Reducing the Earth’s temperature by an average of 1.5°C would decrease the likelihood of extreme droughts or water shortages. To achieve this, a rapid reduction in greenhouse gas emissions needs to happen and achieve climate neutrality no later than 2050. As the report Financing the Green Energy Transition. A US$50 trillion catch, prepared by consulting firm Deloitte indicates, this won’t be easy without a shift in attitude from the banking sector, which has so far shown considerable scepticism towards financing green investments. A chance for a change lies in the engagement of the government sector. One public finance dollar could mobilize over four dollars of commercial capital.
The fight for climate neutrality, besides social and civilizational reasons, also has a financial dimension.
A state in which we would grapple with a global temperature rise of 3°C compared to pre-industrial levels could result in losses of up to 178 trillion dollars globally by 2070, which is almost 8% of the global GDP. On the other hand, the global economy could gain 43 trillion dollars over the next five decades by transitioning faster to net-zero emissions. Technologically, the world is ready for this, but the financing of green investments is the problem – says Irena Pichola, partner, leader of Sustainability Consulting Central Europe, Deloitte.
Climate Neutrality in Developing Countries
At the present 93 economies (92 countries and the EU) can boast about their plan to reach net-zero emissions. Apart from European countries, those in the Americas, Asia and the Pacific lead in this respect. Conversely, developing countries in Africa, the Middle East, South Asia, but also China or Russia show less inclination to set a moment of reaching climate neutrality. Importantly, Poland also has not set such a goal.
Currently, less than half of green investments are being implemented in developing countries. If we were to exclude China from this group, which accounts for one-third of green investments, this percentage would drop to 16%. To achieve the currently set climate targets, around 70% of key projects would have to be implemented by 2030 in the Global South. This will only be possible with the cooperation of the international community and the active participation of financial institutions. Improved financial structures could help reduce the cost of transitioning to a net-zero emission level in developing economies by nearly 40%.
To reduce the financial burdens of developing countries, governments, financial institutions, and international organizations must implement preferential financing, for example through loans granted on better terms than the borrower could obtain in the market. Financial institutions, such as development banks and multilateral funds, play a key role in this context by offering innovative financing structures, which mobilize private capital to support climate actions – says Tomasz Gasiński, Director, Sustainability Consulting Central Europe, Deloitte.
Banks’ Low Trust in Green Investments
Achieving net-zero greenhouse gas emissions by 2050 requires a fundamental transformation from the current model based on fossil fuels to a renewable energy system. Energy and climate transformation is one of the biggest modernization projects for economies worldwide. But the road to that is difficult and costly.
Achieving climate neutrality by 2050 under current financing conditions would involve spending over 7 trillion dollars per year (almost 200 trillion dollars in total). According to Deloitte experts, by reducing the scale of investment and changing the approach of financial institutions to financing initiatives that improve environmental conditions, around 2 trillion dollars per year could be saved, totaling 50 trillion dollars by 2050.
The direct result of weak investment opportunities and high risk in case of green projects is a lack of private funds allocated for the energy transformation. Most of the identified technology solutions necessary to achieve climate neutrality (renewable energy, green hydrogen, etc.) are highly capital-intensive and often uncertain.
Green transformation requires huge investment inputs. Most of these investments are long-term actions, and such solutions are favored by stability and predictability. Investors expect compensation in the form of a higher cost of capital for the lack of optimal conditions, i.e., legislative uncertainty, and an unpredictable country strategy. Only the establishment of necessary regulations, mechanisms, and instruments, focusing on the consistency and stability of the proposed solutions, and appropriate legislative support will allow investors to make a reliable assessment of individual projects – says Przemysław Szczygielski, leader of services for the financial sector in Poland, Managing Partner of the Risk Management department in Poland and Baltic countries, Deloitte.
Cooperation of All Sectors
Key factors enabling a change in the approach to financing by banks of energy transformation can be divided into three main categories:
Reducing the risk of green projects – Risk reduction in the investment landscape can unblock cheap financing, making the costly and capital-intensive energy transformation more affordable. Blended finance mechanisms can both reduce project risk and facilitate the flow of commercial capital into green projects. One dollar coming from public finances could mobilize commercial capital worth over four dollars.
Offsetting the cost gap of green fossil fuels – Setting up investment mechanisms for research and development and adding investment support and/or operational premiums to green assets while penalizing the use of high-emission assets are some of the key tools enabling the gap between green assets and high greenhouse gas generating assets to be bridged.
Limiting the use of fossil fuels – Measures compensating for the early withdrawal of some mineral resources and facilitating a change of employment for people working in high greenhouse gas-generating industries can make the transformation easier and more efficient, both socially and economically.
Achieving climate goals is a huge challenge. Decisive and coordinated political support and collective investor actions are crucial in steering investments towards green and sustainable transformation.
“Governments will play a key role in creating a more sustainable world, which will also make banks look more favorably on financing green projects. Societies and investors should deal with issues related to green transformation today, not waiting for benefits that will come later. The cost of a passive attitude is higher than the burden of a planned transition that has already begun” – summarizes Irena Pichola.
