Blog 07 November 2022

Cutting Through in the Race to Net Zero

Achieving net zero – the state in which the greenhouse gases going into the atmosphere are balanced by their removal from the atmosphere – is a huge, yet unavoidable undertaking. It will require action from consumers, businesses, investors, and governments alike.

Having delayed acting on climate change for many years, the recent enactment of the Inflation Reduction Act in the United States, which commits $369bn in public funding for climate action, can be celebrated as a momentous milestone. As President Joe Biden said: the legislation represents “the largest investment ever in combating the existential crisis of climate change.”

The US – alongside China – is arguably the nation that matters most in terms of reducing global emissions. Long a laggard on climate action, this piece of legislation – combined with the country’s re-entering the Paris Agreement – serves as a signal to the world that the current administration is serious about tackling climate change.

The measures should accelerate the global transition to a low-carbon future, but we must remember that this is just the starting pistol.

Getting down to business

Together with recent climate investment packages set out by the European Union and Japan, investment flows into climate solutions will have implications for every sector of the global economy.

But these measures do not cement the transition to a low carbon future. They just make it possible. Policy creates the rules and incentives for a sustainable future. The private sector then has to act, and act boldly.

Now innovators, entrepreneurs and corporates alike will need to take risks and face trade-offs. The International Energy Agency reports that nearly 50% of CO2 reductions required by 2050 must come from technologies currently under development.

Such technologies will need to be refined, made commercially viable and rolled out at scale. Businesses in all industries will need to rethink their systems and supply chains to address the climate crisis.

Capital allocators that are serving to create greater urgency around the decarbonisation agenda will need to ensure that they no longer prize short term profitability over longer term value creation.

When capital is long-term, business is resolute and policy is supportive, nothing is impossible.

Aligning ambition with reality

While there are reasons for optimism in the climate transition, it remains clear that there is a long way to go until we reach the finish line – the UN’s latest warnings that the world is “nowhere near” hitting its Paris Agreement targets evidence this. And it is unlikely that progress will always be linear.

One of the constant themes we see across both political and corporate arenas is the need to reconcile the short-term and the long-term necessity. Businesses will run the race to net zero at different speeds. Individual stakeholder groups, understandably, will continue to have different and sometimes competing priorities. What makes sense to some, might alienate others. And misalignment between stakeholder expectations, stakeholder perceptions, and business realities can undermine the credibility of a corporate story and derail progress.

The climate transition is not a switch that can be turned on or off. Rather it is a process that needs to be approached with care, honesty and pragmatism.

That is where the need to communicate effectively to a range of stakeholders becomes all the more important. Ambition is laudable. Action is valued. Resolve is critical.

The courage to make an honest assessment of their position now, including the challenges and obstacles that will need to be overcome, can help firms build credibility in these uncharted waters. The journey to net zero will only be strengthened by transparency and openness. As the rise in climate litigation and regulatory scrutiny is showing, anything less will prove counterproductive.