The answer to climate change is more primary investment

The Thinking Ahead Institute carried out analysis of the investment industry to assess how much of the climate problem it actually owns.

The findings suggest public investor-owned companies produce around 12.8bn tonnes of annual greenhouse gas emissions, meaning the industry is therefore responsible for about a quarter of all emissions.

Assuming the investment industry wishes to at least do its fair share, it should look to reduce annual absolute GHG emissions by 25 per cent, which leads us to the next question: how do we cut through the complexity to find the ‘one thing’ the industry should focus on?

Whether your beliefs lead you to favour investment in renewable energy or in negative emissions technologies, the truth is that we will need both — and we will also need to invest in energy efficiency, electrification and infrastructure

How close to zero are we aiming?

The International Renewable Energy Agency estimates that the cumulative investment required between 2016 and 2050 to transform the global energy system to meet the objective of the Paris agreement is $110tn (£77.8tn).

This is a very big number — approximately the same size as the total assets currently stewarded by the investment industry.

To define the path of decarbonisation we must consider how close to zero we are aiming.

At one end, net-zero emissions are achieved by reducing absolute emissions to zero. We label this the ‘low-carbon risk, high-transition risk’ path.

At the other end, absolute emissions could, theoretically, grow, as achieving net zero is driven by scaling-up negative emissions technologies. We label this the ‘high-carbon risk, low-transition risk’ path.

The choice of position on the spectrum does not change the requirement for a massive amount of new primary investment.

At the low-carbon risk, high-transition risk end, the investment is into renewable energy capacity; at the high-carbon risk, low-transition risk end, the investment is into negative emissions technologies.

As we transition from a carbon-based economy to a zero-carbon economy, new jobs will be created. We just do not know yet whether they will be more or less numerous, or better or worse than the jobs that get destroyed.

Reducing emissions should be top priority

What we do know is that the physical consequences of the next 0.1C rise in temperature will be more severe than the previous 0.1C increment.

And, most significantly of all, at some unknown level of temperature rise, humans, and most other life forms, will face existential risk. Therefore, the top priority must be to rapidly to reduce absolute emissions. To do so we need to invest heavily, and rapidly.

The simple truth is that the current industry infrastructure is set up to manage portfolios of securities. New primary investment is only a tiny part of current activity.

Outside a handful of Canadian funds and a similar number of the largest sovereign wealth funds which have the internal teams to pursue genuine primary investment, most investors are not doing any.

Assuming the Irena figure of $110tn is correct, and that the investment industry owns 25 per cent of the problem, investment’s share of the cumulative total over the next 30 years will be $27.5tn. This is new primary investment of approximately $1tn a year.

Of course, it is hard to invest large amounts in new ideas. Technologies can take decades to mature until they are capable of being scaled significantly.

There will be plenty of opportunities to invest in more speculative negative emissions technologies, but there is also an enormous opportunity for lower-risk, lower-return investment in renewable energy infrastructure.

Primary capital must be deployed

It seems clear, to me at least, that we need to massively scale the investment industry’s ability to deploy primary capital. This will be non-trivial to say the least.

What does this say about quantum and quality of skills required in industry? And where will those people reside? Within mainstream asset managers, boutiques, or within large asset owners?

Whether your beliefs lead you to favour investment in renewable energy or in negative emissions technologies, the truth is that we will need both — and we will also need to invest in energy efficiency, electrification and infrastructure.

But most important of all, we should start with the fossil fuel companies and the need to get net emissions to zero as fast as possible.

Tim Hodgson is co-head at the Thinking Ahead Institute