Renewable Energy Investments Too Low to Fight Climate Change

Image: Matthew T Rader on Unsplash

The pandemic has revealed the importance of ESG to the public eye and enhanced the transition to the circular economy. But the current rates of renewable energy investments still seriously lag behind and could not offset the dramatic disruption of climate change. The only solution could come from the combination of more proactive policies and corporate engagement.

The global disruption and economic havoc delivered by COVID-19 might have finally pushed many of us to reconsider our attitudes towards sustainability. Human activities and the destruction of natural habitats are the major reasons of the ongoing slump and apart from the universal appeal to the new vaccine, there is also a shared concern to avoid similar catastrophes in the future.

Green Economy in Transition

Shares of renewables in the energy mix of many developed economies have been consistently growing during the past years. The research by Imperial College London and the International Energy Agency, projected that renewables worldwide accounted for nearly two-thirds of additions to the power sector last year and renewable power capacity had been increasing at over 8 percent annually over the past 10 years.

The U.S. appeared as the most attractive country based on investment in renewable energy, a key part of the energy transition, according to EY. The report by Wall Street Journal stated that the U.S. consumed more renewable energy than coal last year for the first time since 1885, reflecting a steep drop in the use of coal as source of electricity. Furthermore, the consumption of biofuels and other nonhydroelectric renewable energy sources in the U.S. more than doubled from 2000 to 2018 and the U.S. Energy Information Administration projects that renewable energy consumption will continue to increase through 2050.

The current pandemic has likewise increased popularity of ESG ETFs. Investors had spent more than $12.2 billion on ESG funds in the first four months of 2020 and the volumes would likely continue to grow throughout the year. The recent survey by Brown Brothers Harriman likewise  revealed that 54 percent of global investors plan to boost allocations to ESG ETFs in 2020.

Climate Change

But the growing attention to ESG and renewable energy might not be sufficient to offset the wider impact of climate change.

Last year’s roadmap for the global energy transformation by 2050 by IRENA projected that to put the world on track with the objectives of the Paris Agreement, cumulative investment in renewable energy have to reach $27 trillion in the 2016-2050 period. In effect, nations worldwide have to at least double their annual investment in renewables from around $310 billion to more than $660 billion.

The rates of investments had been falling below the target even before the COVID-19. Although the pandemic might have overall contributed to the popularity of the green agenda, it also disrupted the global investments flow. The recent report by IEA indicated that because of the coronavirus worldwide investment in energy collapsed by $400 billion⁠ or almost 20 percent compared with last year. This changes could ultimately affect application of renewables in the energy mix.

Renewable energy has so far been the source most resilient to the Covid‑19 lockdown. IEA further estimates that total global use of renewables will rise by about 1 percent this year despite substantial supply chain disruptions that have paused or delayed activity in several key regions. The major drives of the expansion of renewables are solar and hydro power that will contribute to electricity generation to rise by nearly 5 percent in 2020.

Renewables are described as the most resilient source of energy, but the current slowdown will most likely delay their implementation and make it very difficult to achieve the objectives of the Paris Agreement.

The implementation of renewables might also be impacted by still lagging behind volume of investment. Although renewable power shares offered higher total returns relative to fossil fuels, strong performance may not be sufficient to mobilize equity investors toward the objective of decarbonization.

Policy Changes

The last few months have delivered a great deal of volatility to fossil fuels. Declining consumption, the collapse of the OPEC+ deal and plummeting global gas demand – all that should have been enough to push investors to reconsider their portfolio and shift towards renewables that offer better returns. Nonetheless, many investors still struggle to grasp the full scale of disruption happening in the energy industry. Many perceive renewables as a young and emerging market, and believe that upstream oil and gas projects could still earn big risk-adjusted returns. Furthermore, the Imperial College report noted that large asset managers and institutional investors required deeper liquidity than the renewables market currently held.

Such settings ultimately require more proactive actions to boost renewable energy investments. Specifically, targeted policies that could both assure investors in the long-term stability of the renewables market and underscore their utmost importance to achieve the 2050 objectives of the Paris Agreement.

Recalibrating financial strategies of state-controlled investments could be one solution. Thus, there should be serious shifts in the financial strategies of major institutional investors, such as pension funds, that could expand their portfolio in favor of renewables over fossil fuels. Such decisions might send a powerful signal to all market participants and could facilitate the embrace of renewables by the wider market.

Finally, politicians and bureaucrats in charge should send a powerful message to the market by tightening regulatory measures in favor of renewables.  Long-term development strategies should rely on sustainability concerns and put their focus on green energy. Now, when the world is at a crossroads because of the pandemic, it might be the best time to start addressing the importance of renewables.