The limited return on investments (RoI) – rather than access to capital – is increasingly cited by corporates as a leading barrier to scaling the energy transition, according to a report.

So, what are the major obstacles as to why going green does not always pay? Slow permitting, taxing legal processes, supply chain constraints, regulatory disparities, a lack of organisational capabilities and tepid technology availability (especially across emerging markets) are predominant roadblocks to the growth of low-carbon and renewables businesses, says MUFG's 'ESG Series: Energy transition’s shortage of returns' report.

The report was anchored on the corporate trilemma of growth; profitability; and sustainability. "That is, in a world wherein ESG’s decibels of debate are rising and corporate budgets are being squeezed on the back of a higher for longer rates environment, we asked whether making growth sustainable and inclusive requires inscrutable trade-offs – forgoing revenues and profits for the sake of sustainability," the report said.

Critically, the most pertinent impediment to inadequate returns from the transition has been higher interest rates, it said. Renewables are fuel-free, but that means almost all of their expenditure is incurred upfront – financed with debt. That makes them more dependent on the cost of finance than carbon-intensive alternatives, which incurs a larger share of costs later. Thus, finance is crucial.

Government policy and regulatory support can help bridge the gap of low returns. The unparalleled Inflation Reduction Act (IRA) – the largest climate legislation in US history – is a testament of how receptive corporates can react to favourable policy signals.

Yet, the challenge in most developed markets is that it may prove difficult to pay for these initiatives with higher-for-longer rates, elevated debt-to-GDP ratios or shifting budget priorities (towards more defence spending in a geopolitically charged de-risking world).

All in, companies have ample access to capital markets. Yet, capital seeks returns, and delivering on the energy transition’s ambitions comes down to economics – economic returns are a first-order scarcity, says the report.