In preparation for the upcoming 2023 United Nations Climate Change Conference (COP28) scheduled to be held in Dubai from November 30 to December 12, 2023, Deloitte, a renowned professional services firm, has published a report titled Financing the Green Energy Transition. This report highlights the emergence of innovative financial instruments that can mitigate risks associated with green projects in developing economies. By doing so, these instruments make investments in such projects more appealing, thereby contributing to a just energy transition worldwide.
According to Deloitte, to accomplish the goal of achieving net-zero greenhouse gas emissions by 2050, it will be necessary to make an annual global investment in the energy sector ranging from $5 trillion to $7 trillion. Unfortunately, the current global investment falls significantly short of this target, with less than $2 trillion being allocated each year towards the transition. This level of financing is insufficient to effectively steer the world towards meeting the collective climate goals.
Lack of investment
According to the paper, green projects are currently facing a lack of investment and require higher return rates due to the perception of higher risk among private investors compared to alternative investments. To address this issue, the report emphasizes the importance of collaboration between governments, financial institutions, and investors in developing mechanisms that can mitigate risks associated with green projects. This can be achieved through the creation of blended, low-cost finance solutions that mobilize private investment and contribute to both economic growth and climate neutrality, particularly in emerging economies.
Furthermore, the study highlights the potential benefits of taking action. It suggests that by implementing these measures, projected savings of $50 trillion can be achieved by 2050, leading to a reduction of over 25 percent in the annual investment required. In addition to finance, the report takes a comprehensive approach by considering the technology landscape, policy environment, and the complex financing challenges through analysis and modeling. This holistic overview provides valuable insights for stakeholders involved in the green energy transition.
Definitive steps
“Just as we are continually developing solutions and technology to rapidly decarbonize, we must take definitive steps to remove financial barriers in order to accelerate a just energy transition, especially in developing economies,” says Jennifer Steinmann, Deloitte Global Sustainability and Climate practice leader. “Decisive and coordinated policy support and hand-in-hand action across the global finance ecosystem are critical to guiding investments toward green projects and supporting the growth of sustainable economies.”
Race to net-zero
In order to achieve the goal of net-zero emissions, it is crucial for the world to make strategic investments and find opportunities to reduce costs. Currently, less than half of the investments in green initiatives are directed towards developing economies. This is primarily due to the higher risks involved and the stricter budget constraints faced by these countries when it comes to energy transition projects. However, if we are to successfully attain net-zero emissions, it will be necessary to increase green investments in developing economies significantly. By the year 2030, approximately 70 percent of all green investments should be allocated to these nations. This shift in focus will enable them to develop new, sustainable infrastructures and technologies that are essential for achieving the net-zero target.
Innovative financing structures
“To further lighten the financial burden on the Global South, governments, financial institutions and international organizations must implement concessional finance—a loan made on more favorable terms than the borrower could obtain in the market—through innovative financing structures that mobilize private capital for climate action,” says Hans-Juergen Walter, Global Financial Services Industry Sustainability and Climate leader. “Major financial institutions, such as development banks and multilateral funds, play a pivotal role in this context.”
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