Massive redirection of capital into clean energy needed

An urgent change of mindset and a massive redirection of spending from carbon-heavy investment into clean energy is needed if an affordable transition that meets the Paris Agreement is to be achieved, says DNV in its latest report.

Emissions must fall by around half by 2030 for a 1.5°C future – DNV forecasts they will fall by just 9%, and the world will already exhaust the 1.5°C budget in 2029. Financiers, bankers and governments have an essential role in ensuring a just and accelerated transition. Yet financiers also face significant challenges, the report says, particularly around how to price the risk of often multi-decade energy projects in a rapidly changing energy system and warming climate. This includes the potential for stranded assets, climate risk in infrastructure, and pressure on profitability and rates of return if too much capital chases a limited number of projects.

Together with policymakers and energy companies, financiers also face the challenge of de-risking and improving the profitability of clean energy opportunities that are currently high risk, low return, long-term investments, which are often not considered bankable, but which are needed for an accelerated transition.

DNV believes a clean energy future is affordable. It forecasts that the percentage of world GDP that will be spent on energy will halve from 3.2% in 2019 to 1.6% in 2050. If the current fraction of GDP devoted to energy expenditure remained constant, the surplus funds to spend on clean energy would grow by around $2tn each year, reaching close to $63tn by 2050 – more than enough to finance a transition compliant with the Paris Agreement.

Ditlev Engel, Chief Executive, Energy Systems at DNV, comments: ‘It’s clear that we have the financial capacity to accelerate the transition, hence the question we have to put forward to COP26 is that as world leaders, we have to prioritise upfront investment and ensure governments don’t just deal in long-term climate commitments, but also in short-term climate action. Targets must be grounded with a credible baseline for emissions, translated into action every year for at least the next 30 years.’