The ‘Clean-Energy Arms Race’ Has Created a Momentous Opportunity

The current global energy crisis did not begin with Russia’s invasion of Ukraine, but it dramatically intensified amid last year’s war-induced spike in oil and gas prices. Even though Europe moved quickly to reduce its dependence on Russian energy imports, and later benefited from a mild 2022–23 winter , the possibility of a future power crunch looms large in the minds of European policymakers. At the same time, emerging markets continue to grapple with a host of cost pressures and supply constraints. In some countries, such as Pakistan and South Africa , the problems remain at emergency levels.

All of this represents the biggest global energy story of the moment — but it is only part of the story. The other, more encouraging part is the historic growth of renewables such as solar and wind energy.

In 2022, the world achieved its largest-ever annual increase in renewable-energy capacity, with renewables accounting for a record 83% of global power additions, according to the International Renewable Energy Agency (IRENA). By year end, renewables made up 40% of the planet’s total installed power capacity.

Meanwhile, the United States passed a key milestone in its own energy transition: Last year, for the first time ever, America produced more electricity from renewables than from coal, according to the U.S. Energy Department .

Even developing countries have shown a greater appetite for low-carbon solutions than many people realize. For example, the Economist has noted that clean-energy technologies “are already the main sources of power for 22 of Africa’s 54 countries.” Hydropower is still the continent’s largest renewable-energy source, but solar is far and away the fastest-growing one, according to IRENA . In March, the most-populous African nation, Nigeria, began building a $171-million solar-cell production plant .

Looking ahead, a group of nine Western European countries — Belgium, Denmark, France, Germany, Ireland, Luxembourg, the Netherlands, Norway and the United Kingdom — recently pledged to quadruple offshore wind-energy capacity in the North Sea by 2030.

Globally, the International Energy Agency (IEA) has projected that renewable capacity will set a new annual growth record in 2023, and will expand 85% faster over the next half-decade than it did over the previous one. In fact, between 2021 and 2022, the IEA’s five-year forecast of global renewable growth increased by nearly 30%, which amounted to the biggest upward revision in the agency’s history. All told, the IEA estimates that renewables will account for more than 90% of global electricity-capacity expansion through 2027.

In the words of IEA chief Fatih Birol : “The world is set to add as much renewable power in the next five years as it did in the previous 20 years.”

None of this was inevitable. Fifteen months ago, some analysts feared that the energy crisis would slow the growth of renewables by spurring fossil-fuel investment in general and greater use of coal in particular. And while global coal use did indeed reach a new record high last year, according to the IEA , many countries also doubled down on low-carbon technologies.

As MSCI researchers Tom Leahy, Ashish Lodh, Elchin Mammadov and Andy Sparks have observed , “Russia’s invasion gave a short-term boost to fossil fuels, yet it also spurred a clean-energy arms race.”

That makes sense. Over the long term, an expansion of low-carbon energy — not only renewables, but also nuclear — could help to mitigate the risk of oil and gas price shocks and supply disruptions.

Its other effect, of course, would be to reduce the growth of carbon-dioxide (CO2) emissions. In March, the IEA said that increased use of clean-energy technologies — from wind and solar power to electric vehicles and heat pumps — helped prevent an additional 550 million metric tons of CO2 emissions in 2022.

To put that number in perspective, it is roughly equivalent to the emissions produced by burning 616 billion pounds of coal, according to the U.S. Environmental Protection Agency .

In other words, clean-energy technologies are already delivering enormous climate benefits.

Even still, the IEA reports that global energy-related CO2 emissions hit a new high in 2022 and “remain on an unsustainable growth trajectory.”

Likewise, the National Oceanic and Atmospheric Administration (NOAA) has announced that concentrations of the three primary greenhouse gases — CO2, methane and nitrous oxide — “continued their historically high rates of growth in the atmosphere during 2022.”

More specifically, atmospheric CO2?is now “50% higher than pre-industrial levels,” and it has increased by more than 2 parts per million for 11 straight years, which represents “the highest sustained rate of CO2?increases in the 65 years since monitoring began,” according to NOAA.

Those are sobering datapoints, especially if world leaders still hope to limit global temperature rise to 1.5 degrees Celsius by the end of this century, the level scientists believe is necessary to avoid the worst climate impacts.

In a paper published on June 8, an international team of researchers found that the remaining carbon budget for hitting that target — i.e., the amount of future CO2 emissions compatible with keeping global temperature rise at or below 1.5 degrees — ”is very small.”

If we look at listed companies, the latest MSCI Net-Zero Tracker indicates that only 19% of constituents in the MSCI All Country World Investable Market Index were aligned with a 1.5-degree pathway as of March 31.

What will it take to close the gap? Annual global investments in energy-transition technologies must increase more than fourfold — to an average of over $5 trillion per year through 2050 — to put the world on a 1.5-degree pathway, according to IRENA .

This is not exclusively a task for the energy industry. Achieving a large-scale shift from fossil fuels to low-carbon alternatives will require a global economic transformation — and all economic transformations must start with the finance and investment industry.

In my experience, many companies and investors are eager to decarbonize their operations and portfolios, but they lack the necessary data and tools. Thus, providing greater transparency and insights around climate risks and opportunities is essential to making net-zero a reality.

Again, this will demand collaboration across industries. To help advance such collaboration, MSCI recently held our second annual Capital for Climate Action Conference , at which business and thought leaders from a diverse mix of organizations discussed the best way forward.

Speakers included Razan Al Mubarak , the United Nations Climate Change High-Level Champion for COP28; Catherine McKenna , a former Canadian minister of environment and climate change; Laura Cozzi , director of sustainability, technology and outlooks at the IEA; Yuki Yasui , regional director of the Asia-Pacific Network at the Glasgow Financial Alliance for Net Zero; and other prominent experts.?

MSCI started this conference to explore how the investment industry can support decarbonization. Our goal is to connect the financial economy with the physical economy: We want to show how reductions in portfolio emissions can drive reductions in real-world emissions.

Our 2023 event highlighted the surging growth of renewables, the impressive potential of other transition technologies, the need to accelerate low-carbon investments in developing countries, and the critical role that data can play in driving progress.

The renewable revolution has created an unprecedented opening for governments, industries and individuals to embrace meaningful climate solutions. But meeting the 1.5-degree target remains a daunting challenge, and the window for success is rapidly closing. Now is the time to reaffirm and strengthen our global commitment to net-zero.