Deloitte report: Improved financing could save developing markets 40% as the world decarbonises

• Governments, investors, and financial institutions should work together to develop mechanisms and instruments that can reduce risks and unlock private finance at attractive costs
• Policy and regulatory initiatives are needed to help strengthen existing international investment structures 

Johannesburg, South Africa, 30 November 2023—Released in advance of the 2023 United Nations Climate Change Conference (COP28), 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. Currently, the world 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.

Green projects currently suffer from underinvestment and high required return rates, according to the report, because private investors tend to see green
technologies as riskier than alternative investments. It further 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.

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.

Mark Victor, Sustainability and Climate Leader for Deloitte Africa noted that
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.

Victor added, "We must take definitive steps to remove financial barriers in order to accelerate a just energy transition, especially in developing economies. The financial ecosystem plays a critical role in guiding investments toward green projects. Governments, financial institutions, and international organisations must implement innovative financing structures that mobilise private capital for climate action. Developing banks and multilateral funds, play a pivotal role in this context.”

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.

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). Africa could lose US$16 trillion in net present value (NPV) terms between 2021 and 2070. In 2070 alone Africa could lose 14% of GDP (or US$2.1 trillion) relative to a world without climate change. A loss of this scale is larger than the current combined economies of Egypt, Kenya, and South Africa.

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 labour
   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. 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 is 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,” 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. 

Considerations for global leaders

According to the report (see Figure 1), 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 penalizing 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/za/en/issues/climate/financing-the-green-energy-transition.html.