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When the finance moves, get out of the way: How capital is driving the transition to net zero

Green finance is playing a critical role in meeting the challenge of large-scale climate action.

Green finance is playing a critical role in meeting the challenge of large-scale climate action. Photo: TND

Green finance is accelerating globally, and is playing a critical role in achieving climate action at the scale required to solve the climate challenge.

This is timely, and urgent, given the compounding costs of inaction playing out in the increasing frequency and intensity of extreme weather-related disasters, from catastrophic flooding in Pakistan to devastating heatwaves, wildfires and drought across Europe, the US and China this northern summer.

Swiss Re notes that insured Natural Catastrophe Losses globally exceed $US100 billion annually in the past five years.

climate change France wildfires Europe heatwave

Fires like this French inferno are scorching the planet with unprecedented frequency and ferocity. Photo: AP

A number of other key factors are also spurring decarbonisation.

Firstly, we are seeing a long-duration downward trend in renewable energy prices – solar and wind, and more recently batteries and electric vehicles.

With fossil fuel hyperinflation in 2022, the competitiveness of deflationary renewables has never been more evident.

Growing momentum

Secondly, there is growing global climate and energy policy momentum, most recently apparent in US President Joe Biden’s Inflation Reduction Act (IRA), and the minimum 43 per cent cut in carbon emissions on 2005 levels by 2030 enshrined a few days ago in Australia’s climate bill.

Increasingly, too, governments are pricing in the externalities – the cost burden of greenhouse gas emissions on the environment and human life.

The EU’s Emissions Trading Scheme leads the world, with carbon emission prices averaging €80 ($119) per tonne this year, up 300 per cent in just two years and nearly tenfold in five years.

And just last month, Mr Biden’s IRA put a massive $1500-a-tonne price on methane emissions.

The International Energy Agency (IEA) says the world will spend $US2.4 trillion in 2022 on energy sector finance.

That number is projected to be $US4 trillion a year by 2030, a cumulative $US100 trillion by 2050.

And while China is currently the world’s leader in renewable investment (including green hydrogen, solar and wind manufacturing and hydro), electric vehicles, rare earth processing and nuclear, spending more this year on renewable energy than all other developed countries combined, the flow of green capital is global.

Significantly, we’ve seen major investors sign up to the Glasgow Finance Alliance for Net Zero, which now has a collective $US130 trillion of capital pledged to investing in line with a 1.5 degrees Celsius trajectory.

Here in Australia, responsible investment accounts for $1.5 trillion or 43 per cent of the total market.

Green bonds are building momentum, too, with global bond issuance exceeded half a trillion dollars in 2021 after strong growth over the past two to three years.

These will play a key role in mobilising capital, with the Climate Bonds Initiative projecting green bonds could grow to potentially $5 trillion a year by 2025.

Business backs it in

Larry Fink, CEO of $US8.5 trillion BlackRock, the world’s largest asset manager and financial institution, talks about an accelerating tectonic shift, and he’s backing it in.

BlackRock CEO Larry Fink has made an about-face when it comes to decarbonisation.

BlackRock plans to spend $1 billion in Australia after acquiring Melbourne-based Akaysha Energy, which is building out nine battery proposals across Australia, one of BlackRock’s first global moves into battery infrastructure investment.

In 2021 it co-invested in a decarbonisation platform with Singapore sovereign wealth fund Temasek and launched a number of new global infrastructure funds.

Only three or four years ago, Fink was denying any moral or fiduciary responsibility to decarbonise. Now, the evidence that it presents a multi-trillion dollar opportunity is incontrovertible.

Take for example US-based NextEra Energy, the world’s biggest renewable energy investment firm, which has massively and consistently outperformed the US market over the past decade, and extrapolating its current forward plans will invest some $200 billion over this decade.

Exxon, the US’s biggest fossil fuel company, has consistently underperformed in the US equity market.

Italian utility ENEL is the world’s second largest investor in renewable energy, and has outperformed the Italian market.

ENEL plans to invest a staggering €210 billion this decade including capital recycling in renewable energy and grid and batteries. It is targeting a trebling to 15,000 megawatts of renewable installs a year by 2030.

Importantly, ENEL is a major investor in emerging markets, bringing in Western capital to solve the climate and energy problems as per the Paris Agreement.

Ten years ago, Orsted was the Danish oil and gas company, the largest Danish thermal power generator.

In 2022 it’s the world’s biggest developer of offshore wind with a target to build 30 gigawatts (GW) of offshore wind by 2030 – a phenomenal transformation – as it deploys ever-increasing amounts of capital and hugely outperforms the Danish market.

One of Orsted’s wind generators off the German coast in the North Sea. Photo: Orsted

In India, the country’s biggest company, Reliance Industries, has committed to spending about $100 billion in renewable technologies this coming decade.

Last month its chair Mukesh Ambani, one of the richest people in the world, announced plans to build the largest solar module manufacturing factory outside of China, a 50 GW per annum facility.

That will stand in Gujarat alongside his battery manufacturing facility – also one of the world’s largest – and his electrolyser manufacturing plant, all largely targeted to the Indian domestic market.

There you have 1.4 billion people being lifted out of energy poverty, with Reliance focused on solving the dilemma of energy security for Prime Minister Narendra Modi.

There is no better way to do this than building wind, solar, batteries and electrolysers for the domestic market to replace India’s near $1 trillion a year of fossil fuel imports.

Notably, earlier this year BlackRock invested $500 million to buy a 10 per cent stake in Indian conglomerate Tata Power’s renewable energy portfolio.

We are witnessing the convergence and alignment of interests of global Western capital with emerging markets’ need for capital to decarbonise and to turbocharge their energy transformation.

Global capital is playing an increasing role, and that’s a significant and urgently-needed shift.

Tim Buckley is a global energy analyst and director of new think tank Climate Energy Finance

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