Deloitte report: Improved financing could save US$50 trillion as the world decarbonises

JAKARTA, 29 November 2023 — Released yesterday, Deloitte’s Financing the Green Energy Transition report found that new cost-reducing finance instruments can help de-risk green projects in developing economies while making investing in these projects more attractive, helping to fuel a global just energy transition. Achieving net-zero greenhouse gas emissions by 2050 will require an annual global investment in the energy sector ranging from US$5 trillion to US$7 trillion. However, the world currently invests less than US$2 trillion each year into the transition, which is far short of the financing needed to help put the world on course to meet our collective climate goals.

Released in advance of the 2023 United Nations Climate Change Conference (COP28), the report found that green projects currently suffer from underinvestment and high required return rates because private investors tend to see green technologies as riskier than alternative investments. The report highlights the need for governments, financial institutions, and investors to jointly develop mechanisms to help mitigate risk from green projects by developing blended, low-cost finance solutions to mobilise private investment and help achieve economic growth and climate neutrality—especially in emerging economies. It also highlights the benefits of taking action—the projected savings of US$50 trillion through 2050 could reduce the annual investment needed by over 25%. The report goes beyond finance to provide a holistic overview, employing analysis and modeling to consider the technology landscape, policy environment, and a matrixed vision of financing challenges.

“Just as we are continually developing solutions and technology to rapidly decarbonise, 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.”

Failure to close the financing gap could be costly for the world economy—especially the Global South—and make the transition to net-zero inefficient.

To win the race to net-zero, the world must invest wisely and identify areas for cost reduction. For instance, less than half of green investments are currently made in developing economies mostly due to greater risks and stricter public budget constraints for energy transition projects. However, to reach net-zero, nearly three-quarters of green investments (70%) would need to be made in developing economies by 2030 as these nations look to new, sustainable infrastructures and technologies.

“To further lighten the financial burden on the Global South, governments, financial institutions and international organisations must implement concessional finance—a loan made on more favorable terms than the borrower could obtain in the market—through innovative financing structures that mobilise 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.”

Brian Ho, Sustainability & Climate Leader, Deloitte Southeast Asia, added, “Southeast Asia is at the forefront of the climate crisis, and we have a responsibility to lead the way in the transition to a sustainable future. This means not only reducing our own carbon emissions, but also helping other developing economies to do the same. By improving financing structures and reducing risks, we can make green investments more attractive and accelerate the global energy transition.”

While the cost to facilitate the transition appears steep, it is far preferable to the alternative—Deloitte’s 2022 Global Turning Point Report found the current policy pathway, coinciding with an increase of 3°C in global warming above preindustrial levels, could result in the loss of US$178 trillion worldwide by 2070 (almost 8% of global GDP). By contrast, the global economy could gain US$43 trillion over the next five decades by rapidly accelerating the transition to net-zero through greater investment in clean energy systems and coordinated policymaking.

“Financing the transition in developing regions is arguably at the crux of the global race to net-zero. Our research shows concessional finance and channeling green funds in this way can drive down the cost of the net-zero transition by 40% for developing economies, when done with international coordination and the active participation of governments, multilateral development banks and development finance institutions,” says Dr. Pradeep Philip, Partner, Deloitte Australia and one of the report authors.

Political, market, and transformation barriers preventing the closure of the green finance gap

While the private sector escalates a more targeted investment strategy, governments and international organisations must move swiftly to remove political barriers, rein in risks that can drive up the costs of sustainable investments, and create environments that allow investments to flourish, thereby making the net-zero transition more affordable.

Four actions governments can take:

1. Embrace a clearer, more strategic direction for climate action by actively updating energy transition policies.
2. Create transparent and efficient regulatory frameworks for climate investments to help mitigate legal ambiguities and potential corruptions that can derail critical green initiatives. Governments should also understand how green technologies, and their applicability to high-emitting sectors, are essential for setting appropriate targets and clear regulations.
3. Address market barriers—specifically the absence of sustainable and green markets for investors to gauge projects against. For example, despite green hydrogen being a viable energy carrier, it does not yet have a global or local market, nor technological and delivery specificities and standards. This uncertainty entails risks associated with offtake, revenues, and construction/operation launch delays and can make it difficult for investors to spend the money needed to allow this technology to truly scale.
4. Understand that transformation barriers that impede green investments lie within infrastructure and human capital. Countries with poor electricity infrastructure that rely on fossil fuels, for instance, make investors wary they can handle more variable energy sources like solar or wind power. Moreover, there needs to be a concerted effort to develop more skilled labor to effectively install, maintain, and replace green energy equipment. A successfully coordinated employment plan could benefit investors and the planet, as well as workers—Deloitte’s Work toward net-zero report found that 300 million additional Green Collar jobs can be created by 2050 if appropriate action is taken.

“COP28 this year aligns with the first global stocktake—an assessment of the progress the world is making toward the goals of the Paris Agreement. We all know that we must accelerate in speed and scale in order to stay on a Paris-aligned pathway,” said Prof. Dr. Bernhard Lorentz, Founding Chair of the Deloitte Center for Sustainable Progress and Deloitte Global Consulting Sustainability and Climate Strategy leader, who co-authored the study. “Solving the financial gap is the underlying key to accelerating the much-needed transition. The good news is we have the solutions, we know the technologies, we have the project pipeline, and the financial industry has the resources. It’s now all about making the investments bankable. At COP28, governments have the opportunity to collectively solve the challenges associated with green financing, and outline and agree upon the steps we can take to reduce them.”

Considerations for global leaders

According to the report, successfully guiding investments toward sustainable projects requires global leaders to prioritise the following:

• De-risking green projects: Mitigating risk in the investment landscape can unlock the low-cost finance that can make the costly and capital-intensive energy transition more affordable. Blended finance mechanisms, for instance, can both reduce project risks and facilitate commercial capital flow to green projects.
• Bridging the green-fossil cost gap: Establishing upfront investment support mechanisms for research and development and adding investment support and/or operating premiums to green assets while penalising the use of emissions-heavy assets, are some of the key tools to bridge the cost gap between green and greenhouse gas-intensive assets, both at the project level and larger scale.

To learn more about Deloitte’s 2023 Financing the Green Energy Transition report, visit: https://www.deloitte.com/global/en/issues/climate/financing-the-green-energy-transition.html.

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