Who Is Financing Net Zero?

Net zero can be important to investors for several reasons. Investors may be interested in monitoring progress toward net zero because the extent and speed of emission reduction and removal will likely be an important factor in the degree of climate risk exposure their investments will face in the future. In addition, investors may be interested in how policymakers might implement commitments to reduce net greenhouse gas (GHG) emissions because those decisions may be highly consequential, in both positive and negative ways, to certain companies, industries, and regions — and thus, their portfolios. Finally, many asset owners and individual investors have concluded that climate change mitigation serves their interests — financial, altruistic, or both — and therefore, they are not only interested in monitoring progress toward net zero but also want to contribute to its realization. In short, net zero may be important from the perspectives of risk–return, values alignment, and impact.

Governments are responsible for determining how to respond to climate change, and their responses are typically classified as adaptation or mitigation. Net zero falls in the latter category because it seeks to address the root cause of climate change — namely, the GHG emissions that are produced by human activity. Governments have been working together for decades to mitigate climate change. International cooperation started in 1994 with the United Nations Framework Convention on Climate Change (UNFCCC), which has now been ratified by nearly every country in the world. With the 2015 Paris Agreement, nearly every country and/or government agreed to emissions reduction commitments to limit the global temperature increase as soon as possible.

Investors are important to net zero primarily because the amount of financing needed to achieve it is beyond what public finance can provide. Attaining net zero will likely cost more than $100 trillion. A 2022 McKinsey report titled “The Net-Zero Transition” estimated that “capital spending on physical assets for energy and land-use systems in the net-zero transition between 2021 and 2050 would amount to about $275 trillion, or $9.2 trillion per year on average, an annual increase of as much as $3.5 trillion from today” and that “in comparative terms, the $3.5 trillion is approximately equivalent, in 2020, to half of global corporate profits, one-quarter of total tax revenue, and 7 percent of household spending” (p. viii).

In addition, most carbon-emitting assets are privately owned. The replacement of carbon-emitting assets might serve the overall good of society, but certainly debate exists about the extent to which public money should be used to update and enhance privately owned assets, especially as there are other means by which policymakers might incentivize decarbonization. Climate change mitigation, like past socioeconomic transitions, is likely to be financed through a combination of public and private finance.