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Finding the funds for the low-carbon transition

WORLDWIDE: Around $485 billion a year will have to be invested to meet the 2040 climate change targets agreed at last year's COP21 summit.

Annual investment… $485 billion a year needs to be invested in renewable energy for 25 years to meet Paris target (pic: iStock/Kevin Hilton)
Annual investment… $485 billion a year needs to be invested in renewable energy for 25 years to meet Paris target (pic: iStock/Kevin Hilton)

The capital markets have the means to make this happen, but new approaches are needed to move the money from fossil fuels to renewables.

Just six weeks after negotiators struck a new international climate pact at the COP21 summit in Paris, a group of more than 500 global investors collectively representing more than $22 trillion in assets gathered in New York to thrash out what a pledge to limit global warming to less than 2 degrees C means for energy investing.

"Where the capital goes over the next five years is absolutely critical," UN climate chief Christiana Figueres told the crowd of financial leaders. "The proverbial 'follow the money' is really true here."

The International Energy Agency (IEA) has estimated roughly $1 trillion a year extra will need to be invested in energy efficiency and low-carbon energy technologies between now and 2050 to meet the Paris target.

A report unveiled at the January investor meeting, Mapping the Gap, drilled down into what this means for the electric-power sector in particular, and found that $12.1 trillion of investment in renewable energy will be required over the next 25 years, mainly in wind and solar.

That works out to an average of $485 billion a year, nearly twice the record $266 billion invested globally in new capacity additions in 2015.

Another $6 trillion will need to be invested in large-scale hydro and nuclear. The study maps a sharp ramp-up in clean-energy investment in the next decade to double business-as-usual projections, required in order to cut CO2 emissions sufficiently to allow for climate stability by 2040.

"It's a lot, but I think the report lays out pretty clearly that capital markets can easily absorb these amounts," says Sue Reid, vice-president of climate and clean energy at non-profit sustainable investment network Ceres, one of the organisers of the investor meeting and a partner with Bloomberg New Energy Finance in producing Mapping the Gap.

"Half a trillion a year investment in new renewable energy is roughly equivalent to the amount US automobile buyers are incurring in debt every year. That was eye-popping to me."

Stranded assets

The investment required is dwarfed by the money ploughed into the broader energy sector every year.

The IEA's World Energy Investment Outlook 2014 found more than $1.6 trillion was invested in energy supply in 2013, and more than $1 trillion of that was spent on fossil-fuel extraction and transport, oil refining and the construction of fossil-fuel-fired power plants.

"What we are talking about mostly is the need for a shifting of capital, from high-carbon to low-carbon sources of energy," says Reid.

The message is not lost on those who control the purse strings. A survey of more than 200 global institutional investors by Ernst & Young, released last autumn, found that exposure to climate-related risk in their portfolios is a growing concern.

Jurisdictions from Oregon to Alberta to the UK have already set deadlines for removing coal from their electricity supply mixes.

Meanwhile, Citigroup predicts that upwards of $100 trillion worth of untapped fossil-fuel reserves will need to stay in the ground, while Barclays estimates the fossil-fuel sector stands to suffer a $34 trillion drop in revenues over the next 25 years.

Against this background, it is hardly surprising that nearly two thirds of respondents admitted they are worried about stranded asset risk.

So too is the Financial Stability Board (FSB), an international body that monitors and makes recommendations about the global financial system.

Mark Carney, governor of the Bank of England and the board's chair, announced in December that the FSB is developing guidelines for voluntary company disclosures designed to help lenders and investors understand their climate-related risks.

The California insurance commissioner, who oversees the sixth largest insurance market in the world, took things a step further in January. He announced he not only wants insurance companies doing business in the state to disclose their carbon-related investments, but also to voluntarily divest their stakes in thermal coal.

This concern is starting to translate into action. Norway's $900 billion sovereign wealth fund, for example, is divesting billions of dollars from coal after a government decision to ban investments in companies with more than a 30% stake in coal-based activities or revenues.

French insurer AXA will sell off €500 million in coal holdings from its €925 billion portfolio by 2020. ABP, a major Dutch pension fund, is aiming to cut by 25% the carbon footprint of its €100 billion equity portfolio,and quadruple its clean energy investments to €5 billion by 2020.

Perception

How pension funds, insurance companies and sovereign wealth funds view energy investing is critical, because with $83 trillion in assets under their collective control - according to OECD figures - they will play a key role in funding the low-carbon transition.

"I think COP21 highlighted the importance of these huge, deep pools of capital actually allocating more money to infrastructure. And within that, renewable energy fits very well from an economic and responsibility perspective," says Ben Warren, global power and utilities corporate finance leader at Ernst & Young.

"It has long been talked about, the institutional investor market coming into the renewables sector, and we are starting to see signs of that happening now.

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