Concerted action needed to close USD 271 trillion net-zero investment gap

Financing the path to net-zero emissions requires an unprecedented transformation of the global economy through multi-stakeholder action. And it will take far more investment than previously calculated.

New research from the Swiss Re Institute shows that to reach net-zero greenhouse gas emissions by 2050 – in line with the goals of the Paris Agreement – the world will have to close an investment gap that now stands at USD 271 trillion. That’s an average of USD 9.4 trillion each year until 2050 – a dramatic 609% year-on-year increase from the USD 1.3 trillion invested in 2021.

These new projections are a wake-up call for governments, multinational development organisations and private investors. If annual investment growth remains at 5% – the average for 2016 to 2021 – we won’t erase the investment shortfall until 2069, almost 20 years too late.

It’s time for the conversation to move beyond pledges and focus on the facts of the world's response to climate change. Our report, Decarbonisation tracker: a 98% gap to net zero – off course, but not all lost on green investment, provides full transparency about the investment needed to achieve the goals of the Paris Agreement.

The investment gap represents an opportunity to invest in a resilient future. Change can only happen at the pace required if the public and private sectors work together to unlock capital and channel it in a targeted way.

The steps to be taken to close the investment gap will arguably have the potential to pay for themselves, as green infrastructure and technology are expected to increase the demand to create jobs, boost productivity and reduce the erosion of economic output by climate change. The World Bank estimates that in low- and middle-income countries, every USD 1 spent on resilient infrastructure creates USD 4 in benefits, thanks to new economic opportunities and jobs.

In fact, the costs of not acting are so high, they outweigh any costs of taking action, stress-test analysis from the Swiss Re Institute's Economics of Climate Change report shows. The world economy could lose up to 10% of its GDP from climate change by mid-century under the currently anticipated warming trajectory. 

Our estimate of a USD 271 trillion green investment gap takes into account four key sectors: energy, transport, buildings and industry. The actual figure could be even higher, once other sectors, such as agriculture, and the full spectrum of decarbonisation levers are incorporated.
 

This is a critical moment in the response to climate change. Russia’s invasion of Ukraine has rocked commodity markets, causing a spike in energy prices and driving inflation to its highest in decades. The economic and geopolitical crisis has also sparked renewed demand for highly polluting coal, threatening to hamper a timely, coordinated green transition.

But turmoil can also serve as a springboard for decisive action on global warming. The scramble to bolster energy security is making the case for investing in renewable energy stronger than ever. And the historic climate bill that US President Joe Biden recently signed into law sends a strong signal that governments still have the political will to direct policy – and spending – towards tackling climate change.
 

Despite the enormity of the task, closing the gap is possible. Much will depend on governments more resolutely directing economic policy towards achieving net-zero and creating the right incentives and financial instruments – from establishing a global carbon tax, to emissions trading, feebates, clean technology subsidies, and command-and-control regulations – to mobilise private capital. In fact, if year-on-year investments could be gradually and consistently increased beyond the current annual investment trend of 5%, the gap would close by mid-century. 

While the public and private sectors will need to band together, record government debt and rising interest rates will see private sector investors – including the insurance industry – move front and centre of the net-zero investment push. 

International financial markets already have the capital needed to drive investment towards net-zero. To get there, however, they must channel more investment into the green transition, guided by government policies that build confidence and stronger financial returns. 

The sustainable financial assets segment is growing, but it still accounts for less than 5% of global assets. The global bond market amounted to just over USD 128 trillion as of August 2020. Yet the market for all sustainable debt instruments was around USD 4 trillion in 2021, or about 3% of the overall bond market. Redirecting much more of this capital into green investments is an urgent priority for governments and the financial sector. 

The re/insurance industry has a role to play. Insurers have expertise in assessing, absorbing and transforming risk to encourage innovation in bringing more renewable projects online. Insurance coverage of offshore wind energy by providing risk protection covers for both the construction and operations phases is a case in point. Insurers are also important long-term investors. No other sector combines this knowledge with the ability to act on both sides of the balance sheet. This is why, at the end of 2021, Swiss Re held USD 3 billion in green bonds and had written coverage for more than 8,870 wind and solar farms. 

Initiatives are already underway to bring stakeholders together and focus on decarbonising industry - for example the First Movers Coalition that Swiss Re is part of – but more needs to be done, and fast.
 

Our aim in releasing this report is to provide a reality check to everyone involved in the global efforts to address climate change. For all the progress made in recent years, we are still falling short of what’s required in terms of political will and the investment to back it up.

By providing objective analysis and hard facts about where we stand, we hope to encourage concerted action by the public and private sectors that unleashes the investment needed to create a net-zero economy.