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Report extract

Mobilising investment and finance

Getting the world on track for net zero emissions by 2050 requires clean energy transition-related investment to accelerate from current levels to around USD 4 trillion annually by 2030. The APS sees progress on this front, but the level of investment required in the NZE is three-quarters higher. This expansion is driven by a USD 1.1 trillion increase, relative to the APS, in annual investment in clean power generation and electricity infrastructure (two-thirds for generation and one-third for networks), a USD 0.5 trillion increase in investment in energy efficiency and end-use decarbonisation in the buildings, industry and transport sectors, as well as a rapid scaling up from a low base of low emissions fuels based on hydrogen or bioenergy. All regions see a surge in clean energy spend, but the required increase is particularly large in emerging market and developing economies.

The large increase in capital investment in the NZE is partly compensated for by the lower operating expenditure that follow the shift away from upstream fuel supply and fossil fuel generation projects towards capital-intensive clean technologies. Keeping upfront financing costs low nevertheless is critical to the speed and affordability of this transformation. In recent years, economy-wide financing costs have tended to come down around the world. However, capital remains up to seven-times more expensive in emerging market and developing economies than in advanced economies, while fiscal expansions and inflationary pressures around the world increase the risk of growing debt burdens and higher borrowing costs in the future.

Achieving rapid clean energy transitions depends on enhancing access to low cost finance for clean energy projects. This means channelling retained earnings from the balance sheets of large energy companies, as well as opening funding from a range of companies and external sources – notably banks and the enormous pools of capital in financial markets. We estimate that around 70% of clean energy investment will need to be carried out by private developers, consumers and financiers responding to market signals and policies set by governments. But an expansion of public sources of finance is also required. Public actors, including state-owned enterprises (SOEs), often have a key part to play in funding network infrastructure and clean energy transitions in emissions-intensive sectors. Public finance institutions will need to catalyse private capital, and their role is especially important in the NZE, where their investment more than doubles compared with the APS.

Annual average clean energy financing by source in the Announced Pledges and Net Zero Scenarios, 2016-2050

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Annual average clean energy investment by technology in the Announced Pledges and Net Zero Scenarios, 2016-2030

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Mobilising clean energy investment will depend on obtaining finance from both local and international sources. International capital providers may find it easiest to invest in large, bankable assets, such as renewable power with long-term contracts, but action is also needed to better connect financial markets with projects for end-use decarbonisation and to build capacity for local currency fundraising, particularly in emerging market and developing economies. While clean energy transitions rely on much higher levels of both equity and debt, capital structures are likely to hinge on the mobilisation of more debt, including through expanded use of project finance and third-party arrangements, and it is used to finance over half of all investment by 2030.

While many actions are needed to mobilise the necessary capital for clean energy transitions, two cross-cutting themes in particular need urgent consideration by public and private decision makers.

An international catalyst is needed to boost clean energy investment. Fulfilling the commitment by advanced economies to mobilise USD 100 billion per year in climate finance is necessary, but not sufficient. Development finance institutions (DFIs) have a central part to play, and will need to focus on financing emissions reductions across a broad range of sectors and activities, as well as stepping up delivery efforts. In 2020, climate finance commitments reported by the multilateral development banks (MDBs) topped USD 65 billion, more than double the amount five years ago, and comprised nearly 30% of their total financing. Some MDBs aim to boost climate investments from 30% to over 50% of their portfolio by 2025. Meeting net zero goals will depend on ensuring the delivery and reinforcement of such commitments over time.

Mobilising additional private capital on the back of these commitments will rely in particular on the enhanced deployment of blended finance to catalyse project development. This will need to include the packaging of a range of instruments and approaches ranging from guarantees to concessional loans to first-loss equity. Such packages are critical to improving the risk profiles of some market-ready investments (e.g. renewables-based power in many sub-Saharan Africa countries) and to support development of small-scale projects that lack a track record with banks (e.g. building retrofits or EV charging infrastructure). It will also be important to deploy risk capital in sectors at early stages of readiness to support, for example, industrial decarbonisation, which currently accounts for a small share of DFIs climate finance commitments, and to help in cases where risks are hard to mitigate, such as energy access projects for vulnerable communities or in remote areas.

All of these actions require DFIs to find ways to manage the tensions that can emerge between the objectives of providing risk capital to those areas most in need, promoting private sector development, fulfilling their role as banks with robust systems of financial management and accountability, and maintaining strong environmental and social safeguards. Maximising the effectiveness of scarce public capital may be best done by pairing funding with technical assistance and capacity building for local actors, especially in emerging market and developing economies, and by collaborations with domestic intermediaries. A multipronged effort will also be needed to manage the financial and human consequences of phasing out emissions-intensive assets such as coal plants (see section "Phasing out coal").

If clean energy transitions are to be successful, then private developers and financiers need to increase the amount of capital they allocate to energy transitions and to emerging market and developing economies. The growing emphasis on sustainable finance should encourage both shifts. There is no shortage of institutional investor appetite, as the continued surge of sustainable debt issuance shows: over USD 850 billion was issued over the first-half of 2021, which is more than the total for the whole of 2020.

