Exploring the climate investment gap in the energy sector

At the forefront of discussions about the path to net-zero emissions by 2050 are serious concerns about whether the world is investing enough to keep us on track. In fact, an analysis of planned and required climate investments reveals a substantial issue in need of urgent attention: the projected expenditures of approximately 300 major energy corporations indicate a huge gap in investment is looming.

Major oil and gas producers, leading power and utility organisations, green energy businesses, state-owned enterprises, and private equity firms are expected to invest around $19 trillion by 2030. However, to stay on track for net-zero emissions by 2050, the International Energy Agency’s Net Zero Energy scenario estimates a $37 trillion investment is needed within the same timeframe. This $18 trillion discrepancy illustrates the massive financial mobilisation required to align global emission goals with reality — and we all have to deal with the consequences.

To make matters worse, macroeconomic factors such as rising inflation and interest rates have contributed to a widening of the gap over the past year. Increased costs, coupled with a decreased attractiveness of investments due to lower returns, have posed significant challenges to project approvals and implementation, and the impact is particularly noticeable in the renewables sector as it typically relies heavily on debt financing.

Looking closer, the largest gaps in investment exist in four key categories: development of fossil and low-carbon fuels, infrastructure such as power grids, expansion of electricity power generation, and decarbonisation at the end-use stage. In particular, the end-use category underscores the need for substantial efforts from industrial goods companies, including steel, cement, and aluminum manufacturers — and makes up around 50% of the total gap. These companies will need to ramp up investments in energy efficiency, fuel switching, on-site renewables, and carbon capture, utilisation and storage (CCUS).

The role of end users in energy investment is also changing, reflecting a broader shift in how we view and use energy. Traditionally, energy has been an extractive resource with high risks and returns. However, as we move towards net zero, it’s increasingly seen as a developed, manufactured resource with lower risk and returns. This shift further necessitates a cooperative model of investment, where energy providers and users jointly contribute to the capital expenditure of projects.

A nascent new form of energy ecosystem, in which cross-sector joint investments are facilitated like this, is now beginning to take shape. Policymakers have a pivotal role to play in encouraging these types of collaborations through incentives such as the Inflation Reduction Act, and streamlining processes to reduce obstacles in planning and permitting. A good example is the Green Hydrogen Hub in Denmark, supported by companies across the value chain and Danish public authorities.

Large industrial energy users have a significant role in addressing the investment gap in transition. They can increase spending on energy transition initiatives, help drive the creation of new ecosystems for greater investment, capitalise on expanded government support, and innovate business models and technology for energy utilization. These industries will also find that investments in data and digital skills can enhance energy use efficiency — but achieving this will require investments in the gathering of data and the development of digital skill sets.

Investors, naturally, will also play a critical role in bridging the investment gap — however we have found that the integration of carbon risk into portfolio management may not yet be widespread or sufficient. Large investors will need to aid the companies in their portfolios in balancing short-term profits with long-term energy transition investments. The focus of private equity investors on emissions reduction as a value-creation opportunity — rather than simply as a cost — should incentivize the companies they invest in to push forward with decarbonisation.

Perhaps above all, this transition calls for the adoption of a new mindset, reflecting a fuller understanding of the evolving landscape. The good news is that integrating these elements should be instrumental in enhancing organisational agility and innovation overall — with advantages for business emerging as a result.

The climate investment gap can only be bridged by combining this new attitude with policy incentives, industry efforts, and investor contributions, working together to foster a sustainable net-zero future.