The race to net zero is becoming a big business with many pensions, sovereign wealth funds, endowments, and foundations declaring their intent to have net-zero portfolios by 2050 or sooner. Though the task at hand is crucial for our survival and also capital intensive, the way private funds are gearing up to the challenge raises many eyebrows.
It’s true that the programme on a global scale is capital intensive with experts estimating a need for $5 trillion in new equity and debt investment each year between now and 2050 to fund the transition of key industries such as energy, transportation, and manufacturing. That is equal to roughly 5% of the global GDP in 2020.
It’s also equally true that we are running out of time. To reach net zero by 2050, we need to cut global emissions in this decade by almost 60% from 2010 levels. According to the Intergovernmental Panel on Climate Change, only five-to-ten years’ worth of the global carbon budget remains; exceeding this budget means losing a fighting chance at preventing a 1.5°C rise in the average global temperature.
Expecting meaningful return for their investments by the investors is reasonable. At the same time, it’s also true that moving ahead only with profit motive may prove to be suicidal for the entire mankind.
Climate change represents one of the greatest risks to the mankind and at the same time presents infinite opportunities to the investors. In fact, the sustainability agenda could have even more impact on leading companies than the digital revolution. This time, every person, community, company, and country will be affected to some extent. In the investment community, the climate leaders are those who seize the moment. They can have real impact on the future of human civilization through climate change mitigation —and generate significant upside returns for their clients in the process. The only threat here is the human greed which may force us to forget the original objective.
What is needed is climate leadership—the kind that can generate real-world climate impact while also delivering investment returns. Asset owners can be climate leaders by deploying long-term capital and strong governance to steer sectors and companies toward a lower-carbon future. That would be an ideal situation. But often ideal situation remains only on paper and on the ground the situation is overwhelmed by the human greed. It also may lead to exploitation of the rich by the poor in the name of sustainability and conservation. When trillions of dollars are going to be spent on the objective there is likelihood of participants deviating from the original objectives and focusing on the returns which may altogether create new sets of problems and further divide the rich and the poor. We need to be vigilant and guard against such possibility.