BNY Mellon Investment Management in partnership with Fathom Consulting, today issued new research, ‘An investor’s guide to net zero by 2050’, which shows the global economy is significantly behind schedule in reaching 2050 net zero goals but can bridge the gap with $100 trillion of ‘green’ investment.
Although green investment is growing, the research highlights that more action will be required from governments, asset allocators and corporations to facilitate the transition to net zero. This $100 trillion represents around 15% of total global investment over the next 30 years, or around 3% of global Gross Domestic Product (GDP) over the same period. Corporations in the S&P 500 alone will need to spend roughly $12 trillion of green capital expenditure by 2050 to remain on course.
Shamik Dhar, Chief Economist at BNY Mellon Investment Management, said: “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.”
Brian Davidson, Head of Climate Economics at Fathom Consulting, added: “The economics of climate change remain poorly understood. The study helps to remove some of the fog and will help corporations, investors, policy-makers and other stakeholders to better understand this important topic.”
New investment must flow into critical sectors despite current emissions trajectories
The energy and utilities sectors face the largest climate transition challenges and are therefore most in need of capital to decarbonise. Allocating over half of the green corporate investment to these sectors will be crucial in reaching 2050 targets.
Corporations in these 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.
Kristina Church, Global Head of Responsible Strategy at BNY Mellon Investment Management said: “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.”
Opportunities for investors
The $100 trillion of green investment may create considerable opportunities for investors across many sectors and geographies. 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.