Just how big is the decarbonization investment opportunity?

The need for greater climate finance has been the focus of industry conversations, including at the 2023 United Nations Climate Change Conference (COP28). CapEx investments – company funds earmarked for its physical assets – for climate solutions have reached record highs in recent years, estimated at $1.1 trillion in 2022 by BloombergNEF and $1.7 trillion in 2023 by the International Energy Agency (IEA).

However, even with the additional funding commitments made by governments and businesses at COP28, investment levels remain multiple times below what is needed to reach net zero by 2050.

In addition, not all investments have the appropriate risk-return profiles to meet the fiduciary mandates of investors and there is often a mismatch between climate and investment time horizons. According to the Climate Policy Initiative, while total climate finance is rising, the share of financing from corporations, funds and institutional investors has declined from 30.6% in 2018 to 15.2% in 2022.

Although capturing accurate data on climate finance is challenging, the downward trend in relative private sector contributions highlights the need to evolve the climate finance discourse beyond financing gaps.

To provide a way for investors to evaluate their potential exposure to the energy transition mega theme, GIC has developed a climate scenario-agnostic framework to compute the incremental investment value expected from decarbonization revenues across technologies, regions, time periods and asset classes. The approach takes a holistic view of investment opportunities across the entire value chain. Rather than solely covering climate solution providers, it includes capital goods providers, raw material producers and low-emission fuel suppliers.

Applying statistical techniques to financials and forecasted revenue growth, our research estimates that the total incremental enterprise value of the climate solutions supply chain will reach between $5 trillion and $11 trillion by 2030.

The range is calculated using two IEA climate scenarios as bookends: a conservative Stated Policies Scenario, which assumes no further policy change besides existing and announced frameworks and the more optimistic Net-Zero Emissions by 2050 Scenario, which models the pathway for the global energy sector to achieve net zero by mid-century.

For each scenario, we reviewed the required CapEx investments, raw material inputs and low-emission fuel needs of representative projects to identify revenue opportunities for relevant supply chain segments. We built comparable company baskets using the set of value chain segments across technologies. We analysed historical financials to estimate future enterprise values and the respective investment opportunity size in debt, public equities and private equity.

Based on a recent study by FTSE Russell, which sizes the green economy based on listed equities, we anticipate that the green economy has the potential to grow at an estimated 7-11% per annum and expand from roughly 8% of today’s global listed market capitalization to approximately 12-17% by 2030, provided that equity markets grow in line with global gross domestic product (GDP).

Under the IEA’s net-zero scenario, the biggest opportunities by incremental enterprise value – each constituting over $400 billion by 2030 – include electricity networks, sustainable vehicles, electric vehicle (EV) charging infrastructure, wind, solar, copper, lithium, hydrogen and building heating solutions. Except for hydrogen and EV charging, these are mature solutions offering readily investible opportunities today.

The fastest-growing opportunities include hydrogen, biofuels, lithium and electricity storage. These opportunities are projected to achieve a compound annual growth rate of over 20% between 2022 and 2030, resulting in over $100 billion in enterprise value growth by 2030 in the net zero emissions scenario.

Biofuels, in particular, offer a currently underappreciated area of growth given multiple end-use applications in power generation, aviation and other hard-to-abate sectors. Sustainable aviation fuels, for example, are seeing increasing momentum in regulatory support and end-user demand.

Below the $100 billion enterprise value mark, nascent technologies such as direct air capture, hydrogen-powered and electric aviation offer interesting opportunities for early-stage venture and growth capital.

These technologies are currently in the prototyping phase with limited revenue and cash flow generation. They require technology risks to decline and paths to commercialization to mature and scale.

Based on a net-zero pathway, the most significant increase in investment values is expected this decade. However, the transport and industrial sectors offer longer runways for growth as asset replacement and the adoption of decarbonization solutions is likely to continue into the 2040s.

Geographically, Asia-Pacific represents the largest addressable market as the region faces increasing pressure to tackle rising carbon emissions from rapid population and economic growth. A noteworthy exception is the buildings sector in Europe and North America, which is seeing increasing demand for retrofits and heating and appliance upgrades to comply with higher sustainability standards.

The net-zero narrative often centres on risks, with limited attention paid to the potential upside. Understanding the decarbonization investment opportunity in terms of revenues and value rather than financing gaps has enabled GIC to develop a holistic and granular view of the opportunity set across asset classes.

It has also allowed us to assess the relative attractiveness of different parts of the climate solutions value chain, particularly those less covered by the market. The analysis has helped us build conviction that there is significant room for institutional investors to grow their exposure across the cone of potential climate outcomes based on the expected value and returns implications.

However, the trajectories and opportunities will differ significantly across underlying technologies, regions and periods. Combining such top-down methods with additional bottom-up due diligence is needed to help investors identify areas where they could scale their exposures and optimize capital allocation.

Further investor-minded research and approaches should be developed to address the multi-fold increase needed in climate finance, framing the conversation squarely in the language of investors: growth, returns and valuation.

Read the full paper for more details on the rest of the findings and the research methodology.