Megatrends: the bumpy path to net zero

The war in Ukraine has highlighted the importance of energy security: economies can’t function without it. The developed world has brought forward planned investment to reach net zero. But we think it will be a bumpy path to get there. This article is part of our series on megatrends.

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Rob Clarry
Published: 06 Jan 2023 Updated: 08 Feb 2023
ESG Savings and investments IFAs

Seventy years ago, the world emitted less than 5 billion tonnes of CO2 emissions each year. Today, that figure stands at over 37 billion. This profligacy has set in motion a vast climate crisis. Policymakers are scrambling to wind back the clock, to achieve ‘net zero’ emissions – levels last seen more than 200 years ago.

This can only be achieved by steering the world away from carbon-intensive energy sources towards renewable options. Governments around the world know this, but persuading their citizens to give up their cars, heated homes, air travel or industrial advancements is not an easy sell. The transformation that is required across all industries is vastly expensive. As a result, there remains a vast gap between the targets they have set and the progress they have delivered.

The war in Ukraine has shone an uncomfortable light on how little progress has been made. The world has slept-walked to a situation where it is dependent on damaging fossil fuels from unreliable nations for the energy that powered its economies. With hindsight, this appears an extraordinary risk to have taken.

Slow progress towards net zero as temperatures rise

The Intergovernmental Panel on Climate Change says that the world is currently warming at a rate of 0.2 degrees celsius per decade[1]. Around 80% of the world’s GDP is currently subject to a net zero target [2] (where a business or country is no longer a net emitter of carbon), but even if those targets are met, global warming is projected to reach 1.7 degrees celsius by 2100[1]. If they aren’t, the current projection is for warming of 2.4 degrees[2].

A 2-degree scenario[3] is viewed as the acceptable limit for temperature rises to avoid catastrophic changes to the planet that would make life unbearable for millions of people. Even a 2-degree scenario would come with significant changes to rainfall patterns, agricultural productivity, a devastating loss of coral reefs, a major shrinking of biodiversity and more than a third of people exposed to extreme heat at least once every five years[4].

Countries have made important commitments to achieving net zero emissions. The Paris Agreement in 2015 sought to limit global warming to 1.5 degrees, aiming to reach a peak in global greenhouse emissions as soon as possible. However, progress has been slow, with few of these pledges translated into concrete policies and actions.

Ahead of the COP27 climate change conference, the Climate Action Tracker found that “Few governments have increased their 2030 targets, made new net zero commitments, nor substantiated them.” [5]

Admittedly, the Russia-Ukraine war has proved a significant distraction, but governments do not have a lot of time on their hands.

Nevertheless, there were two major initiatives in 2022: the US Inflation Reduction Act and RePower EU. The Inflation Reduction Act brought more than $370 billion to support action on climate change and promote renewables. Analysis by clean energy consultancy Rhodium Group said that by 2030, the Act could reduce US emissions by between 31% and 44%, compared with 2005 levels. Without the Act, it would have been 25% to 34%[6].

The RePower EU initiative seeks to wean the region off Russian gas. It encourages the rapid rollout of solar and wind energy projects combined with renewable hydrogen deployment. A modified Recovery and Resilience Fund will support investment and reforms worth €300 billion. It also proposes €3 billion of frontloaded projects to boost industrial decarbonisation, plus investments in an integrated and adapted gas and electricity infrastructure network[7].

These two projects mark a sea change in clean energy investment.

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The path to net zero will be bumpy for a number of reasons

It is not simply a case of allocating capital, setting targets and letting industry work it out.

1. Competition for commodities

The energy transition is resource intensive. It requires specialist materials to build the infrastructure for renewable energy, for the manufacturing of electric cars and for batteries and solar panels. The World Economic Forum recently forecast that 3 billion tons of metal could be consumed during the transition. This means that compared to today, six times more mineral inputs will be required in 2040.

  • Copper is a typical example. Copper is a vital component of electric vehicles (EV). They use around 4x the amount of copper as a conventional combustion engine car. As EV penetration rises, copper consumption has surged. In 2020, renewable copper demand totalled 24% (5.76mt) of total copper demand. The International Energy Agency (IEA) has forecast that this demand will rise to 36%, reaching 10.8mt (almost double).
  • It is a similar picture for lithium and nickel (used in batteries), cobalt (used to make magnets), plus rare earths.

Demand for these commodities will increase as the energy transition accelerates. This demand will come from across the world and it is happening against a general underinvestment in supply. Mining companies have reined in capital investment in recent years, leaving little new supply coming to market. As countries compete for limited supply, it may push up costs significantly.

2. Geopolitical complexities

A significant share of these crucial raw materials is sourced in geographically ‘difficult’ areas. They are either remote, politically unstable or openly hostile:

  • 70% of the world’s cobalt is produced in the Democratic Republic of Congo (DRC), a country which has recently seen fighting over access to mining resources
  • Indonesia produces approximately 35% of the world’s nickel and Russia another 10%
  • China produces 60% of the world’s rare earths

In a deglobalising and increasingly polarised world this may create barriers to a reliable supply of crucial materials for the energy transition.

