Investing in the Transition to Net Zero: Capital Requirements and Opportunities

The transition to a net zero economy is a monumental task that will require trillions of dollars of investment over the coming decades. Recent data from BloombergNEF shows that global investments in energy transition reached $1.8 trillion in 2023, representing a 17 percent increase from the previous year. However, this is just the beginning, as annual global investment needs to reach $4.8 trillion by 2030 and $6.6 trillion by 2040 to put the global economy on track to reach net zero by 2050.

The majority of capital requirements for this transition are likely to come from the generation of clean electricity, distribution of energy, electrification of heat and transport, retrofitting of real estate, and more sustainable industrial processes. While renewables are essential, they are not the only answer. Investment needs to be channeled across sectors to facilitate a low-carbon, digitally connected society.

One area of opportunity for investors is in network resilience, particularly in the electricity grid and transmission assets that support it. Future network buildout will lead to a significant increase in demand for materials like aluminium, copper, and steel, creating investment opportunities in these sectors.

Historically, banks have been the main source of debt capital in infrastructure and energy, but alternative lenders are growing in prominence. Different categories of debt providers will likely remain relevant for the net-zero transition, offering various products and playing to their strengths as capital providers.

Investors can construct portfolios targeting a wide range of risk profiles, focusing on credits with defensive characteristics while aiming for higher returns. Private credit is well-positioned to fill funding gaps left by banks and provide opportunities for investors to achieve risk-adjusted returns and diversification via assets not readily available in public markets.

Understanding the opportunities and challenges of the transition to net zero will enable investors to drive the shift to a low-carbon, digitally connected economy. With the right investments and strategies, investors can play a crucial role in supporting the infrastructure of our future.