OW Paper: Closing the Investment Gap

Policies to Accelerate the Net-Zero Transition

This briefing paper is co-authored with the World Economic Forum.

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The case for finance acceleration

The time for concerted climate action is now. Unless there is a significant and immediate reduction in carbon emissions, studies by the United Nations Framework Convention on Climate Change show that global warming will exceed 1.5°C, resulting in irreversible damage to the planet and grave threats to ecosystems and humans. To achieve net-zero emissions worldwide, the heavy industry and transport sectors, which together comprise 25% of global greenhouse gas (GHG) emissions, require rapid decarbonization and the scaling of critical solutions and infrastructure. The aviation sector alone requires an additional average investment of $300 billion each year between 2022 and 2050. Steel, a critical hard-to-abate sector, requires an additional $200 billion to transition steel assets to net-zero compatible technologies and $2 trillion to set up enabling infrastructure by 2050.

However, as discussed in the Financing the Transition to a Net-Zero Future report, private finance is not in a position to mobilize capital at the scale and speed required for industrial decarbonization. There is insufficient willingness and capacity to invest in innovative, emerging technologies that have not yet been proven and deployed at a commercial scale. Reduced investment appetite and the high cost of financing are causing a widening investment gap.

The factors driving this resistance:

• The high cost of ownership for new production facilities or critical supporting infrastructure results in the slow deployment of capital from financiers.
• Several transition solutions are lower on the technology readiness scale and therefore associated with a higher risk profile.
• The lack of standardized definitions of “green” production processes and outputs leads to underinvestment in promising technologies.
• Supply-side (such as shortage of feedstock) and demand-side (such as the cost differential between existing and green products) challenges threaten the soundness of business models.
• Unharmonized global regulations can result in competitive distortions and a lack of a level playing field given the international, integrated nature of sectors.

Bridging the existing investment gap will require targeted policies that make use of the lessons learned from the successful mobilization of capital towards renewables during the past decade. Scaling up investments in decarbonization solutions will require establishing the underlying economic case with certainty and mitigating the operational risk. Designing effective policies will require the input of policy-makers, financial institutions and industry stakeholders. To do so, the aviation and steel sectors require a policy framework and key policy recommendations that are the most likely to increase financier confidence in net-zero transition investments.

Recommendations for policy-makers

Effective policies that aim to catalyse private sector action will ultimately strengthen the underlying economics of the net-zero business models required to scale up affordable finance from financial organizations, with the objectives of:

• Solving for broader, systemic issues constraining industrial decarbonization. The transition to net-zero requires changes across value chains that address key binding constraints. For example, enabling sustainable aviation requires sufficient feedstocks and infrastructure, going beyond just the airlines.
• Achieving commercial viability for innovative transition solutions and scaling them to a point where they can be commercially viable. This is a capital-intensive and resource-consuming undertaking for early financiers.
• Enhancing investment appetite and reducing the investment through targeted de-risking of investments and establishing liquid asset classes, thereby reducing the cost of capital for industry.

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Climate ChangeFinanceOliver Wyman