Net zero investment: addressing the capital shortfall

The state of climate capital

New research by Pictet with the Institute of International Finance highlights the stark gap between actual investment and what’s needed to reach net zero.

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.
1 The implied temperature rise (ITR) is a forward-looking metric, expressed in degrees Celsius, designed to show the temperature alignment of companies, portfolios, and funds with global temperature.

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."

Read the full report

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The information and data presented in this document are not to be considered as an offer or solicitation to buy, sell or subscribe to any securities or financial instruments or services. The information used in the preparation of this document is based upon sources believed to be reliable, but no representation or warranty is given as to the accuracy or completeness of those sources. Information, opinions and estimates contained in this document reflect a judgment at the original date of publication and are subject to change without notice. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any products or services offered or distributed by Pictet Asset Management. Pictet Asset Management has not ensured the suitability of the securities mentioned in this document for any specific investor, and it should not be relied upon as a substitute for independent judgment; investors are advised to determine the suitability of the investment based on their financial knowledge, experience, goals and situation, or to seek specific advice from an industry professional before making any investment decisions. Investors should read the prospectus or offering memorandum before investing in any Pictet managed funds. Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future. Past performance is not a guide to future performance.  The value of investments and the income from them can fall as well as rise and is not guaranteed. Investors may not get back the amount originally invested.

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