A report commissioned by Guernsey Finance has mapped investors’ main opportunities and challenges for the transition to net zero for the next three decades.
The report, Private finance and its role in supporting the transition to net zero, compiled by energy and environment consultants Baringa Partners, looked at topics including the need for a just transition, the impact of net-zero commitments on financial services firms and the potential role of Guernsey in the net-zero transition.
In terms of how financial services firms can make the transition themselves, Baringa recommended they identify key changes and risks in longer-term strategy development and risk management.
The group said its report, which incorporates just transition objectives and wider ESG considerations, provides an introductory framework for this task.
Transition this decade
In this decade, the key technologies required for the transition to net zero are already available, the paper stated. It is now necessary for mainstream capital to be employed to rapidly scale up renewables while more risk-focused investors back areas such as clean technology and climate technology, hydrogen, battery and storage.
The main opportunities identified for developed markets in the 2020s are this scaling up of renewables, increasing nuclear capacity, hydrogen and carbon capture and storage. There is also the chance for electrifying light vehicles and promoting their adoption among consumers. Developed markets could also be investing in transmission and distribution networks and grid reinforcements and encouraging electrification and energy efficiency measures.
Meanwhile, emerging markets have opportunities to roll out decentralised, distributed renewables in remote areas, scale up renewable infrastructure and establish technologies to electrify transport and improve mobility. Where financially viable, the paper stated, emerging markets could also be identifying options for nuclear, geothermal and low-carbon energy sources.
The challenges for this decade centre around global price inflation, energy price rises and affordability crisis as well as high upfront capital investments which are needed to build up infrastructure and increase the capacity of renewables.
Baringa noted in the 2020s there could be political upheaval from economic difficulties which could stall net-zero commitments and there could be resistance in regions which have high fossil fuel dependency.
Finally, the report pointed to the challenge of establishing supply chains around new models in emerging markets with higher risk ratings. It also flagged the potential for a “green bubble” and crowding technology investment into areas aligned with ESG and net zero.
Amid the challenges and opportunities the transition presents, the report suggested investors should consider collaborating with governments, central banks and development banks to promote risk-sharing through blended financial models.
Other actions investors could focus on up to 2030 include working with regulators and industry associations to combat shared challenges, developing common standards around ESG and climate investing and encouraging further investments into emerging markets, carbon removals, biodiversity and natural capital.
2030s and 2040s
In the 2030s, Baringa predicted developed market opportunities for the net-zero transition will move towards decarbonising aviation and hard to abate sectors and rolling out projects for smart cities and retrofitting traditional cities.
Emerging markets, in the next decade, could be looking more towards decommissioning and repurposing plans for fossil fuel plants, building sustainable infrastructure and upgrading transport systems.
Examples of transition challenges for the 2030s include the fact 71 million jobs are estimated to be at risk in the move to a circular economy. Investors are also recommended to be aware of resource scarcity challenges, for example around the copper, nickel and cobalt required for electrification.
There are also health issues around urbanisation and growing risk of air pollution to consider and the environmental risks of scaling up new technologies into emerging markets.
Looking further ahead to the 2040s, the report said we could see an acceleration of stranded asset risk in emerging markets and a risk of more job losses and unrest where supply chains are not yet developed.
There may be challenges meeting global energy demand if storage solutions and alternative energy sources are not successful and there could be increasing risks around the provision of food and water to meet population growth.
However, the report authors again identified opportunities for the decade – including business models and technologies to support a circular economy and agritech in emerging markets to boost yields and food supply.
The report predicted impact investing in the 2040s may be focusing on the just and equitable access to natural resources, clean water, sanitation and food.