Investing in Sustainability is Possible (and Profitable)

Transforming the global economy towards energy neutrality requires $9.2 trillion per year of investments in physical assets and wilderness protection. The figure raises the climate bill by $3.5 trillion per year compared to 2020 and reveals that the challenge of achieving net-zero CO2 emissions by 2050 is equivalent to half of corporate profits, or if considered in terms of production, to expenditures similar to 6.8% of current global GDP.

By Ignacio J. Domingo

It is time for financial courage and massive investment efforts aimed at certifying a 45% reduction in CO2 emissions by 2030—55% in the EU's most ambitious roadmap—because the premise that the greater the global warming, the higher the bill for combating climate change will be, is absolutely true, according to a McKinsey Global Institute study that puts figures on the investment efforts required to meet the main Sustainable Development Goals (SDGs).      

The net-zero transition is a process of alternating costs and benefits in which governments and companies "must constantly reinforce their actions against the climate crisis," the report stresses. "They are -it recognizes- on the right track" but their progress "is insufficient to slow down or delay global warming." This is why it calls for the "strengthening of capital portfolios with more sustainable assets," for an increase in investments to accelerate energy neutrality and for the addition of both human resources—to expand the workforce for green projects—and financial resources to support the decarbonization strategies of the private sector, and technological resources to contribute to the elimination of the productive footprint of CO2.

The reactivation of these road maps requires "significant investment readjustments that make corporate plans universal and involve social sectors and communities in their paths." This is needed on an ongoing basis in order to shape a "prosperous and sustainable" business super-cycle. 

The McKinsey think tank agrees with the predictive calculation of the Network for Greening Financial System (NGFS), a group of 83 central banks that advises boosting green investments with ESG criteria and undertaking an orderly economic shift towards energy neutrality. This includes Cepsa's Positive Motion strategy of extending the maturity of its 2,000 million euro syndicated credit line to five years—at the end of 2022—and linking it, for the first time, to sustainable indicators such as the reduction of CO2 emissions and gender diversity. 

In the opinion of the company's CFO, Carmen de Pablo, the green conversion of this loan "shows our determination to transform our business and respond to the challenge of net zero." "Cepsa—she assures—will continue to align its financing strategy with sustainability objectives to support the implementation of energy transition projects".

The triptych of finance-technology-green business will not be cheap, but it is manageable. McKinsey values the total cost of the disappearing carbon footprint at $9.2 trillion per year - the combined value of the economies of Germany and Japan—which is a $3.5 trillion surplus—the size of India's GDP—over the 2020 bill. 

Moreover, that will be affordable. In keeping with McKinsey's comparisons, the annual capital gain since the Great Pandemic would be equivalent to half of corporate profits, a quarter of tax revenues or 7% of the world's real estate business in 2020. Again, these are manageable costs, equivalent to 6.8% of current world GDP and 8.8% predicted for 2026 and 2030, the latter year when they would begin to fall.  

In addition to this accounting liability, however, there are new financial returns, on the asset side, which bode well for investor appeal. Because the rate of return will be enormous. Despite the fact that expenditure and financing requirements have not yet reached the desired cruising speed and the elevated geopolitical risks - the second unknown to be cleared up - the technological leap that has Artificial Intelligence (AI) as its standard bearer "will reduce expenditures more quickly than expected."  

McKinsey's predictive study acknowledges that electricity bills will rise in the short and medium term—by around 25% between 2020 and 2040—but will fall thereafter to 20% below 2020 rates due to the lower operating costs of renewables, the productive flexibility of the sector and the lower cost of this utility's service. Although it will not travel uniformly across the various regions of the planet. 

In the labor sphere, the path would be similar. The transition to clean sources will destroy 185 million direct and indirect jobs by 2050, especially in the fossil fuel industry. But it will create 200 million jobs in productive segments linked to hydrogen, solar and wind energy sources or biofuels, and through the reallocation of human resources in large-scale industrial reconversions; essentially in the automotive, transport and construction industries, which will involve reassignments and will add tens of millions of jobs, regardless of the jobs that will be created in their auxiliary companies and suppliers. 

The hydrogen economy is a good example. Cepsa and ManpowerGroup have launched a predictive study showing that green molecules are setting the pace for an imminent employment revolution in Europe and the United Kingdom. Specifically, between 1.7 and 2 million new direct, indirect and induced jobs will be created in their business segment, at a rate of 101,000 per year, and 145 billion euros will be added to the GDP of the Eurozone in 2040 compared to its value in 2023, at an annual average of an additional 8.5 billion. 

In Spain, the hydrogen business would contribute 15.6 billion euros more to the current size of the fourth largest economy in the euro, an increase of 1% compared to 2022, and would be the partner with the greatest power to generate employment between 2030 and 2040. It would also lead European employment demanding Green Skills, with 55.4% of green skills required in its job offers.   

In parallel, and according to the NGFS Net Zero 2050, coal will disappear from most of the energy mix by 2050 and the volume of crude oil and gas will fall by 55% to 70%. 

All this in a context where electricity demand will more than double and where developing nations would have investment needs 1.5 times higher than those of the industrialized powers in terms of GDP. Although these middle- and low-income markets "would be more likely to accelerate the transition and undertake capital expenditures" and thus abandon fossil energy infrastructure, hire skilled labor or adopt technological resources. 

The private sector has taken up this reformist baton. This is what Oliver Wyman found in a survey on the degree of green awareness of companies. A total of 31% of them admit that inaction in their decarbonization processes will create a major existential threat in 2030. In comparison with the current 6% In an ecosystem that is calling for far-reaching and structural changes, especially after the Great Pandemic, and despite the fact that they acknowledge that their green businesses are 55% integrated into their priority investment projects.  

In the financial sphere, the experts at Boston Consulting Group (BCG) envision a similar theater of operations. "The resilience of companies to climate risks has become more reliable with the implementation of tools to minimize the exposure of their assets to inclement weather or natural disasters, mechanisms to quantify the costs of inaction or instruments to protect against losses." And, although they have identified only 25% of the physical risks and materiality of their finances, "they are on track" to address the $18 trillion that BCG has assessed as the capital gap that still separates the climate goals from the investments needed to match the 2030 sustainability gains with the 2050 net-zero challenge. 

However, this transition towards sustainability and its inclusive power in the distribution of wealth will not be possible without society's contribution. Consumers will play a decisive role in the fight against climate change. Fortunately, more and more consumers are showing their willingness to pay a green premium when purchasing their personal goods and services.

Ignacio J. Domingo has spent most of his 30 years of professional practice analyzing geopolitical, international economic and capital market issues in Expansión and collaborating with media channels such as El Confidencial, Capital, Estrategias de Inversión and El Diario.es, among others. He received the award as a first runner-up for the Citigroup Award, which recognizes the best annual economic reporting.