An energy turnaround in emerging markets leads to greater returns

To reach the net-zero target by 2050, investments of around $100 trillion are needed. This is equivalent to about 15% of total global investment over the next 30 years.

The global economy is significantly behind schedule for achieving the net zero target in 2050. However, this gap can be closed with "green" investments worth around 100 trillion US dollars. That's according to the latest "Net Zero by 2050" study by BNY Mellon Investment Management, which was prepared in collaboration with Fathom Consulting.

Governments, asset managers and companies must do more

Although green investments are increasing, the study shows that governments, asset managers and companies need to do more to reach the net zero emissions target. The $100 trillion represents about 15% of total global investment over the next 30 years, or about 3% of global gross domestic product (GDP) over the same period. In addition, companies in the S&P 500 alone will need to make about $12 trillion in green investments by 2050 to stay on track.

High investments in the energy turnaround are necessary

Achieving net zero by 2050 will require heavy investment in the energy transition, but it can be done, says Shamik Dhar, Chief Economist at BNY Mellon Investment Management. He continues, "If we get it right, the benefits to society and investors will be enormous. " Investment, however, is only one side of the coin - broader policies are needed to accelerate the pace of decarbonization. Thus, there have been calls for a global carbon tax. However, Dhar believes a coordinated approach is unlikely: "Governments instead need to encourage and incentivize private sector investment, while also mitigating the risks of the energy transition through policy measures."

New investments must flow into critical sectors

Energy producers and utilities are most affected by climate change and therefore need the most capital to decarbonize. According to Brian Davidson, head of climate economics at Fathom Consulting, directing more than half of green investments to these sectors of the economy is critical to meeting the 2050 targets. Davidson adds, "As the energy transition progresses, they are very likely to accumulate assets that become worthless. The study projects a value of $20 trillion in such 'stranded assets,' which will become larger the longer the energy transition is delayed. To limit the financial risk to investors, companies must identify and pay for these costs. "

"As responsible investors and capital managers, we see great value in companies with credible plans for how they will manage the energy transition," says Kristina Church, Global Head of Responsible Strategy at BNY Mellon Investment Management. For asset managers, she said, ongoing engagement with the public and private sectors is critical to creating a fair transition. "Pulling capital out of companies when a company fails to make the necessary restructuring in line with the energy transition is the very last resort. Our investments are designed to ensure that capital flows to where it is needed most and where the greatest opportunities for investors lie," Church says.

Opportunities for investors

The $100 trillion investment will create opportunities for investors across many industries and geographies, investment managers assert. According to the report, suppliers that provide energy producers and utilities with the means to decarbonize will reap the greatest benefits. Among the biggest beneficiaries, according to the investment managers, are likely to be companies that make battery storage, grid infrastructure and pipelines for carbon dioxide storage ("carbon capture"), hydrogen and natural gas.

More than half of the capital is needed in emerging markets

Geographically, more than half of the $100 trillion is needed in emerging markets, and nearly a quarter in China alone, according to the study. In this context, the share of global green investment needed in emerging markets to reach net zero is greater than the current share of annual global GDP accounted for by these markets. "Because decarbonization is cheaper there compared to advanced economies, the energy transition in emerging markets can lead to greater returns, both financial and environmental," the authors conclude.