The global economy is “significantly behind schedule” when it comes to meeting 2050 net zero goals, according to new research from a leading asset management.
However, despite this bleak assessment, BNY Mellon Investment Management says targets could still be reached with a huge $100 trillion investment into the green economy. This represents around 15 per cent of the total global investment over the next 30 years.
Much of this expenditure, it says, will need to be directed towards ‘green’ energy and utilities, despite their current emissions. It says that these ‘critical sectors’ face the largest climate transition challenges and are therefore most in need of capital to decarbonise.
The research suggests that allocating over half of the green corporate investment to these sectors will be crucial in reaching 2050 targets.
Given this scale of this challenge and the massive investment required, BNY Mellon estimates that corporations in the S&P 500 alone will need to spend roughly $12 trillion of green capital expenditure by 2050 to remain on course.
Its research, ‘An investor’s guide to net zero by 2050’, compiled in conjunction with Fathom Consulting, says more action is required, from governments, asset allocators and corporations to facilitate the transition to net zero.
BNY Mellon Investment Management chief economist Shamik Dhar says: “Achieving net zero by 2050 will require transformational investment, but it is attainable.
“Get it right and the payoff to society and investors can be substantial. Investment is just one side of the coin. Wider policy action is needed to accelerate the pace of decarbonisation and there have been calls for a global carbon tax, but we think a coordinated approach is unlikely, so other incentives must be considered. Governments need to encourage and incentivise private sector investment whilst alleviating transition risks through policy levers.”
Fathom Consulting head of climate economics Brian Davidson adds: “The economics of climate change remain poorly understood. The study helps to remove some of the fog and will help corporations, investors, policymakers and other stakeholders to better understand this important topic.”
The report states that corporations in the energy and utilities industries face a high probability of incurring stranded assets — polluting assets that may have to be scrapped before reaching the end of their economically useful life.
The research forecasts a potential $20 trillion worth of stranded assets during the transition, and that will increase the longer the transition is delayed. To limit financial risk to investors, corporations must identify and account for the costs associated with scrapping these stranded assets.
Despite this challenges ahead the report says the transition towards a green economy still creates opportunities for investors across many sectors and geographies.
It says suppliers providing the energy and utilities industries with the means of decarbonising may be set to reap the greatest reward; with some of the largest beneficiaries likely to be companies producing battery storage, grid infrastructure and piping for carbon capture, hydrogen and natural gas.
Geographically, more than half of the $100 trillion of green investments are expected to be needed in emerging markets and nearly a quarter in China alone.
The share of global green investment required in emerging markets to reach net zero targets is larger than their current share of annual global GDP. With cheaper decarbonisation solutions relative to advanced economy peers, the transition in emerging markets can potentially lead to greater returns, both financially and environmentally, for impact-focused investors.
BNY Mellon Investment Management global head of responsible strategy Kristina Church says: “As responsible investors and stewards of our client’s capital, we see significant value in companies with credible transition plans. Continuous engagement with the public sector and corporations is key to ensure a just transition. Divestment is a very last resort should a company fail to transition. Engagement allows for the directing of capital to the sectors and geographies that need it most. This is where the biggest transition opportunities for investors lie.”
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