Sustainability in action – opportunities and challenges

The rising demand for electricity¹ has made it necessary for massive investments to be channelled into both existing and new green technologies to combat climate change.

While significant progress has been made in the past few years to reduce the cost of generating renewable energy, many challenges remain. Some of those relate to scaling innovative solutions that already exist – such as in the cement industry², one of the most carbon-intensive industries in the world. Others involve filling gaps in funding on the supply side of electricity – in transmission, distribution and storage facilities.

An expert panel at the HSBC Global Investment Summit said greater collaboration between investors, corporations and governments is crucial to mobilise the required capital, while balancing the need for energy security and affordability.

Two-thirds of the technologies that are needed to meet the Net Zero targets for 2050 already exist, while investments are still needed to develop newer and innovative technologies that are missing, according to Hans Kobler, Founder and Managing Partner at Energy Impact Partners.

“We need those revolutionary technologies, but we also need to just deploy what we have fast, and get companies to pick them up faster. And a lot of that is around electricity,” he said.

“We see a lot of venture money and growth capital coming in. But to actually deploy the technologies required to scale, we’re talking about a magnitude more of capital that has to come from somewhere, and with these high interest rates, it will be harder,” he added.

He made a reference to an analysis by McKinsey³, which indicated that the world would need US$150 trillion of capital spending for a Net-Zero transition, with two-thirds of that money required in developing economies. That amount is more than the entire world’s economic output, estimated to be around US$110 trillion this year⁴.

One reason behind the challenge in scaling up deployment lies in the capital-intensive nature of investments. Building transmission lines from a power generation plant to centres of demand, for instance, could take years of negotiations to receive all required financial, regulatory and environmental clearances.

Some industrial solutions, such as retrofitting large carbon-emitting factories with low-carbon emission systems, or building electric charging stations, also require large investments. Such investments require the involvement of specific categories of investors with different investment horizons and risk-reward preferences.

“So you have this gap that I think is currently holding up the growth to some extent,” Mr. Kobler said. “But it’s a huge opportunity because it is really needed, and money can be made there.”

To be sure, there are reasons to be optimistic.

Rodi Guidero, Executive Director at Breakthrough Energy and Managing Partner at Breakthrough Energy Ventures, recalls a time in 2015 when there were very few people willing to invest in critical climate technologies. That has changed markedly in recent years, with momentum building. Now, he expects the “fantastic trajectory” to continue.

“It’s not just Ultra High Net-Worth people either. It’s sovereign wealth funds; it’s corporates; it’s institutions; it’s endowments,” he said. “We’re investing here in human wellbeing. And we have to present these fundamental technologies to help the world get to where it wants to. So we’ve got incentives aligned just right for that continued trajectory.”

Still, there is no one right fit for all, and differences in underwriting criteria, risk appetite, investment mandates play a role in what investors choose to invest in, and how.

“This is a collective action challenge,” Mr. Guidero said. “Innovation isn’t just a scientist and a lab where they come up with the idea. There is a big tent that is required of participants and you know, it does start with a regulatory framework that is as friendly as possible.”

The level of difficulty involved in meeting the climate goals also requires the participation of constituent groups across the whole chain.

“It’s part of the government’s role to actually think down the road and create the incentive structures that jumpstart a market you want to develop,” he said. And while one can’t rely on government’s subsidies indefinitely, “that’s how you build a new industry,” he added.

Mr. Kobler made a reference to the production of hydrogen as an energy source, which got a boost from the U.S. Inflation Reduction Act (IRA). The IRA⁵ created new provisions for clean hydrogen, whereby clean hydrogen plants receive tax credit of up to US$3 per kilogram of the gas.

The production of green hydrogen is a highly capital-intensive initiative that requires a large amount of renewable energy as an input source, making policy support key for projects to be viable.

“So there are certain challenges where a subsidy is necessary. Otherwise, we will never get there,” he said.

“We need all hands on deck to tackle this challenge. That means all of the industry, and the oil and gas industry people have to play a role, especially when we talk about hydrogen and ammonia,” Mr. Kobler said.