The UK’s Green Industrial Revolution is central to achieving our country’s net-zero target, and within this plan is an ambition for the UK to become a Green Finance Hub. In the US, environmental progress and ESG investing has a renewed impetus under the Biden administration, and the EU has put in place its own Green Recovery Plan as a way out of the pandemic.
While addressing COVID-19 has been a key focus for governments globally in the past 18 months, it has highlighted the risks of disruption in the global system and the links between our health, food and environmental systems. Rather than distracting from these pressing issues, it has spurred interest in addressing climate change further with the upcoming COP26 creating momentum for governments, financial players and corporates to commit to achieving net zero.
But where are we now, where do we need to be?
As the IPCC warned, limiting global warming to 1.5 degrees would require “rapid, far-reaching and unprecedented changes in all aspects of society”.
However, while there has been some encouraging progress to date, especially when it comes to countries and companies setting ambitious net zero targets, the world is still not on track to meet the goals of the Paris Agreement. And fundamentally, there are some gaps that are not being addressed.
There remains a big elephant in the room in terms of how we decarbonise certain sectors that are central to the economy, but are also very carbon intensive.
Indeed, critical industrial sectors in areas such as steel, cement and chemicals account for a huge proportion of our global emissions – around 16% of direct CO2 emissions and 65% of industrial emissions (IEA 2020). Emissions from these sectors are locked into processes that are expensive to shift without the right incentives, and this makes decarbonisation particularly challenging.
Investors have a significant role to play in providing capital for the step change in technology required to drive transition in these sectors. However, despite the massive growth of sustainable finance – with ESG funds attracting record inflows of €120 billion in the first quarter of 2021 – “brown” industrial sectors are not benefitting from these capital flows.
And despite the number of different ESG research providers, investors still lack the tools to assess where climate impacts take place across the value chain and the full carbon footprint of companies. There is also a risk that initiatives such as the EU taxonomy which are trying to address “green washing” in the proliferation of sustainable finance funds, may inadvertently drive investors to underweight the carbon intensive industrial sectors which need the capital most to change current business models and technologies.
Addressing the decarbonisation of these sectors is particularly important as the output from these upstream sectors feed into a number of products and services which we rely on in the real economy and are integral to the way we live.
Leading companies have committed to net zero targets and are responding to the requirement for better disclosure under the TCFD framework. However, these ambitious targets need to be backed up by detailed actionable plans. These plans with the right regulatory signals can tap into the opportunities and interest in the green finance world and achieve tangible impacts in combating climate change.