segments. She brings to Newton the depth of global macroeconomic knowledge and cross-asset perspective the multi-asset solutions require. Lale is also a regular on-the-record source and live-broadcast commentator, delivering market views to external audiences through a variety of media outlets.

Lale earned her Master of Arts degree in economics from Yale University, and Master of Science degree in finance (MSIA) from Carnegie Mellon University’s Tepper School of Business. Lale was a Teaching Fellow at Yale University and was awarded the Yale University Department of Economics.

Jake Jolly, CFA

Senior Investment Strategist BNY Mellon Investment Management

Jake Jolly is a Senior Investment Strategist at BNY Mellon Investment Management. In this role, he is a primary contact for the firm’s largest and most complex clients, providing ongoing updates on the market outlook, investment philosophy, process, and performance across asset classes. He produces rigorously researched market commentary and investment content to shape investment strategy decisions. Jake collaborates with portfolio managers and researchers across BNY Mellon Investment Management’s investment firms to provide a vital link between investment, product, and distribution teams.

Prior to joining BNY Mellon Investment Management in 2021, Jake was a Portfolio Manager at systematic quant manager Dimensional Fund Advisors (DFA) for more than four years. At DFA, he managed the firm’s flagship $16B US Small Cap equity fund, among other factor-based strategies. Before DFA, Jake worked as an emerging markets economist at IHS Markit (formerly IHS Global Insight).

Originally from Northern California, Jake received his B.A. degree in Economics and International Studies from the University of California San Diego (UCSD). He is also a graduate of Brandeis University, where he earned an M.A. degree in International Economics and Finance, and from Carnegie Mellon University’s Tepper School of Business, where he earned his MBA. At Carnegie Mellon, Jake was awarded the distinction of being the graduating MBA with the highest academic achievement in Finance. Jake Jolly is CFA® charterholder.

Sonia Meskin

Head of US Macro

Sonia Meskin is the US Macro Head in the NY office. Previously, she held roles with the International Monetary Fund, Standard Chartered Bank and the Federal Reserve Bank of New York. In these roles, Sonia held chief responsibility for the analysis of macroeconomic and market developments for external clients as well as internal senior management and policy stakeholders. Sonia received her undergraduate degree from the University of Pennsylvania and her Masters degree from the London School of Economics.

Aninda Mitra

Vice-President and the Head of Asia Macroeconomics and Investment Strategy

Sebastian Vismara

Financial Economist BNY Mellon Investment Management

Sebastian Vismara is a Financial Economist in the Global Investment Strategy team at BNY Mellon Investment Management. His responsibilities include conducting analysis on the global economy, financial markets and investment implications.

Prior to this role, Sebastian spent 5 years at the Bank of England working on global macroeconomic analysis and financial market research. In his last role he provided macro financial research support for Governor Carney's international meeting engagements.

A native of Italy, Sebastian has a two-year Masters in Management with a concentration in Finance from the London School of Economics and an undergraduate degree in International Relations with a concentration in Economics from the University of Florence in Italy.

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The conclusions and views expressed in this paper are derived from that research and are the opinion of the authors and do not constitute advice. All charts and data tables are provided for illustrative purposes only and are not indicative of the past or future performance of any BNY Mellon product.

FATHOM AND BNY MELLON INVESTMENT MANAGEMENT PARTNERSHIP

Since 2019, Fathom Consulting has provided bespoke macroeconomic modelling and scenario analysis for BNY Mellon IM’s quarterly economic and investment

outlook publication, Vantage Point.

Quarterly meetings are held to decide the key questions that will inform developments over the forecast horizon so that Fathom can conduct detailed scenario analysis that is theoretically founded, empirically driven and consistent with BNY Mellon IM’s house views. This helps to inform stakeholders of the outlook for the economy and markets, as well as the risks.

Fathom also engages in other bespoke projects for BNY Mellon IM, such as the work and analysis involved in the production of this research. BNY Mellon IM hired Fathom Consulting to provide expertise on the economics of climate change and undertake certain elements of this project. The final output, presented in this report, reflects the efforts of both parties.

