While Capex figures have existed for a long time, the term “Green Capex” is being increasingly used in the financial world. Green Capex correspond to investment spending made in economic activities contributing to the energy and ecological transition. There are several signs suggesting that Green Capex at companies should rise over the near future.

Legislation should be an important factor in the shifting of investment in favour of the climate

The current commitments within the framework of the Paris Agreement (which aims to limit global warming to 1.5° C), such as the nationally determined contributions (NDC) mechanisms, are giving a boost to the ambitions of countries to reinforce their actions in favour of the climate.

With numerous countries having promised to reach carbon neutrality by 2050, we can anticipate regulatory and tax changes to encourage investments in infrastructures, water and clean energies. In the framework of the European Green Deal, the European Union has taken substantial measures (such as the setting up of a taxonomy permitting the standardised classification of economic activities making substantial contributions to the reaching of environmental objectives based on scientific criteria) in order to build a sustainable finance ecosystem.

According to the European Commission, around 350 billion euros in Europe will be needed in order to attain a 55% reduction in greenhouse gases looking out to 2030. It is therefore necessary to redirect private financial flows in favour of sustainable activities.

6,000 billion dollars of investments per year would be needed to decarbonise the world

According to a Goldman Sachs study, as of now, no less than 6,000 billion dollars in investments would be needed each year (versus 3,200 billion dollars per year between 2016 and 2020) in order to decarbonise the world, meet needs for water and improve transportation systems and infrastructures.

In the United States, the Inflation Reduction Act (IRA), which unblocked 433 billion dollars in investments (including 369 billion dollars allocated to the energy transition), has enabled the establishment of tax credits, subsidiaries and other support mechanisms destined for “green” sectors such as electric vehicles, solar, wind, hydrogen and carbon capture. These measures have had the immediate effect of lowering profitability thresholds for numerous projects, along the lines of carbon capture projects, where the threshold has fallen from 85 dollars to around 55 dollars. Numerous companies have subsequently announced major investment plans involving this theme.

In Europe, discussions concerning the establishment of a similar plan are continuing. The European Union is calling for the creation of a European sovereignty fund to support industrial projects.¹ The scope of this fund has not been specified for the moment.

Certain sectors in particular should benefit from Green investments

Certain sectors in particular should benefit from these Green investments, notably renewable energies, biofuels, hydrogen and the oil sector (due to potential investment in CO² capture and storage technologies), mining (thanks to the investments need for the extraction of raw materials enabling the electrification of vehicles such as copper, aluminium, lithium, nickel and cobalt), semiconductors (used in energy efficiency and electric vehicles) and finally software (notably for automation solutions).

Green Capex – a new indicator for responsible investors

Companies that have promised to respect the Paris Agreement must now evaluate their investments in connection with this commitment. While certain companies disclose their Green Capex, not all indicate these investments’ share of overall capex. As such, we believe that the percentage of Green Capex compared to total capex is an appropriate indicator in order to put these investments into perspective.

The greater the share of Green Capex in a company’s investment spending, the greater the improvement in in its carbon emissions trajectory. This new indicator should enable investors to identify those companies taking concrete steps in support of their ambition to assure their energy transition. We believe that companies showing a significant percentage of Green Capex will be better positioned within their sectors in order to assure the energy transition.

Sources:
¹ European Commission A European Sovereignty Fund for an industry “Made in Europe”
Goldman Sachs Green Capex - Goldman Sachs Making infrastructure happen 11 October 2021
Goldman Sachs Green Capex: Capturing the Opportunities - 2022 Sustainability And Impact Series

Capex corresponds to company investment spending for the acquisition of tangible (real estate, manufacturing plants, machines) and intangible (technologies, software and equipment) assets with the goal of generating future returns on investment.

Why are Green Capex at companies slated to rise?

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