Accelerating the path to net zero – the crucial role of finance and investment

As businesses and entire industries completely retool and refocus their priorities to achieve net zero targets, they must also look for ways to fund their transition.

Business and world leaders are aligned on the need to move to net zero, with thousands of large corporations setting ambitious goals to reduce emissions and bolster sustainability.

And with wind, solar, electric vehicles and hydrogen being embraced on a grand scale, a renewable future seems well underway. Technology is already a critical enabler, helping to track and measure emissions as well as providing new ways to reduce them. Even so, more needs to be done and faster, with better collaboration and fast-tracking of financing opportunities to push businesses toward their targets. New initiatives like the Climate Impact X1, a global exchange for high-quality carbon credits can help make essential financial strides.

“The transition to net zero requires vast amounts of capital, and the financial sector must play a leading role to make sure companies can transition, and those that are already transitioning have the support they need to flourish,” says Chris Leeds, Standard Chartered’s Executive Director, Head of Carbon Markets Development.

Collaborating for success

Moving forward, working together will be central to making the deep transitions that cut across the whole economy. While at least one-fifth of the world’s 2,000 largest public companies have net zero commitments, these pledges vary hugely in their quality, according to a report from the Energy and Climate Intelligence Unit and the University of Oxford2. Around 20 per cent of existing net zero targets already meet a minimum set of robustness criteria, or ‘starting line’ as set out by the UN Race to Zero Campaign, leaving major work to be done by governments and business leaders, the report found.

The essential components of a corporate climate action plan should include short-term targets as well as long terms absolute goals; average absolute emissions need to fall at a rate of 7-8% pa to halve emissions by 2030. Fossil fuel use should be phased out as quickly as possible and executive compensation, independent auditing of emissions and annual performance reporting to shareholders should all be used to ensure delivery.

Cooperation between governments, banks and investors is also key to the transition, particularly for countries that may struggle to attract investment. The hope is that developing countries in Africa and South Asia are able to leapfrog stages of technology development and harness their solar and wind potential.

New levels of public-private partnership will also be required to boost financial flows to developing countries, as well as collaboration between development banks, international investors and the governments of the countries.

Each country needs to develop its own strategy toward net zero, according to a special report by the International Energy Agency3 (IEA), taking into account its own circumstances and stage of economic development. Developed countries such as those in the EU and the USA have committed to be net zero by 2050, whereas others such as China and Indonesia have committed to be net zero by 2060.

Critical technology

Technology is another piece of the puzzle. Much of what’s needed to help reduce emissions already exists and while there are some gaps, entrepreneurs and innovators are working hard to fill them.

Even so, the scale of the effort needs to increase and the speed needs to quicken, the IEA says, which calls for the immediate and massive deployment of all available clean and efficient energy technologies, combined with a major global push to accelerate innovation.

Many of the tools that can affect change already exist and are improving. For example, solar panel efficiency has improved dramatically, with the latest technology more than 40 per cent efficient4, up from around 30 per cent in 2016 and around 20 per cent in 2012. Batteries are also developing rapidly, making them an increasingly economic source of propulsion for vehicles and a viable energy storage facility to protect energy supply from volatile renewable sources.

China is investing heavily in green technology, and is making huge strides in many areas, including battery storage5. We need to embrace and allocate critical capital toward developing new technologies like low-carbon fuels for heavy transport, low-carbon steel and cement, and better carbon removal technologies. If we don’t start financing innovation now, it will be impossible to reach our decarbonization goals before we run out of time. Work is needed to identify the promising new green technologies that could benefit most from significant investment, and to create more innovative financing programs that can generate the levels of investment needed to scale those technologies.

At the same time, there’s a revolution in food and agriculture, with vertical farming, regenerative agriculture and an increase in plant-based foods all contributing to lower emissions. Investment into plant-based foods6 reached about USD1.7bn in 2020, up nearly three times compared with 2019, according to research firm PitchBook.

Crucial role of finance and investment in accelerating to net zero

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Channelling capital

Financial players like banks, asset managers and investors are crucial to unlocking the funding businesses need to transition to net zero. They can provide finance and risk management solutions that enable companies to make changes to their business models and operations to align with the transition, and investment for green businesses and technologies contributing to the transition.

For companies that are unable to reduce emissions as quickly as they would like, or cannot ever fully eliminate their emissions, purchasing carbon credits to compensate for the greenhouse gases they’re releasing into the atmosphere can offer a critical pathway to net zero.

At the moment, high-quality carbon credits are scarce and a report by McKinsey found that the market is characterised by low liquidity7, scant financing, inadequate risk-management services and limited data availability. The Taskforce for Scaling the Voluntary Carbon Markets (TSVCM)8, chaired by Standard Chartered’s CEO Bill Winters, has committed to resolve these issues and develop high quality carbon credits that follow a set of Core Carbon Principles (CCPs). Climate Impact X, a joint venture from DBS Group, Standard Chartered, Temasek and Singapore Exchange, seeks to support this work by listing contracts in line with the recommendations of the TSVCM that increase transparency, boost liquidity and give a viable option in the voluntary market.

Demand for carbon credits is likely to increase by a factor of 15 or more by 2030 and by a factor of up to 100 by 2050, the McKinsey report found, putting the total market value at more than USD50bn in 2030.

Measurement and transparency

As investor interest continues to increase, so too will the need for demonstration of results and measurement. That means bringing data to the fore and making information about progress, projects, and technologies more widely available and more transparent.

Setting targets can accelerate progress. Companies with science-based targets9 have reduced their combined emissions by a quarter since 2015, compared with an increase of more than 3 per cent in global emissions from energy and industrial processes over the same period.

Demonstrating a strong commitment with a concrete plan for getting there and interim targets can also help attract international investors. Markets are providing the financing to help companies and institutions achieve their sustainability aims.

Net zero is a big ask: entire industries will have to completely retool and refocus their priorities. While many are progressing well with their transition, reaching even the most moderate targets requires an unprecedented global cooperative effort from governments, technology and financial markets.

“The future is coming faster than we think,” says Mr. Leeds. “Standard Chartered is going to be there every step of the way with our clients to provide the appropriate capital to support them as their industries transition and decarbonise.”

This article is based on themes discussed during a panel at Standard Chartered’s recent Global Credit Conference: Opportunities from Disruption. View the recording.

1 https://www.climateimpactx.com/

2 https://eciu.net/analysis/reports/2021/taking-stock-assessment-net-zero-targets

3 https://www.iea.org/news/pathway-to-critical-and-formidable-goal-of-net-zero-emissions-by-2050-is-narrow-but-brings-huge-benefits

4 https://news.energysage.com/solar-panel-efficiency-cost-over-time/

5 https://www.nature.com/articles/d41586-020-02464-5

6 https://www.reuters.com/business/bezos-backed-plant-food-firm-notco-joins-unicorn-club-after-latest-funding-2021-07-26/

7 https://www.mckinsey.com/business-functions/sustainability/our-insights/a-blueprint-for-scaling-voluntary-carbon-markets-to-meet-the-climate-challenge

8 https://www.iif.com/tsvcm

9 https://sciencebasedtargets.org/sbti-progress-report-2020

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