Why net zero without a ‘just transition’ is not an option

While climate change does not respect borders, its impact will be felt much more keenly by the poorest markets in the developing world.

The world is waking up to the reality that action is needed to reduce our reliance on fossil fuels and push towards net-zero carbon emissions, but we must transition in a way that leaves no one behind.

The big question is how we find the money to transition to net zero? Governments are looking at ways to introduce more renewable energy sources, create cleaner transport networks and make buildings more energy efficient.

While developed markets are likely to have the finances to reach their long-term climate goals, in emerging markets the funding gap remains wide. According to our latest report, "Just in Time", emerging markets require almost $95 trillion to transition.

Finding the funding will not be easy. Higher taxes and borrowing in emerging markets could heap more pressure on some of the most disadvantaged communities. Emerging market household consumption would be, on average, 5% lower per year, making households around $2 trillion poorer annually between now and 2060. That’s just not going to work.

What we need is a just transition – a transition where emerging markets can reach net zero without sacrificing growth and prosperity. For as long as their growth remains heavily dependent on carbon intensive activities, emissions in many of these markets are likely to continue increasing. The sooner we can channel climate finance to them, and cultivate more sustainable growth, the faster they can transition to net zero.

To transition fairly, developed markets must help emerging markets find the financing they need. It is here that private investors can have a huge impact.

Of the $94.8 trillion needed, there is an estimated $83 trillion opportunity for private investors. However, as shown in our 2020 report, “The $50 Trillion Question”, encouraging investment in emerging markets can prove difficult.

The world’s top 300 investment firms, with total assets under management of more than $50 trillion, have just 2%, 3% and 5% of their investments in the Middle East, Africa and South America, respectively.

Encouraging more private investment could help emerging markets transition while also increasing growth. If investors help fund a just transition, household consumption in emerging markets could be up to 4.5% higher on average each year between now and 2060, with emerging market GDP 3.1% higher on average each year in the same period.

Getting this investment is crucial, as the stakes could not be higher. If emerging markets do not get help with their transition to net zero, either they will not transition at all, which means the Paris Agreement goals are missed, or they will transition but it will have a crippling impact on their economies. Denying these markets the same development that richer nations have enjoyed over two centuries, fuelled by carbon, would be unjust and could cause deepening global inequality and social unrest.

To unlock the necessary private investment, there needs to be greater collaboration between the government and the private sector. The public sector will need to use its own funds to encourage private investment. Blended finance, for example, can crowd in private sector investment by reducing the risk, as public money is used to subsidise the cost of capital or mitigate possible losses.

Meanwhile, banks and other financial institutions need to step up and take the lead with innovative financing products for emerging market investments. Low-carbon projects in emerging markets offer great opportunities in terms of both impact and potential returns and this would help attract the necessary capital. As revealed by our “$50 Trillion Question” research, 88% of investors said investments in emerging markets matched or outperformed developed markets between 2017 and 2020.

More importantly, banks need to live up to the pledges made during COP26 if emerging markets are to transition to net zero. For instance, the Glasgow Financial Alliance for Net Zero, of which we are key members, will need to fully leverage the influence of the $130 trillion of assets that it represents, towards the achievement of our shared climate goals.

In short, the funding needed is significant and reaching net zero will be no mean feat. However, despite the mountain we have the climb, we must remain optimistic in our ability to deliver a just transition.

We’ll all need to act with much greater urgency and relentlessly work through the difficult issues together. But then again, given the stakes involved, why wouldn’t we?