Sustainable debt issuance by geography and type of issuer, 2017-2021

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However, a major challenge stems from the fragmented and complex state of reporting and assessment within sustainability frameworks. In order to better incentivise capital markets to fund sustainability in a reliable way, improvements are needed in the quality, quantity and comparability of metrics, corporate disclosures and risk assessments based on clear benchmarks.

As things stand, the alignment of investment portfolios with NZE goals risks excluding countries with high carbon footprints or sectors with more challenging pathways. Sustainable finance approaches are needed that encourage engagement – by both equity and debt investors – with emissions-intensive companies and economies on the development of credible transition plans. Initiatives by the financial community should also focus on working with regulators and issuers to create sustainability fundraising opportunities in markets that currently lack them.


Measuring the performance and targeting of capital flows against the investment needs of long-term net zero emissions goals is a complex task. Some investments will unequivocally help to reduce emissions; others are sure to increase them. But the idea that all energy sector investments divide neatly into “clean” and “dirty” does not survive contact with the realities of energy transitions. Our scenarios reveal a large number of gradations: a large portion of investments go towards sectors, technologies and infrastructure that do not immediately deliver zero emissions energy or energy services, but do enable such investments or provide incremental emissions reductions; some of these investments can also help to deliver zero emissions energy over time, but are contingent on actions elsewhere in the system, notably those concerned with decarbonising the power sector. In practice, this middle ground of actions that “make dirty cleaner” is crucial in determining the speed and scope of energy transitions, and delivers the largest share of emissions reductions in getting from the STEPS trajectory to a net zero one.

Emissions reductions by type of measure in Net Zero versus Stated Policies Scenarios, 2015-2030

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To illustrate, we have divided the total energy investment requirement in our scenarios into four categories:

  • Low emissions: Investments that provide zero emissions (or very low emissions) energy or energy services, regardless of how the energy system evolves. Examples include renewables, low emissions fuels, CCUS and direct air capture.
  • Contingent: Investments that could provide or enable zero emissions energy or energy services but only with changes elsewhere in the energy system. Examples include electricity networks, electrification of end-use equipment or improvements in the efficiency of electrical appliances, and EVs, that rely on the eventual decarbonisation of power generation.
  • Transition: Investments that provide emissions reductions but do not themselves deliver zero emissions energy or energy services. Examples include efficiency or flexibility measures that reduce fossil fuel use, investments that support fuel switching away from coal or oil to less polluting alternatives (e.g. new gas boilers that replace coal-fired ones, refurbishments of power plants to support co-firing with low emissions fuels), and gas-fired plants that enable higher penetration of variable renewables.
  • Unabated fossil fuels that do not enable emissions reductions: Investments in coal, oil and natural gas that do not provide any emissions reductions from today.1 Examples include investment in coal mines and in unabated coal-fired power plants.

The allocation of investment in certain assets or technologies varies across countries/regions and over time: for example, a new gas-fired power plant may help to reduce emissions in one area, but not in another; investment in a coal-fired power plant may shift from one category to another if it is repurposed or retrofitted with CCUS or to co-fire with low‑carbon fuels; and investments in electricity grids, appliance efficiency and EVs shift from being contingent to low emissions as power systems move towards near full decarbonisation. The results show that in the NZE around half of investment over the next decade falls in the complex middle ground of spending.

The results highlight challenges for environmental, social and governance (ESG) regulation and sustainable finance taxonomies, as well as for companies in their corporate planning and decision making. The key challenge is how to ensure that adequate financial channels remain open to support these “contingent” and “transition” investments without this becoming a loophole for investments that are not aligned with the Paris Agreement, or that allow for greenwashing.

One of the most important ways for companies to send appropriate signals about investment in these categories is by setting credible (science-based) targets that include measures to reduce emissions, and to complement this by improving the quality and quantity of metrics, governance and key performance indicators that allow the financial community to assess their progress towards these targets. A number of companies around the world have set ambitious targets, but their potential impact remains uneven.

The Scope 1 and Scope 2 emissions reduction targets for the largest oil and gas, and industrial end-use companies account for less than 5% of the required emissions reductions in those sectors in the NZE by 2030.

It will also be important for the financial community to engage with emissions-intensive companies and countries to develop credible transition pathways and properly account for these contingent and transition investments in sustainable finance taxonomies. This should be accompanied by work to develop better and more consistent reporting and assessment standards and improved ways to translate climate performance data into investment. 

Average annual energy investment by emissions reduction potential by scenario, 2022-2030

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References
  1. Upstream fossil fuel investments are allocated according to how much of the energy produced is used within each category. For example, investment in a natural gas field is apportioned based on how much of the gas produced is used with CCUS (assigned to low emissions), used for coal-to-gas switching (assigned to transition), and used without providing any emissions reductions (assigned to unabated fossil fuels). In considering investment in fossil fuels, we assume that emissions from the production and processing of fossil fuels is minimised (as is the case in the NZE).