The conversation on aligning finance with climate goals has largely focused on fossil fuels. And rightly so. Fossil fuels are the primary GHG emissions driver. They seem like the ‘intuitive’ areas of action, given the availability of zero-carbon alternatives for their primary uses.
Tackling fossil fuels in power and transport however still leaves a big part of the ‘high-carbon challenge’ unaddressed. This relates in particular to industrial GHG emissions, notably in the cement, steel, and aluminium sector, but also for chemicals.
So far, the conversations in these sectors have been very focused on energy efficiency, since there isn’t a zero carbon alternative. However, it is clear that at some point ‘energy efficiency’ hits a ‘glass floor’. It can only get us so far. According to the IEA, one-third to one-half of the decarbonisation achieved by 2050 under a 2°C scenario for these sectors will need to come from zero carbon alternatives that currently do not exist.
Here is the problem: Unlike for infrastructure, we have no idea how much R&D investment we actually need to develop these alternatives. And even if we knew, we have almost no visibility as to whether it is being delivered. There are no R&D investment roadmaps in 2°C scenarios and corporate disclosure is even more opaque on R&D than on other climate issues.
While we don’t know how much R&D we need, the little information we do have suggests that, in relative terms, the ‘investment gap’ on R&D for industry is even higher than for renewable energy or transport. According to i3 data, nearly 90% of financing in the ‘cleantech’ venture capital space goes to companies working on cleantech solutions related to the power sector or energy efficiency. Of the 5% or so actually classified as ‘advanced materials’, only a small fraction actually relates to building materials. A look to companies does not comfort the mind. Companies in the construction & materials sector only spend around $1 for every $100 in sales on R&D. Compare that to $4 for the automobile sector and a whopping $11 for the software and computer services industry.The fellow laggards sound like a who’s who of the high-carbon economy with oil & gas producers and utilities at the bottom of the list with only around 40 cents per $100 in sales. To put that number into context: the sum total R&D – climate related or otherwise – of the 69 largest construction & materials companies in the world in 2015 was only around $11 billion.
While we don’t know what the number should look like, if we think that the construction & materials sector will require a similar technological revolution as the software industry (replacing its core ‘product’ over perhaps 5-7 product cycles), those figures are off by a factor of at least 10 (keeping in mind that only a fraction of that $11 billion is likely climate relevant). Even to match the car industry requires quadrupling investments. The investment gap – in relative terms – thus is likely significantly higher than for the deployment of renewables.
To be clear: We should not treat this as a zero sum game. Renewable power, electric vehicle deployment and the winding down of high-carbon capex remains as much of an imperative as ever. We should keep our eye on the prize. At the same time, overcoming the R&D financing gap seems like small change compared to the ‘shifting the trillions’ we all (including at 2° Investing Initiative) love to talk about.
Indeed, R&D may in some respects be low-hanging fruits for investors. Some companies claim details on R&D investment is confidential, but technology-specific R&D investment disclosures in the past by EDF and Lafarge – while granted a bit outdated – belie this argument. Many companies are increasingly looking to venture capital arms as part of their core strategy. Why not strengthen zero-carbon breakthrough technologies in this context? And asking for more R&D has a smaller impact on the bottom line than shifting huge capital expenditure plans. The downside? The slogan. Shifting the billions is perhaps less sexy than shifting the trillions. But we may soon realise it may be equally important.
Jakob Thoma is a Director at 2° Investing Initiative