This brief is based on a panel discussion with Ted Moynihan, Huw van Steenis, and Rupal Kantaria from Oliver Wyman, and Mark Carney (Special Envoy for Climate Action and Finance, UN), Dev Sanyal (CEO, Varo Energy), Jean-Pierre Clamadieu (Chairman of the Board of Directors, Engie), Martina Cheung (President, S&P Global Ratings), and Greg Guyett (CEO of Global Banking & Markets, HSBC) during the World Economic Forum Annual Meeting in January 2023.
We are at a critical juncture in the global climate crisis. Most of the world’s major economies have made commitments to reach net zero greenhouse gas emissions, and more than 4,000 companies and financial institutions are working toward the same goal with the Science Based Targets initiative. Yet, global emissions continued to rise last year, driven in part by Russia’s invasion of Ukraine, while record heat and drought affected wide parts of China, Europe, and the United States, and devastating floods ravaged Pakistan. The need for finance and energy sectors to work together, to foster a just and secure transition to net zero, has never been more urgent. At this year’s World Economic Forum in Davos, Switzerland, we brought together senior policymakers and chief executives from leading financial services and energy companies to discuss the issue. These are the key learnings:
Bolder, faster action is needed to achieve Paris climate goal
Mark Carney, a former central banker who chairs Canada’s Brookfield Asset Management and serves as the UN special envoy on Climate Action and Finance, kicked off the discussion by explaining how the window of opportunity for limiting global warming to 1.5 degrees Celsius — the Paris agreement target — is closing fast. War itself is very carbon intensive and the disruption of Russian gas supplies forced many European countries to turn to dirtier energy sources such as coal, he noted.
What’s needed, he argued, is an approach that rapidly ramps up investment in renewable energy infrastructure while recognizing that some limited investment to maintain fossil fuel energy capacity will be needed during the transition period. The world currently invests $1 in clean energy for every dollar put into conventional sources. “That ratio needs to go to four to one by the end of the decade,” Carney said.
We need multiple pathways to get to net zero
The energy shock sparked by the war in Ukraine demonstrated that the global economy needs energy security as well as sustainability. That means we will need to maintain some investment in brown sources as we ramp up the green during the transition period. Companies can allocate their carbon budgets differently depending on their existing assets and strategy. Having a variety of approaches — spreading the bets — can strengthen energy security as long as we collectively increase renewables dramatically.
In the next five years, our company will basically treble its earnings, and 50% of our earnings will come from five new strategic pillars in biofuels, bio gas, nature-based carbon removals, green hydrogen, and e-mobilityDev Sanyal, CEO, Varo Energy
Governments can play a big role as enablers
Policymakers can accelerate the transition to net zero with the right mix of regulations and incentives. The United States showed the way last year with the Inflation Reduction Act — a record package of climate-related investment and tax credits that could triple the country’s production of solar, wind, and other renewable energy sources. The law is already prompting a reaction in Europe, where governments increasingly see renewables as key to achieving energy independence. In December last year, the European Union approved a big increase in German funding for renewables that aims to get the country to net zero emissions in 2045. Much more can be done, such as providing clear incentives for green hydrogen. Where supportive policy leads, private capital will follow.
Europe has no other choice than to move quicker and quicker to make sure that we can decarbonize our energy mix because this is the only way we can achieve strategic independence, and hopefully affordability of energyJean-Pierre Clamadieu, Chairman of the Board of Directors, Engie
We need better alignment of standards and disclosures
There is no common language on how to measure a company’s carbon footprint or treat transitional assets. The alphabet soup of standard-setting bodies like Task Force on Climate-Related Financial Disclosures (TCFD) and the International Sustainability Standards Board (ISSB) share common goals but employ different metrics. Greater clarity on those standards can unlock more transition finance from banks and remove uncertainty around firms’ credit ratings. Progress is being made. S&P assesses the sustainability performance of some 3,000 companies, enabling investors to track their progress toward net zero. More detailed corporate disclosures about near-term emissions commitments would help markets allocate capital more efficiently to support the energy transition.
The performance against near-term commitments is something that we’re looking at closely. It implies that we need to see more disclosure on near-term commitmentsMartina Cheung, President, S&P Global Ratings
Don’t forget emerging markets and developing countries
Climate change is a global threat that can’t be addressed just by reducing emissions in advanced economies. Emerging markets and developing countries need to find ways to decarbonize their economies while continuing to raise living standards, but they face headwinds of rising global interest rates and high risk premia. They need help from governments, multilateral development banks, and public-private partnerships to accelerate their transitions. In late 2022, developed countries partnered with the Glasgow Financial Alliance for Net Zero (GFANZ) to commit a total of over $35 billion to Vietnam and Indonesia to accelerate their green energy transition. That is welcome but developing countries will need many more such initiatives.
We’ve got to be willing to finance companies in these markets including those with so-called stranded or brown assets. It is better to support companies with vision and appropriate transition plans across the board than to put them in a position where they might have to sell assets to those who might act less responsiblyGreg Guyett, CEO of Global Banking and Markets, HSBC
Countries and companies are increasingly turning net zero commitments into action, and our discussion showed how the finance and energy industries are stepping up their efforts with potential catalytic effects. Economic actors need to move bigger and faster enough to avert serious consequences of a warming planet. We look forward to working with the public and private sectors to meet that challenge.