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An electric vehicle charging station in Monterey Park, Calif.
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A new report by management consulting firm McKinsey says it will cost $275 trillion to transition the economy to net-zero emissions by 2050 but it will create “rich new opportunities” for companies and sectors.
The opportunities will come in three areas: decarbonizing current production and processes like steel plants; making new low-emission products such as electric cars or wind or solar farms; and creating things to support the other two areas such as batteries or solar panels or charging stations.
The transition comes with a hefty price tag: The authors said about $9.2 trillion a year must be spent on physical assets for energy and land-use systems between now and 2050. That is about $3.5 trillion a year more than current spending, according to the report.
In the net-zero scenario outlined in the report, demand for high-emissions products would fall, while demand for low-emission products would increase, giving rise to innovation and investment. The analysis is based on the Net Zero 2050 scenario developed by the Network for Greening the Financial System (NGFS), a group of central banks and financial supervisors.
“If we come even close to the kind of transition that’s being described [in the report], the implications for companies and their investors is really profound,” said Charlie Donovan, visiting professor of finance at the Foster School of Business at the University of Washington.
While Donovan agrees there are opportunities for investors, it’s not as straightforward as might appear at first blush.
“When you look at investors who have tried to green their portfolios or make their portfolios less carbon intensive, the challenge they will find time and time again is that there is no straight substitution,” he said.
Donovan said the McKinsey report is as important for what it doesn’t say. With increased capital expenditure, he said the next set of questions that investors should be asking is: “What does that mean for dividend policy? What does that mean for the capital structure? The firms that they’re invested in?”
The report’s authors cautioned that transitioning the economy was complex and could end up being disorderly and there was no guarantee that it would be possible to limit warming levels to 1.5°C. This makes “the case for action even more critical,” they said. Limiting global warming to 1.5°C is crucial if the planet is to avoid some of the worst risks to humans and nature posed by climate change, experts say.
The 2021 United Nations Climate Change Conference, known as COP26, held in late last year was widely seen as a tipping point in the race to reach net zero emissions.
Under pressure from investors, an increasing number of companies are pledging to cut emissions to net zero. Earlier this month,
Exxon Mobil
(ticker: XOM) became the latest company to announce its “ambition” to achieve net-zero emissions for operations by 2050. Nearly 700 companies have made similar promises, according to Net Zero Tracker.
Write to Lauren Foster at lauren.foster@barrons.com
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