The transition to a low-carbon, resilient, and just economy is the greatest investment opportunity of our lifetime. Institutions that are well prepared to embark on Net Zero pathways will be able to take full advantage of decarbonization-focused policy shifts and avoid being stuck with stranded assets.
Until now, however, no comprehensive estimate existed of the of that opportunity, (or, to put it another way, the size of the financing gap between committed spending and the investment needed to deliver Net Zero by 2050 across sectors and geographies).
Allen & Overy and Climate Policy Initiative have conducted this study to quantify the finance needed to achieve the Net Zero transition, shed light on the current funds available, and outline the roles different stakeholders can play in closing the gap.
Better climate finance data can enable investors and policymakers to identify the areas of greatest need and to align their efforts around the most promising opportunities, ensuring that financial and policy resources are being deployed to their greatest effect.
By making this data publicly available we hope to focus minds on the scale of the challenges and opportunities that lie ahead, while informing debate about how to accelerate financial flows to decarbonize the global economy and improve climate resilience.
Our study reveals the scale of climate finance required to deliver Net Zero
Climate finance flows have grown consistently over the past decade, but they still lag far behind what is needed to meet the goals of the Paris Agreement. Our study estimates that USD6.2 trillion of climate finance is required annually between now and 2030, and USD7.3tn by 2050, to deliver Net Zero – a total of almost USD200tn.
However, tracked global climate finance is only expected to pass USD1tn for the first time in 2022 (Figure ES.1).
While the sums involved in decarbonization are substantial, the benefits are even larger. Some studies suggest that concerted climate action and investment could add net USD43tn to the global economy – equivalent to a rise of up to 3.8% in global GDP by 2070.
Transport and energy require the greatest investment
The sectors with the greatest climate finance needs are transport (requiring 50% of the total estimated finance needs, or at least USD3.2tn annually through 2050) and energy systems (requiring 32%, or at least USD2.1tn annually through 2050). Huge increases in climate investment are also required to deliver building energy efficiency (to reach USD731 billion annually through 2050); decarbonize industrial processes (USD320.2bn); and develop clean energy storage solutions (USD251.3bn) and carbon capture, utilization, and storage (USD145.3bn).
Finance for climate adaptation and resilience is far below the estimated USD254bn needed on average per year through 2050. Further adaptation finance may also be needed given that the rate of global warming is accelerating faster than many scientists expected.
Action is required from both the public and private sectors
To rise to these challenges, both public and private actors will need to increase their ambition, efficacy, and coordination. Public climate finance has grown faster than private climate finance over the past decade, but this may change; multilateral development banks (MDBs) have publicly committed to increase their annual climate finance by just 32% annually through 2030, and only six of the 27 largest national and bilateral development finance institutions have set climate investment targets.
Given the scarcity of public capital, effective deployment of funding, policies, and frameworks will be crucial to mobilize private investment at the scale required. This is more urgent in regions where public money makes up a larger share of total climate finance; for example, public funding comprised 86% of total climate finance in Africa over the past decade, but just 4% in North America.
To scale private finance globally, public finance should be deployed to lower the cost of capital for private investors who, due to the respective risks, require a rate of return that is three to ten times higher in developing economies than in the EU or the U.S.
Private climate finance expected to grow in future
Research indicates larger future growth in private climate finance than public finance, given the amount of private capital in the global financial system and the fact that public finance will continue to remain scarce. For example, the 30 largest global banks have committed USD870bn annually to finance climate solutions, although asset owners and managers have been slower to set public climate investment targets.
Venture capital (VC) investment in businesses providing climate solutions reached USD70.1bn in 2022, 89% higher than the previous year, with climate-focused VC investors holding USD37bn in unallocated capital as of late 2022. Climate solutions businesses have been able to raise equity and debt capital relatively easily, though these companies’ equity raising in 2022 was 40% lower than in 2021, in line with general reduced availability of capital in the second half of 2022.
Funding for mining of critical minerals – and manufacturing capacity – needs to rise
Investments in supply chain and manufacturing facilities for climate solutions rose to USD79bn in 2022, 44% higher than in 2021. However, this figure needs to increase by a further 58% to stay on a Net Zero pathway. Similarly, investment in the mining and processing of critical minerals must triple by 2050 to USD331.5bn annually to achieve this goal.
Neither public nor private finance can bridge the investment gap alone; collaboration and more effective use of financial resources will be vital to achieving Net Zero. Multiple gears need to move together to deliver the broader energy transition, with government policy and public money creating the environment for private investment to flow.
In addition, the scale and complexity of the financing needed to decarbonize the global economy will only grow if adequate funds are not deployed now.
Unfortunately, current climate regulation and policy is insufficient to meet the 1.5°C target set by the Paris Agreement. Many governments do not have the necessary capacity or political backing to take the actions necessary, causing the financing gap to grow and preventing more rapid expansion of private investment.
There has been progress in recent years, but solutions with great potential impact, such as setting an explicit price for carbon commensurate with its impact on the climate, remain out of reach. Developing comprehensive, negotiated solutions is hampered by politics and narrow national interests, making it harder to address multigenerational global common issues.
Against this backdrop, our research identifies a range of steps that can help close the Net Zero financing gap.
- Stakeholder alignment on policies to accelerate private investment that transcend short-term economic and political cycles and are designed to avoid investment in stranded assets. Public financial institutions should channel their funding to mobilize private finance and achieve higher impact, including by providing political risk support, guarantees to reduce foreign exchange risk, and liquidity to increase funding for less commercially viable sectors and regions.
- Policy and financial support to boost critical decarbonization technologies that are not currently commercially viable and for regions that receive less private investment.
- Emissions policies that smooth the path to Net Zero, accounting for the ongoing demand and negative externalities of demand for fossil fuels.
- Support for a just transition for communities reliant on fossil fuels or that will be impacted by a transition to low-carbon solutions, including through measures such as Just Energy Transition Partnerships.
In order to tackle any challenge, it is vital to first understand its scope. We hope that this research will provide a critical missing piece of the decarbonization puzzle.
Our research tracks climate finance to projects in the real economy that have mitigation or adaptation benefits, such as solar infrastructure and electric vehicles (EVs), or those that improve communities’ resilience to climate change.
It uses data sourced through CPI’s Global Landscape of Climate Finance from several third-party providers, including BloombergNEF (BNEF), IJ Global, the Organization for Economic Cooperation and Development (OECD) and the International Energy Agency (IEA), as well as proprietary surveys of the activity of more than 50 development finance institutions (DFIs), including the major MDBs.
We have included all climate finance flows that are disclosed and can be reliably tracked without double counting. However, our analysis remains limited by a lack of disclosure of climate finance data in some areas, such as where figures are only available through to 2020. Data for 2021 and 2022 will be included in the next iteration. In the interim, we have used external estimates to fill these gaps where possible. More information on data gaps is provided in Annex.
Figures on annual climate investment needs are sourced from third-party estimates and analysis (including BNEF, the International Renewable Energy Agency (IRENA) and the IEA). Details on these needs estimates are provided in Annex.