The state of climate capital
Bridging the gap: investments for net zero
At first glance, the world appears to have made solid progress towards building the green economy it urgently needs. In 2023, capital investment in clean energy hit a record USD 2 trillion, double the amount allocated to fossil fuels, with the number of listed companies with net zero targets almost trebling since 2020.
Scratch the surface, however, and those achievements look far more modest.
New research by Pictet Asset Management and the Institute of International Finance shows there are significant gaps between the financial and commercial commitments contained within net zero pledges and what investors and big business are currently delivering.
Specifically, we have identified the following key findings:
- To reach net zero by the middle of this century, the ratio of low-carbon to fossil fuel energy investment must rise from 2:1 to approximately 7:1 by 2050. This means that climate investment will need to increase by as much as USD 8 trillion annually through to the end of this decade.
- The funding shortfalls are substantial across every major sector (see Figure 1). If green investment remains at current levels, the energy industry alone will face an annual funding shortfall of some USD 2.5 trillion by 2030.
Figure 1 - Mind the investment gap
Annual net zero funding shortfall, in USD trillion, by sector, through to 2030.
Source: Climate Policy Initiative, IIF, forecast period 31.12.2023–31.12.2030.
- The transport, construction, heavy industry, and agriculture sectors will each have USD 1 trillion less capital per year than they need to become carbon neutral.
- The funding problem is more acute in the emerging economies. Our estimates show that India will need to invest up to 10 times more in clean energy than in fossil fuels to reach net zero; for China and Brazil, the ratio needs to rise to 7:1 and 5:1, respectively.
- Less visible but no less important is the failure by big business to act decisively on its net zero pledges. While a growing number of companies are adopting ambitious net zero goals, over half of the world’s listed firms continue to operate in a business-as-usual mode. The implied temperature rise (ITR)1 of their day-to-day activities exceeds the 2°C safety threshold.
- This misalignment is particularly pronounced in countries where publicly listed firms are heavily involved in carbon-intensive activities, such as South Africa, Canada, India, and Brazil (see Figure 2). Consequently, the longer these changes are deferred, the greater the risk of encountering costly errors, particularly for companies with already stretched financial resources.
Figure 2 - Companies still some distance away from net zero
Listed companies' impact* on global warming, by country, expressed as implied average temperature rise attributable to corporate activities.
Source: IIF, Bloomberg, MSCI; *excludes financial and Chinese companies; data as of 31.12.2023.
This is a summary of one section of the report "Climate Crunch: A Closer Look at the Transition Risks of Net Zero."
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