How will we pay for going ‘Net-Zero’? The expense of going green globally

Awareness, activism and investment around forging solutions to the global climate crisis are all on the rise. As more extreme weather events batter countries around the world – alongside more persistent signs of background environmental degradation – more money is being pumped into our global struggle for survival.

The key question, as is always the case with issues of societal importance, is how much money is needed? How much will it cost to contain climate change and address it for good? How will we pay for it? 

The ‘how’ is being addressed through an increasingly wide and innovative range of financing methods and vehicles. But is money flowing into green funds, climate tech and ESG-based (environmental, social, and governance) practices quickly enough? 

“Capitalism and market forces got us into this warming planet, and it’s the only thing that’s going to get us out of it.” – Mike Rea, executive director of E8, a Seattle-based climate tech investment network

Sustainable finance, a catch-all term for primarily taking ESG considerations into account when making investment decisions, is at the threshold of a global investment revolution. Today, investment funds using ESG have more than $50 trillion in capital. This is astonishing growth, more than doubling in five years from $22.8 trillion in 2016. Two new ESG-focused funds are now being launched every single day.

Encouraging as this is, it may not represent enough capital, and it may not be flowing fast enough to keep up with the pledges of national governments and leading companies worldwide. Net-zero commitments today cover 68% of global GDP. If these pledges are to be upheld, it means that between now and 2050, all activity on Earth (finance, production, consumption, everything) must gradually adapt to the point that two-thirds of it is fully sustainable and carbon-neutral.

This is a daunting prospect, one that needs faster and more ambitious investment. Currently, ESG assets are predicted to reach between $53-60 trillion by 2025. Impressive growth in this area is important, but not the only metric that matters. 

According to the UN Environment Programme (UNEP), there is a $4.1 trillion financing gap in nature-based investments that needs to be closed for the world to hit its climate change, biodiversity, and land degradation targets. This means that the current level of investment will need to triple by 2030 and quadruple by 2050.

A recurring theme in the current climate debate – and in our coverage of it – is the hope that technology will ultimately provide enough solutions to staving off global catastrophe. From breeding heat-resistant bees in Dubai, to Masdar and Adnoc’s new low carbon hydrogen development hubs, individual innovations are driving sustainability increases across every major sector and global region.

Climate tech, in all its many forms, is also experiencing rapid growth against the wider backdrop of ESG fund expansion. By mid-2021, companies representing the global climate tech sector reached a combined $14.2 billion in capital. This is just off the key targets set back in 2020, which means that the sector is still behind on its goals but is quickly making up the lost ground.

As well as private sector-driven investments in climate tech, another key sustainable finance trend to consider is the investment actions of the public sector. 

According to researchers at the University of Cambridge, Governments consistently underestimate their own power and influence when it comes to prompting change in investment trends. This observation was made in connection to their recent project to use prefabricated engineered timber construction methods and digital design to quickly, yet sustainably, build much-needed new schools in the UK. Government procurement of infrastructure that uses sustainable methods that mature beyond the R&D phase is essential for providing invaluable ‘first customer’ endorsement while “pulling down the learning curve” to cheaper, dependable production.

The World Bank estimated in 2018 that global government procurement amounted to $11 trillion annually, around 12% of global GDP. This makes greater state-led green investment and sustainable procurement impetus a necessity for hitting their own climate targets. 

This is a reality well understood by governments in the Middle East. Late this month, Saudi Arabia’s Public Investment Fund (PIF) announced that it would be the world’s first sovereign wealth fund to issue green bonds. A full 50% of PIF’s investments are earmarked for (or are already engaged in) renewable and sustainable power sources, and the fund itself is responsible for developing around 70% of all renewable projects in Saudi Arabia.

Across the public and private sectors of countries all around the world, the need to think and act more sustainably is translating into greener investment practices. The question of whether this is happening fast enough is one integral part of the wider question of whether our whole global response to climate change is being deployed swiftly enough to be successful. All current indications are that it is not, since the international community is "nowhere close" to meeting carbon targets set in the Paris Agreement.

However, the global climate response is lagging, all indications are that the size, scale and speed of the response are accelerating. Since money often talks loudest, the rising investment levels for sustainable finance will be vital in setting the overall pace throughout the rest of this crucial decade.

https://www.six-group.com/en/blog/2021/future-sustainable-finance.html

https://www.bloomberg.com/professional/blog/esg-assets-may-hit-53-trillion-by-2025-a-third-of-global-aum/

https://www.weforum.org/agenda/2021/09/how-will-we-fund-the-shift-to-a-more-sustainable-future-4-experts-explain/

https://www.unep.org/resources/state-finance-nature

https://edition.cnn.com/2021/09/22/middleeast/hatta-honey-dubai-bees-spc-intl/index.html

https://www.thenationalnews.com/opinion/editorial/2021/09/19/the-world-is-running-out-of-good-co/

https://www.cdbb.cam.ac.uk/news/research-profile-precision-engineered-timber-digital-design-and-delivery-healthier-schools

https://www.project-syndicate.org/commentary/greentech-boom-needs-state-follow-through-by-william-janeway-2021-03 

https://blogs.worldbank.org/developmenttalk/how-large-public-procurement

https://www.bolnews.com/latest/2021/09/pif-first-sovereign-wealth-fund-to-issue-green-bonds/