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How investors can drive us to net zero

December 10, 2021, 2:00 PM UTC
Helping industrial “gray” assets transition to net zero is one arena in which investors can make a particularly meaningful impact, the authors write.
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COP26 has created real momentum in getting investors to achieve net zero by 2050. Numerous banks, asset owners, and asset managers made net-zero commitments ahead of the Glasgow meeting, with more than $130 trillion of assets under management now subject to such pledges. That’s good news, but it’s a bit early for a victory lap.

There’s a big difference between committing to ensuring a portfolio achieves net zero, with associated measurement methodologies and interim targets, and making the actual investments that are needed to drive decarbonization of the global economy. Somewhere between $100 trillion and $150 trillion of investment will be required to achieve global net zero by 2050, according to research by the Global Financial Markets Association and BCG. That’s trillions, with a T. However, the pace of annual investment in global decarbonization today is only about $500 billion—just 12% of what is required.

Investors must now move from pledges to action by increasing capital deployment activity in two areas: helping industrial “gray” assets transition to net zero, and accelerating the development of new, promising, low-carbon or decarbonization technologies. To be clear, for asset managers and asset owners, going beyond pledges is more than just doing the “right thing.” It is part of maximizing risk-adjusted returns in the long run and is fully consistent with the discharge of their fiduciary duties. Similarly for financial institutions, it about maximizing long-term shareholder value. 

There are some rational reasons asset owners and managers today are not investing in each area at the levels we ultimately need. First, buying into a heavy-emitting sector in order to help accelerate that industry’s decarbonization journey makes it more challenging, not less, for an investor to achieve interim 2025 or 2030 net-zero targets. Second, decarbonizing a business is challenging, and requires real expertise that many investors do not yet possess. Third, some of the most important technologies required for society to achieve net zero—for example green hydrogen, green cement, and carbon-capture technologies—are more capital intensive, and come with a very different risk profile, than investments that traditional early-stage investors have become accustomed to. 

But if we truly want to deliver the best risk-adjusted returns and, at the same time, provide the money needed for the transition, those obstacles can and must be overcome. Net-zero alliances within the investment community must embrace new mechanisms that celebrate and recognize asset owners, managers, and banks for going beyond portfolio math and actually taking these factors into their investment decision-making processes. 

The climate investment imperative 

A look at a couple of critical areas may illuminate how a significant gap persists between the funds that are needed to achieve net zero globally and the actual investments being made—a gap that presents an opportunity to generate outsized risk-adjusted returns. 

Gray-to-green opportunities. Consider the necessary, but challenging, transformation of high-emitting sectors. 

Investors who put in the effort can catalyze decarbonization of companies. They can encourage management teams to set a decarbonization strategy and road map, set and track an emissions baseline (for scopes 1, 2, and 3), and provide access to “patient capital” that can help fund the journey. This is a vital role not only in hard-to-abate sectors, but also in industries where decarbonization of supply chains is a viable, but under-leveraged, opportunity. Eight supply chains—food, construction, fashion, fast-moving consumer goods, electronics, automotive, professional services, and freight—account for more than half of all global greenhouse gas emissions, according to research by BCG and the World Economic Forum. And roughly 40% of emissions in these supply chains could be eliminated using available and relatively affordable actions. 

However, an investor who has made a public net-zero commitment may not be incentivized to take a leading role in driving decarbonization. Right now, if that investor buys high-emitting assets with the intention of helping those assets decarbonize, the carbon intensity of their overall portfolio will increase. By contrast, if that same investor sells any such assets to another investor (one who may care less about decarbonization) they will see their overall carbon intensity levels improve—although that transaction does little to advance the global push for net zero. In essence, bad assets risk ending up in the portfolios of bad owners.

Emerging low-carbon technologies. Today’s fully scaled technologies will not be enough to get us to net zero. According to the International Energy Agency, almost half of the reductions in greenhouse gases (GHGs) needed to achieve net zero by 2050 must come from less mature technologies that are under development today, such as hydrogen and carbon capture, utilization, and storage. Private investors, including venture capital, private equity firms, and infrastructure investors, must play a critical part in providing that funding, given their longer investment time horizons and risk appetite. According to our analysis, annual private investment must reach $470 billion by 2030.

However, while private investment has increased every year from 2016 to 2021 for a total of $160 billion, the current investment levels are woefully insufficient. We need eight times the amount invested in 2021 to get the job done by 2030. 

A new approach to investing for net zero 

So how can we create a context that encourages more return-seeking capital to take action toward creating a net-zero world? We see at least three ways: 

  • Shift the focus of climate activists. Climate activists have achieved something we had not thought possible even three years ago. They have won the attention of asset owners. The question is: What will climate activists do with that attention? To date, they have used that influence to pressure asset owners to divest gray assets. Climate activists should instead turn their attention to pressuring asset owners and asset managers to catalyze the decarbonization journey among high-emitting companies and encouraging investments in promising climate technology companies. They should also shine a light on the significant number of viable climate technology businesses that lack the capital to scale.
  • Create a decarbonization leaders’ circle among those committed to net zero. Net-zero target-setting frameworks can go a step further and start issuing guidance on measurement, target-setting, and reporting that enables investors who are pursuing active gray-to-green strategies to be recognized and celebrated as the true climate heroes. And they could create some version of a “Net Zero Leaders’ Circle” to single out those asset managers, owners, and banks actually catalyzing decarbonization journeys among gray assets. 
  • Create the climate venture leaders’ circle. Those same frameworks should celebrate investors leaning into critical early-stage climate ventures. As commitments grow, simply hitting a portfolio-wide emissions reduction target cannot be the only mechanism by which investors are acknowledged. As discussed, this could end up having the opposite effect. Providing special distinction for those driving climate impact can create a ripple effect whereby other investors seek to “catch up.” There has been progress on this front. Funds are being raised with a focus on driving climate impact and taking climate action. Adding a layer of recognition may result in even more investors putting their capital to work where it matters most. 

We need to acknowledge that net-zero commitments, however well intentioned, will not alone create real impact. Instead, they may create complacency among investors; an “I made my pledge and did my part—now let me go back to the work of investing” attitude. And that’s a dangerous scenario at a time when we need capital in order to allow for real climate action.

Vinay Shandal is the global lead of Boston Consulting Group’s sustainable finance and investing business. Mark Wiseman and Nili Gilbert are BCG senior advisers.

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