Our analysis indicates there are plenty of alpha opportunities to be found across a multitude of climate solutions and so-called transition leaders, both in low- and high-emitting industries, and across developed and emerging markets. But having thematic support alone is not enough. The secret lies in the balance between impact and economics. Leaders in higher-emitting sectors are therefore also part of the net-zero equation. When sticking to classic investment principles and not blindly chasing everything that colors green, climate transition investing can certainly create value for investors while contributing to the climate goals.
Introduction
Climate change is a systemic challenge, requiring a more pervasive transformation of various sectors and industries than often assumed. Simply adding more solar and wind or plugging more EVs to the grid is not enough to solve for the complex puzzle called ‘net zero’. Moreover, climate transition creates new challenges too. For example, how should we
ensure equity and inclusiveness for workers and communities that still depend on fossil fuels? How can we enhance the efficiency and resilience of our food, transport, and building systems, which account for a large share of global emissions?
These questions imply the need for a comprehensive set of climate solutions beyond just clean technologies. We need to invest in the transition of all sectors that have a significant impact on the environment and society, while supporting the innovation and adaptation of businesses that are committed to sustainability. Next to the companies providing climate
solutions, or ‘enablers’, we also need to recognize and reward the transition leaders already reducing their environmental footprint, improving their social performance, and aligning their strategies with the long-term goals of the Paris Agreement.
In the first section of this white paper, we’ll quickly touch on the various climate solutions buckets and associated investment spend needed to make a transition to net zero happen. The second section will then look at the alpha potential of transition investing, as well as the role of transition leaders in the net-zero equation. Does doing good ultimately lead to
doing financially well for investors too? In this white paper, we try to answer this question by, first, looking into the historical returns of various climate solutions and, second, comparing the historical returns between the transition leaders versus transition laggards. Of course, we’ll use those findings as a guidepost for our playbook for the many
exciting investment opportunities that lie ahead.
Investment needs
‘Net zero’ is a two-word ambition that is anticipated to take decades and require tens of trillions of dollars investment spending. Most reports looking at the economics of net zero conclude that a global investment of around USD 5 trillion per year is needed,1 about three times today’s annual spend, or around 4.5% of annual global GDP. While many pundits
point to the need for a rapid investment scale-up across all systems, we, however, see real-world limitations to this.
Moreover, a fixation on the short term might lead to a misallocation of capital over the long term, potentially jeopardizing the transition itself. By triangulating capital expenditure projections from several leading research reports, we’ve assessed the investment needs by climate solution category. Most investment needs to be geared toward the power generation sector (43% of total), mainly as this forms the gateway to many other sectors. For example, without clean power, there will be no green buildings. The transportation space is another big investment driver (32%), followed by buildings (13%), industry
(8%) and agriculture, forestry and other land-use (AFOLU; 4%).
Download the report here.
1. IIGCC (2022), IEA (2023). McKinsey (2022) even arrives at USD 9.2 trillion per year of spend needed, though this also includes, for example, continued spending
on high-emission assets of USD 2.7 trillion within that figure.↩
