Recent instances of threatened energy supply have the potential to galvanize investors, corporates and policymakers to prioritize green energy sources that are also secure, reliable, and accessible. To achieve this, significant capital investment will need to be deployed globally — to the tune of $6 trillion year. We talked with Brian Singer, global head of GS SUSTAIN, to understand more about Green Capex, which industries will feel the effects, which technologies hold the most potential, and where policy can help to drive investment.
To set the scene, what are we talking about when we us the term “Green Capex”?
Green Capex describes the capital investment needed to decarbonize the world, address water needs and shore up transportation and other critical infrastructure. We believe it will be the dominant driver of global infrastructure over the next decade, requiring $6 trillion deployed annually to meet these goals. That’s clearly a very substantial increase from the $3.2 trillion per year invested from 2016 to 2020, and the incremental $2.8 trillion need represents around 2.7% of global gross domestic product, so there’s a major opportunity for Green Capex to become a critical secular theme.
Why are we talking about Green Capex now?
There are several reasons. Very clearly, at the highest level there is a climate imperative, for which the United Nations has outlined various net zero, clean water, and infrastructure-related sustainable development goals. More recently, energy reliability has been an issue as well. Even before the war in Ukraine, there were multiple instances where supply was threatened or cut entirely — in China, in Europe, in Texas, in California — all of which are developed global economies.
We think this backdrop is pushing a shift in mindset from aspiration to action. It’s not enough to just have clean energy: It needs to be secure, it needs to be reliable, and it needs to be accessible.
As investor priorities shift, which industries will come into focus?
One of the big points we continue to make is there's a broader supply chain that's needed to ensure the success of decarbonization, develop green infrastructure and guarantee clean water. It's not just in the technologies and the verticals of the final product — there are lots of sectors needed to support the parts and services.
For example, when it comes to solar, wind, and electric vehicles, it’s not just the panels or cars themselves but includes:
- The supply chain of goods and services needed to deliver these products such as engineering and construction building out the infrastructure
- New innovations in automation that provide software and hardware opportunities
- Scaling up and lowering the cost of battery storage and hydrogen
- Deploying energy efficient products more widely such as in as zero carbon buildings
But that’s not all. Most ESG funds are extraordinarily overweight versus their benchmarks across solar, wind and water. We see an opportunity more broadly, particularly in sectors of the supply chain where near-term investment is critical because investments come with long lead times: between two- and 12-year horizons. We call these “Greenablers.”
This space includes infrastructure companies refurbishing and building out electricity grids; cybersecurity companies keeping networks reliable; metals companies producing needed copper and aluminum; and semiconductor companies reducing the energy intensity needed to power our demand for data and automation. These sectors don't necessarily get thought of as much or as consistently as green, but are vital to ensuring clean energy security, reliability, and accessibility.
Which technologies will be particularly vital targets for Green Capex and R&D?
The path to net zero will require breakthroughs across multiple green technologies. Put plainly, decarbonizing certain emissions — like those generated by industrial processes or long-haul transport — require solutions that are relatively new and still very expensive.
That’s why significant and swift green capex is so necessary. If we can start to unlock scale — and in so doing reduce costs — across an ecosystem of seven critical technologies, it could provide transformational and disruptive solutions to drive decarbonization in the longer-term.
To what extent is Green Capex a regional question?
According to our Energy and Utilities research teams, meeting Net Zero objectives will likely require total capital and investment of about $11 trillion in the EU by 2050 and $16 trillion in China by 2060.
A recent Princeton University report highlighted the need for at least $2.5 trillion of incremental cumulative spending during 2021-2030 for the U.S. to stay on track to meet net zero emissions.
Where will the funding for Green Capex come from?
First, it’s important to note that while we’ve highlighted a need to increase annual investment needed for us to reach those key U.N. goals by $2.8 trillion, not all of that is on track today.
The good news is that we see a significant opportunity for public companies to be investing more. Recently they’ve been investing lower and lower percentages of their operating cash flow back into capex and R&D, but that means, as a result, we think publicly traded companies have spare capacity to spend about $1 trillion more per year in Green Capex, within free cash flow and without straining balance sheets.
That doesn’t make all the math work, but it gets us part of the way. Importantly, for investors to support these investments, companies will need to demonstrate a clear return on their investments. For some sectors and companies, this may warrant a combination of higher product prices, lower costs via innovation, and policy support.
Given this context, to what extent can policy be a Greenabler?
A great example of where policy is a Greenabler is in encouraging carbon capture. As my colleague Michele Della Vigna has said, we believe that carbon capture can take care of somewhere between 10% and 15% of global emissions, especially from heavy industries that are tough to decarbonize. Not only does the technology exist, but it has for years. We’ve just never developed it in a standardized large-scale way, of the sort that drives down costs.
Things like financial incentives and tax treatments — policy — can change that. In the United States, there's the 45Q tax credit that is out there now, and it's already started conversations between the industrial emitters themselves, firms that can transport CO2, those that have sequestration expertise, and landowners.
Generally speaking, clarity on the extent and mechanics of government support for Green Capex and consumer incentives will help to drive greater corporate and consumer engagement.
Regulatory classification systems such as the introduction of the new E.U. Taxonomy for sustainable activities could help companies and investors understand how much Green Capex companies are investing, particularly companies that have diversified business lines.