Without Finance, the Energy Transition Remains on Paper

The role of financial institutions in the broader energy transition and the larger fight against climate change? Fundamental, as it is precisely through financial institutions — banks, insurance companies, asset managers and asset owners — that the investment game is played out regarding the financing of projects and the hedging of risks. Such investments, says Valerio Micale, Associate Director of the London office of the Climate Policy Initiative (CPI) and a Bocconi graduate from the Master in Environmental Economics and Management (MEMA), will have to multiply globally if the Paris Agreements are to be met. Total investment in renewables has almost doubled, and capital spending in storage (batteries) and energy networks has grown fourfold.

What is the current state of investment in climate solutions, and what is the trend?

Investments for the energy transition reached nearly $2 trillion in 2023, spanning from mitigation to adaptation. This leaves out a significant gap compared to the more than $6 trillion needed by 2030 to attain investment targets. However, if current growth rates continue, annual flows could reach that level by that date. Of the $1.8 trillion in investment for climate mitigation, the energy transition constitutes 45%, or approximately $800 billion (and as much as 75%, or $1.4 trillion, if the transport sector is also included).

Does the energy sector play a central role in the transition to a greener economy?

Absolutely. In 2022, electricity and heat production accounted for approximately 44% of global energy-related CO₂ emissions, according to the International Energy Agency. The energy transition generates positive spillover effects on the overall decarbonization process and evolution towards a Net Zero economy. The data shows that, currently, progress in the energy transition has been primarily driven by private investment in renewable energy.

Regarding financial flows, where are the largest gaps concentrated?

Gaps concern the industry’s energy efficiency, due to the persistence of certain investment barriers, and then, in absolute terms, investment in renewables, which will need to rise from €800 billion to €1.3 trillion in the near future. There is an obvious gap that needs to be filled, especially in electricity grids and battery storage, where current investment levels must quadruple. 
Another significant hurdle, which reveals something of the other side of the energy transition coin, is continued investment in new fossil fuel generation capacity. Even today, at least $180 billion a year is still spent on new fossil fuel expansion projects. This is an aspect that is often neglected in discussions, but it is very important.

In emerging countries, the cost of capital remains high. How to accelerate the transition in these economies?

Attracting international capital is crucial to prevent investment in new fossil fuel plants and the associated long-term lock-in effects. Investors from developed countries are needed. Institutional investors play a particularly important role, but they must balance risk management (in countries perceived as risky) with long-term returns. Multilateral development banks and climate funds can help in this regard, accelerating investment and promoting innovative forms of blended finance — finance in which public capital takes a subordinate position to private capital, thus cushioning investment risk and attracting private capital. Solutions of this kind include green bond funds, as well as debt and equity funds.

And what contribution can policymakers make?

They have a key role in mobilizing financial institutions. In the European Union, where there are regulations on sustainable finance and legally established climate objectives, financial institutions are emerging with better performance across multiple green transition indicators. This stands out in comparison to other regions of the planet, such as the United States, where there is now strong opposition to Net Zero policies.