The modelling framework and report conclusions were developed in collaboration, while Fathom’s proprietary climate data and tools were used to develop the sectoral risk framework presented in this report.

¹This was an American initiative enacted in 1948 to provide foreign aid to Western Europe

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BNY Mellon Investment Management is one of the world’s leading investment management organizations, encompassing BNY Mellon’s affiliated investment management firms and global distribution companies. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and may also be used as a generic term to reference the corporation as a whole or its various subsidiaries generally. • Insight Investment – Insight North America LLC (INA) is a registered investment adviser under the Investment Advisers Act of 1940 and regulated by the US Securities and Exchange Commission. INA is part of ‘Insight’ or ‘Insight Investment’, the corporate brand for certain asset management companies operated by Insight Investment Management Limited including, among others, Insight Investment Management (Global) Limited (IIMG) and Insight Investment International Limited (IIIL) and Insight Investment Management (Europe) Limited (IIMEL). Insight is a subsidiary of The Bank of New York Mellon Corporation. • Newton Investment Management – Newton” and/or the “Newton Investment Management” brand refers to the following group of affiliated companies: Newton Investment Management Limited (NIM) and Newton Investment Management North America LLC (NIMNA). NIM is incorporated in the United Kingdom (Registered in England no. 1371973) and is authorized and regulated by the Financial Conduct Authority in the conduct of investment business. Both Newton firms are registered with the Securities and Exchange Commission (SEC) in the United States of America as an investment adviser under the Investment Advisers Act of 1940. Newton is a subsidiary of The Bank of New York Mellon Corporation. • Alcentra – The Bank of New York Mellon Corporation holds the majority of The Alcentra Group, which is comprised of the following affiliated companies: Alcentra Ltd. and Alcentra NY, LLC. which are registered with the U.S. Securities & Exchange Commission under the Investment Advisers Act of 1940. Alcentra Ltd is authorized and regulated by the Financial Conduct Authority and regulated by the Securities Exchange Commission. • ARX is the brand used to describe the Brazilian investment capabilities of BNY Mellon ARX Investimentos Ltda. ARX is a subsidiary of BNY Mellon. • Dreyfus is a division of BNY Mellon Investment Adviser, Inc. (BNYMIA) and Mellon Investments Corporation (MIC), each a registered investment adviser and subsidiary of BNY Mellon. Mellon Investments Corporation is composed of two divisions; Mellon, which specializes in index management and Dreyfus which specializes in cash management and short duration strategies. • Walter Scott & Partners Limited (Walter Scott) is an investment management firm authorized and regulated by the Financial Conduct Authority, and a subsidiary of BNY Mellon. • Siguler Guff – BNY Mellon owns a 20% interest in Siguler Guff & Company, LP and certain related entities (including Siguler Guff Advisers LLC).

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MARK-312542-2022-10-21

Reaching for net zero

Unless investment is ramped up – significantly – the world cannot meet desired net zero targets by 2050, according to a paper jointly written by BNY Mellon Investment Management and Fathom Consulting. And this is more about redeploying capital than new investment.

Implications for investors

An Overview

Global investment requirements* USD, Trillions

Brian Davidson

Global investment requirements* USD, Trillions

Brian Davidson

Levelised cost of energy

Median values, USD per megawatt hour, 2020

Corporate issues

According to the report:

Some highlights from the report:

S&P 500 green investment by sector, in net zero scenario

S&P 500 transition risks by sector, z scores

Where in the world

it reads:

The report states:

EMs green investment required* vs CO2 emissions

Global green investment breakdown*

At home

the report argues:

Global greenhouse gas emission breakdown by activity

Shamik Dhar

BNY Mellon Global Economics and Investment Analysis team

Shamik Dhar

Lale Akoner

Jake Jolly, CFA

Sonia Meskin

Aninda Mitra

Sebastian Vismara

Download the full report

Important Disclosures

Global investment requirements^*
USD, Trillions

Global investment requirements^*
USD, Trillions

EMs green investment
required* vs CO₂ emissions

BNY Mellon Global Economics
and Investment Analysis team