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DISCOVER

Reaching for net zero

Understanding the investment risks and opportunities created by what may be the largest redeployment of capital in history
 

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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

<p class="cite-name">Shamik Dhar</p>
<p class="cite-role">Chief Economist</p>

 

 

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
Other 'clean' investment
$445 Trillion
$445
Trillion
Investment in ‘dirty’ assets,
$111 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

Other 'clean'
investment, $456TR
$456
Trillion
'Green' investment
(new/natural)**, $82TR
$82**
Trillion
'Green' investment
(stranded)***, $18TR
$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.

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

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

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

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:

1.

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.

3.

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

EMs green investment
required* vs CO2 emissions

CO2 emissions, percent
of global, log scale
4.8% Russia, Investment $1.4M
CO2 emissions 4.8%
0.9% Poland, Investment $0.6M
CO2 emissions 0.9%
0.1% Hungary, Investment $0.2M
CO2 emissions 0.1%
0.3% Czech Republic, Investment $0.4M
CO2 emissions 0.3%
0.2% Greece, Investment $0.4M
CO2 emissions 0.2%
1.2% Turkey, Investment $1.2M
CO2 emissions 1.2%
30.7% China, Investment $23.8M
CO2 emissions 30.7%
0.3% Qatar, Investment $0.4M
CO2 emissions 0.3%
1.9% Korea, Rep. of, Investment $2.4M
CO2 emissions 1.9%
0.7% Egypt, Investment $0.3M
CO2 emissions 0.7%
0.6% Pakistan, Investment $0.2M
CO2 emissions 0.6%
0.6% UAE, Investment #N/A
CO2 emissions 0.6%
--% Taiwan, Investment $0.6M
CO2 emissions --%
1.5% Saudi Arabia, Investment $1.1M
CO2 emissions 1.5%
7.3% India, Investment $6.9M
CO2 emissions 7.3%
1.4% Mexico, Investment $1.3M
CO2 emissions 1.4%
0.8% Thailand, Investment $0.7M
CO2 emissions 0.8%
0.4% Philippines, Investment $0.6M
CO2 emissions 0.4%
0.7% Malaysia, Investment $0.6M
CO2 emissions 0.7%
1.7% Indonesia, Investment $3.1M
CO2 emissions 1.7%
1.3% Brazil, Investment $1.7M
CO2 emissions 1.3%
0.2% Peru, Investment $0.2M
CO2 emissions 0.2%
0.3% Chile, Investment $0.4M
CO2 emissions 0.3%
1.3% South Africa, Investment $0.4M
CO2 emissions 1.3%
0.5% Argentina, Investment $0.4M
CO2 emissions 0.5%

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

Global green investment breakdown*

Percent of total
1.7% Canada, 1.7%
32.4% Rest of the world
1.7% Brazil, 1.7%
17% US, 17%
3.5% Germany, 3.5%
2.6% UK, 2.6%
6.9% India, 6.9%
3.9% Japan, 3.9%
0.4% South Africa, 0.4%
2.5% France, 2.5%
1.4% Russia, 1.4%
2.1% Italy, 2.1%
23.8% China, 23.8%
Source: BNYM/Fathom Consulting. Date as of September 2022
*Net zero 2050 scenario G7, BRICS and others
Source: BNYM/Fathom Consulting.

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

Source: Penn World Table / Refinitiv Datastream / BNYM / Fathom Consulting. Date as of September 2022

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
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.

 

 

 

 

 

 

 

Download the full report