Although the urgency to mitigate climate change has been prominent for years, COP26 gave a public platform for global leaders to present their unified efforts and potential solutions, ultimately putting climate change on the top of the list for international issues. In turn, discussions around climate finance took centre stage.
However, the true cost of the transition and barriers to delivering the necessary financing became somewhat lost among the refreshed buzz of trillions theoretically committed to align to net zero.
To understand the cost of the transition, it’s important to segment the associated implications based on timeframes and scenarios. In the short term, the transition away from fossil fuels may take longer than expected. But net-zero emission goals are an issue requiring significant progress this decade, not just by 2050, creating a conundrum.
From a macroeconomic perspective, the landscape today is not offering any favours to the inflationary costs of climate transitioning. The cost of living has reached record highs, with energy bills and petrol costs through the roof largely due to the Ukraine crisis. This, coupled with increasing inflationary pressures and tightening monetary policies, has left consumers stretched and under pressure.
The urgency of ensuring people can afford to live is resulting in the green transition taking a slight backseat given the further associated pressures transitioning can add in the short term. From a cost perspective, the short term will most definitely be an uphill battle.
But policy developments and private financing can help keep focus on the transition and mediate costs.
For example, the European Commission published its REPowerEU Plan in response to Ukraine’s invasion and the subsequent energy crisis. This plan is a package of measures outlining the European strategy to reduce dependency on Russian oil and gas before 2030 with the aim of redirecting the cashflow to increase funding in renewables projects.
The UK has committed to ramping up wind and solar energy, which could mean 95% of domestic energy comes from low carbon energy sources by 2030. There is still a long way to go, and a huge scale of investment is needed, but it presents an attractive opportunity for investors and has potential to double – or triple – in size with the right investment.
Some of the most hard-to-abate carbon intensive sectors, such as chemicals, cement, heavy-duty transport, and steel production, need the greatest support with their transition plans and targeted funding to evolve their businesses and assets successfully and responsibly.
There is increasing pressure on corporates to measure and disclose their transition plans, which will in turn help investors identify those with the most credible and tangible strategies.
For instance, the UK Transition Plan Taskforce recently published a ‘call for evidence’ legislation on its proposed sector neutral framework for private sector transition plans, requiring further levels of disclosures and reporting to ensure private market players are encouraging and abiding to the transition plans in place.
With all these developments in motion, the cost of transition may create pressure in the short term and set the highest ambitions of the Paris Agreement at considerable risk, but we are hopeful for the medium term.
COP27 will likely focus more on the need for adaptation finance, as mitigation efforts prove too slow.
But the combination of legislative action and global government initiatives, greater corporate disclosure, refined focus from asset managers, increased investment in renewable energy and ultimately, industry-wide support for climate change, should ultimately deliver more targeted climate solutions.