Introduction
As debates continue over how much is enough to green the world’s energy supply, transparent, diversified and liquid strategies may help investors play their part while also pursuing sustainable outcomes, says Jason Ye, Head of Strategy Indices in APAC at S&P Dow Jones Indices (S&P DJI).
Fresh from the discussions at COP27 in November, clean energy is top of mind on the global agenda. For many investors, the financial incentives to move as quickly as possible from fossil fuels to renewables such as solar, wind and hydroelectric power are greater than ever.
In short, the cost of climate change is at a tipping point. The economic impact of the increasing frequency and severity of disruptive natural disasters hit USD 343 billion last year—over 95% of which was due to weather and climate-related events—making 2021 the third-costliest year on record, according to Aon’s annual report.
The numbers appear to get even more striking as time goes on. Deloitte, for example, estimates that climate change could cost the global economy USD 178 trillion over the next 50 years.
It is no surprise to see extreme heatwaves, drought and flooding become more common. The World Meteorological Organization’s latest findings show the past eight years on track to be the eight warmest on record.
Yet in the face of the mounting evidence, the journey toward a renewables-led future is proving to be relatively slow and long. Perhaps most revealing is the UN’s own 2022 progress report on its 17 Sustainable Development Goals (SDGs); it concludes that, when it comes to affordable and clean energy, the current progress is insufficient.
For example, the pace of electrification has slowed amid the growing challenge of getting to those hardest to reach. Intensified efforts are needed in the least developed countries to jump-start access to clean cooking fuels and technologies. Without these, the health of 2.4 billion people is at risk. Further, rising commodity, energy and shipping prices have increased the cost of producing and transporting solar photovoltaic modules, wind turbines and biofuels worldwide.
Despite these trends, investors may offer optimism for greening the world’s energy, based on how they allocate capital. The motivation should be strong; achieving the desired goal can potentially boost the size of the global economy by USD 43 trillion in net present value terms from 2021 to 2070, according to Deloitte.
Cleaning Up with More Capital
There are many reasons why investors may be encouraged by the combination of public and private sector support for renewables.
Among various recent initiatives, the U.S. and the United Arab Emirates agreed to invest USD 100 billion in clean energy projects, with the aim to produce 100 GW of clean energy worldwide by 2035. Meanwhile, the European Investment Fund (EIF), the region’s largest venture capital and private equity financier, made a clear statement at COP27 by signing investments totaling EUR 247 million (USD 247 million) to enable five equity funds to back EUR 2.5 billion of climate action investment that helps deliver the EU’s climate and energy targets.
On a grander scale, governments representing over half of global GDP agreed at COP27 to the “Breakthrough Agenda,” a 12-month action plan to help make clean technologies cheaper and more accessible everywhere.
Interest in renewable energy and clean tech across developed and emerging markets has been accelerating. In the first 10 months of 2022, for example, the UNFCCC (UN Climate Change) said USD 94 billion had been committed by governments to demonstrating clean energy technologies by 2026 in response to U.S. president Joe Biden’s USD 90 billion challenge.
