Did you know that half of global trade emissions come from complex global value chains? At Gunung Capital, a leading asset management firm focused on sustainable investing, we believe private capital has a critical role to play in transforming these chains and building a more resilient future. As the urgency of climate action intensifies, decarbonizing global value chains presents a unique opportunity for investors seeking both positive environmental impact and attractive financial returns.
Global value chains (GVCs) refer to the interconnected production and distribution networks that involve multiple countries in the manufacturing of a product or the delivery of a service. These networks have been instrumental in driving economic growth and promoting cross-border trade. Asian Development Bank (ADB) in its report stated that Asia’s participation in GVCs rebounded strongly, shifting towards regional value chains. After a significant drop in 2020, Asia’s GVC activity grew by 10.7% in 2022, surpassing the global growth of 7.7%. While backward linkages, essential for assembly roles, became stronger but less diversified, forward linkages diversified and became more regional. There is little evidence of reshoring or increased domestic sourcing.
However, the reliance on carbon-intensive processes and transportation in GVCs has led to significant environmental impacts, particularly in terms of greenhouse gas emissions. To mitigate these impacts, decarbonizing global value chains has become a priority for policymakers, businesses, and investors alike.
GVCs account for roughly half of global trade emissions, decarbonizing these chains can unlock cost savings by focusing on areas like energy efficiency and renewable energy adoption. However, achieving this requires significant upfront investments. International Energy Agency (IEA) Estimates suggest a global annual investment in renewable energy will need to more than triple to over $4 trillion by 2030 in order to achieve net zero emissions by 2050.
Private Capital Steps Up
Private investors are increasingly recognizing the opportunity and responsibility to drive decarbonization in value chains. A 2022 report by the Global Sustainable Investment Alliance (GSIA) found that sustainable assets under management reached a record $30.3 trillion globally. Within this, investments in climate solutions are growing rapidly. For example, the Climate Bonds Initiative reported that green bond issuance reached a record $1 trillion in 2024. Private investors can play a multifaceted role in decarbonizing value chains. Here are key strategies:
Impact Investing
Impact investors specifically target companies or funds with a positive environmental impact alongside financial returns, further accelerating the transition. In 2022, the impact investing market was estimated at $1.164 trillion, with a significant portion directed towards environmental sustainability projects as estimated by the Global Impact Investing Network (GIIN). These investments are channelled into renewable energy, sustainable agriculture, and green infrastructure, driving substantial reductions in emissions. For example, impact investments in sustainable agriculture practices can reduce emissions by promoting techniques like no-till farming and agroforestry, which sequester carbon in soil and trees.
Financing Clean Technologies
Investing in clean technologies like renewable energy, energy storage, and carbon capture, utilization, and storage (CCUS) across different stages of the value chain can significantly reduce emissions. For instance, BloombergNEF reported that global investment in renewable energy reached $495 billion in 2022, driven by falling costs of solar and wind power and increasing policy support. Energy storage technologies, such as batteries, are also seeing substantial investment, with over $20 billion being invested globally in battery energy storage in 2022, primarily for grid-scale deployment, which accounted for more than 65% of total spending. Additionally, investments in CCUS are critical, with the International Energy Agency (IEA) reporting that CCUS projects received $27 billion in investments in 2022, essential for capturing and storing CO2 emissions from industrial processes.
Engaging with Portfolio Companies
Active ownership through engagement with portfolio companies can encourage them to set ambitious decarbonization targets and implement best practices. A survey by the Global Impact Investing Network (GIIN) found that 80% of impact investors actively engage with their portfolio companies to improve their environmental performance. This engagement includes setting science-based targets, developing comprehensive decarbonization plans, and adopting innovative technologies to reduce emissions. For instance, some investment funds require portfolio companies to achieve net-zero emissions by 2050 as a condition of their investment.
Challenges and Opportunities
Despite the growing interest, several challenges remain. Measuring and managing the carbon footprint of complex value chains can be complex. Additionally, ensuring transparency and avoiding greenwashing – making misleading sustainability claims – is crucial. Collaboration across different stakeholders, including governments, investors, and businesses, is essential to overcome these hurdles.
The Path Forward
The potential for private investment to decarbonize global value chains is immense. By focusing on financing clean technologies, promoting sustainable practices, and engaging with portfolio companies, investors can drive systemic change. As data collection and reporting methodologies improve, and collaboration increases, transparency and accountability will further solidify the role of private investment in building a more sustainable future.
The increasing pressure from climate change, coupled with growing investor appetite for sustainable solutions, presents a unique opportunity. By embracing their role in decarbonizing value chains, private investors can contribute to a more sustainable future while capturing significant financial returns. As the world strives towards a net-zero future, private investment has the power to transform the global economic landscape, ensuring a cleaner and more resilient future for all.