The supply chains for clean tech are also dominated by a handful of countries. China dominates almost the entirety of the renewable energy supply chain. It:

  • Makes around three-quarters of the world’s polysilicon, a key material used in solar panels
  • Has nearly 70% of the global manufacturing of solar modules; and almost 90% of the global manufacturing capacity of lithium-ion batteries
  • Processes 78% of rare earths
  • Currently accounts for 55% market share in the manufacturing of wind turbine infrastructure

3. Infrastructure challenges

Existing infrastructure has been built for the distribution and storage of fossil fuels rather than renewables. It pipes oil and gas from place to place. The existing electricity infrastructure needs to transform to accommodate renewables. Storage capacity must improve to cope with the intermittency of wind and solar while distribution needs to be more localised.

This requires huge investment. The Federation of the European Electricity Industry, Eurelectric, says the EU needs to double its investment in the electricity grid to €55 billion per year[11]. The International Renewable Energy Agency (IRENA) say a doubling in the growth of renewables between 2017-2030 will need to see a tripling of the stock of electrical energy available in storage systems[12]. This is a vast undertaking.

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4. Technology adoption

There are a number of sectors that remain resistant to decarbonisation, such as iron and steel manufacturing or aviation and shipping. Existing renewables solutions do not always provide an answer for these carbon-intensive sectors. Policymakers increasingly recognise that hydrogen may provide an alternative. It can be compressed and stored and can create the high temperatures needed for iron, steel and cement manufacturing but it is too expensive at current levels.

Both the Inflation Reduction Act and RePower EU incorporated initiatives on hydrogen development, which may move the dial for these industries. A number of large-scale hydrogen plants are likely to come on line in Europe by 2025, earlier than planned.

5. The role of fossil fuels

It is an uncomfortable truth that fossil fuels will play a role in the energy mix for some time to come. In the very short term, liquified natural gas has become important to support European energy supplies while some countries have switched coal stations back on — the UK Government recently approved plans to open the first deep coal mine in more than three decades. Fossil fuels are needed to provide stability of supply as renewables are brought on stream[13].

Equally, with deep pockets and significant know-how, the oil and gas majors are likely to be part of the energy transition. BP, for example, own Chargemaster, the UK’s largest electric vehicle charging network[14]. These companies will need to be held to account by shareholders and policymakers.

Who wins from energy transition?

The energy transition brings a lot of money into motion. Total investments across energy sectors are projected to grow by more than 4% per annum. World energy investment is sitting at around $2.4 trillion, well above pre-Covid levels [15], with the majority of the investment in renewables and grids. This will accelerate over the next decade. Investors need to be on the right side of the change.

Investment implications

The vast sums of money committed to the energy transition create plenty of opportunities for investors. Below we identify three main areas that stand to benefit.

  • Icon Core Checking Pos

    Critical minerals

    There is a significant opportunity for mining and materials companies supplying critical materials to support the energy transition. This includes lithium and copper needed for electric car batteries or rare earths for wind turbines.

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    Renewable energy infrastructure

    There is now real choice in energy infrastructure providers. Some specialise in developing new infrastructure in specific areas, such as wind, solar or battery technology, while others aim for a mix of options, including hydrogen development. These companies draw their income from the sale of energy, plus government subsidies. Their cashflows are often inflation-linked and partially linked to energy prices.

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    Oil majors

    The world’s largest energy companies have been a mainstay of investment portfolios. The world will still need fossil fuels until more energy supply comes on stream. However, these companies increasingly recognise that the future is in renewables and are building or buying renewables capabilities. They will continue to play an important role as the transition gathers momentum.

For more of our research on the next decade visit our megatrends hub.


[1] Global Warming of 1.5 ºC - Special Report, [accessed December 2022]

[2] For a livable climate: Net-zero commitments must be backed by credible action, United Nations, [accessed December 2022]

[3] Global Energy Perspective 2022 Report, McKinsey, 26 April 2022

[4] COP26: World headed for 2.4C warming despite climate summit - report, BBC News, 9 November 2021

[5] What’s the Deal with the 2-Degree Scenario?, S&P Global, 25 February 2020

[6] What’s the difference between 1.5 and 2 degrees of global warming?, World Economic Forum, 28 July 2021

[7] Dash for gas a serious threat to the Paris Agreement’s warming limit, Climate Action Tracker, 10 November 2022

[8] What the Inflation Reduction Act means for investors, Impax Asset Management, 22 August 2022

[9] REPowerEU: affordable, secure and sustainable energy for Europe, European Commission, [accessed December 2022]

[10] World Economic Outlook, October 2021: Recovery During A Pandemic, International Monetary Fund, October 2022

[11] The EU needs more public investment in energy infrastructure to fight climate change, European Economic and Social Committee, 30 September 2022

[12] Renewable energies: Storage, [accessed December 2022]

[13] Enery transition: Decarbonization, [accessed December 2022]

[14] BP to acquire the UK’s largest electric vehicle charging company, BP, 28 June 2018

[15] World Energy Investment 2022: Overview and key findings, [accessed December 2022]

Important information

By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. Details correct at time of writing.

The value of an investment may go down as well as up and you may get back less than you originally invested.