As Climate Week NYC draws to a close, our data shows that the world needs to reduce the carbon intensity of economic activity by 15.2% a year - 11 times faster than the global average achieved over the past two decades. The question is how?
Corporate leaders increasingly embrace the need to act. They recognise that failing to address climate change would both undermine trust with their stakeholders - from employees to investors - and compromise their ability to deliver sustained outcomes. As we set out in our strategy, The New Equation, a focus on trust and sustained outcomes is essential for success.
The need to increase management and boardroom commitment to change will never go away, but it needs to be matched with a focus on directing the commitment that exists into the most effective areas, with actions that deliver real impact. In particular, there are four priorities business should pursue.
The first is the decarbonisation of a company’s operations and, crucially, of its supply chain. For us at PwC, supply chain emissions dwarf the carbon impact of our direct operations. That is not unusual, for most companies they make up 65–95% of their carbon impact. Many companies recognise the need to tackle these emissions in principle, but are put off doing it in practice by a fear that it is too complex to do. However, as our Global Climate Leader Emma Cox has noted, we’ve typically found that as much as 80% of an organisation’s supply chain emissions come from as few as one-fifth of its purchases. Companies need to commit to understanding and cutting these emissions. There is a lot of momentum building around scope 3 and we’re focused on driving that discussion forward at Climate Week NYC.
Second is the need to understand climate risk and build resilience. There are a number of different types of risk to consider, but one of the starkest is one that many businesses haven't yet properly evaluated: physical risk from the changes that are manifesting in the climate. From the droughts that have gripped the world this last year to the catastrophic floods in Pakistan, there is no longer any doubt that climate change is a material threat to communities and businesses around the world. Supply chain is, again, an important element here. Many businesses may feel their centres of operations are relatively secure from, at least, the short term risks of climate change. The pace of climate change means that judgement is not always reliable, but even if it is; a study of supply chains will often identify locations which are highly vulnerable. Business has both a duty and an interest in helping identify and manage risk.
The third priority is the mobilisation of sustainable capital. The net zero transition is the right choice for the world economically, but it can only happen if it taps into the capital held in the private sector. The Glasgow Financial Alliance for Net Zero now brings together more than 450 institutions managing $130 trillion of capital around a set of principles designed to accelerate the net zero transition. The Sustainable Markets Initiative, which we are part of, is focused on building a coordinated global effort to enable the private sector to accelerate the transition to a sustainable future.
Investing capital to fund technology breakthroughs is critical to achieving the net zero transition too. While there is growing investment in climate technology, our research found that it is currently focused on technology solutions that account for only 20% of emissions reduction potential. There is opportunity to shift greater emphasis to areas and technologies that can make a bigger impact.
Fourth is the need for robust reporting and audit, as well as the right high-quality data. In a global survey of investors we conducted last year, only about one-third thought the quality of the ESG reporting they’re seeing today is good enough. A survey of the public might find an even lower number. There is real effort going into addressing this trust problem, with regulators demanding new types of disclosure and standard setters creating frameworks that should enable robust, comparable reporting. As our Global Reporting Leader Nadja Picard and our Global Public Policy and Regulation Leader Gilly Lord argue, it will be vital that these frameworks are complementary. In addition, there is a need for standard setters and regulators to act with more speed and alignment and be pragmatic in their approach. From a user perspective, before regulation is finalised, we encourage business to leverage the work of both the World Economic Forum and International Sustainability Standards Board which provide a good starting point.
We are actively engaging with standards setters and other key stakeholders to support the development of globally aligned sustainability reporting standards. We are also working with technology companies and alliance partners, along with preparers, on enhancing the technology, tools and processes needed to promote high quality information.
There is an argument being made that the current global energy crisis is a reason to slow down change. The reality is that it shows the opposite. A world powered by low-carbon fuels would be better insulated from geopolitical shocks. It would also benefit from cheaper energy, thanks to the rapid fall in costs of many renewable energy technologies. While it is crucial to consider the societal impacts of any plan to decarbonise, that cannot mean a deceleration of ambition.
Global business is one of the fastest, most effective agents of change in the world. The history of the last century shows that market systems can rapidly innovate, reduce costs and create opportunities. The challenge is to ensure the world uses that engine to deliver the change needed for a net zero future. That is a responsibility for policy makers who set the rules which define how markets work, but it is also an imperative for investors, employees, consumers and management to recognise the urgency of the challenge and get it done.