The adoption of new technology, data and funding is critical to meeting sustainability goals.
by Peter Gassmann, Global Strategy& Leader and PwC’s Global ESG Leader, PwC Germany
This time last year, the urgency of climate change was pushing governments around the world to increase their decarbonisation commitments ahead of the UN’s COP26 conference. Hundreds of businesses rushed to make net-zero pledges before the November 2021 meeting in Glasgow. And the confusing multitude of standards around sustainability reporting were beginning to get sorted out, giving hope to investors looking for greater clarity on corporate climate risk. Money was pouring into climate tech, with a 3,750% increase in venture capital between 2013 and 2019, accounting for 14% of all VC investments. And more companies appointed chief sustainability officers in 2020 and 2021 than had done so in the previous nine years.
That’s the good news. However, we know the actions underway or planned as of today are still not enough. The latest Intergovernmental Panel on Climate Change calculations of the gap between the speed of decarbonisation and the rise in temperatures remain alarmingly far apart. Catastrophic climate events are happening with great frequency and are expected to rise sharply. And early indications suggest that new investment in innovative climate solutions may have moderated over the past six months. The threat to energy, social and food security as a result of the war in Ukraine has also created new challenges to finding solutions to the climate emergency. And some investors and politicians have recently questioned the return on investment of the sustainability agenda.
Let’s be clear: we cannot allow the short-term uncertainty of recent years, the spectre of rising inflation and the looming global recession to stall efforts to meet the longer-term challenge of climate change. But businesses must forge ahead—and governments must continue to support them by aligning and clarifying policy and regulations with net-zero goals.
Many of the strategies governments and businesses can undertake, from incentives to investments in decarbonisation already underway, will put them in a position to deliver on both short-term resilience and the longer-term sustainability goals of the Paris Agreement. Trailblazers, like the European Union, with its Green Deal and the recently announced REPowerEU US$300 billion investment in renewable energy, for example, are leading the way. To those just starting to review sustainability strategies, this is good news. Newcomers face less uncertainty and fewer obstacles to each of these, thanks to what are now the time-tested practices and policies of early climate innovators—who themselves must continue to be at the forefront.
If we remain focused, three elements at the core of climate action are poised to accelerate a global effort and lay the groundwork for an inclusive energy transition: faster adoption of existing technology, the deployment of data and the convergence on global reporting standards to improve performance on both financial and nonfinancial criteria, and increased funding.
Whether a company is at the vanguard of scientific breakthroughs, is among the first adopters whose commitments make breakthroughs commercially viable or is only now getting started on using technology to enhance sustainability goals, much of the progress needed at every company depends on more mundane aspects of day-to-day operations. And although any technology on its own can enable sustainability, it is the convergence of technologies that yields the most powerful decarbonisation results and facilitates the measurement of sustainability at the same time. As Leo Johnson, a futurist at PwC UK and co-author of PwC’s latest climate-tech report, says: ‘Technology is not the answer. It’s the amplifier of intent, and climate tech alone is not the panacea, but it’s a…critical mechanism to bend the emissions curve down and get us back on track towards 1.5 degrees.’
Companies need to invest in technology that can change the way they operate to reduce carbon emissions in their direct operations (scope 1); in their use of electricity, heat and steam (scope 2); and even in those of the companies in their supply chain and the customers who buy their products and services (scope 3). Indeed, meeting climate goals is only possible if the digital and the sustainability transformation—so far, pursued largely independently of each other—are jointly integrated as part of a company’s strategy. This goes hand in hand with measuring, managing and reporting key performance indicators.
New business models can help. Start-ups are offering increasingly useful software solutions that manage a company’s internal greenhouse gas emissions. They’re also replacing manually managed spreadsheets with automated programmes that provide visual representations of information and easily referenced dashboards. Some companies are even applying this approach across the supply chain, programming cloud platforms that bundle data from factories and suppliers into an overview of sustainable performance, human rights objectives and supply chain regulations. And the development of new technologies to help solve decarbonisation conundrums is accelerating across sectors. By 2050, the International Energy Agency predicts that roughly half of our improved carbon efficiency in energy will use technology that exists now only as prototypes.
Examples abound: artificial intelligence is enabling start-ups to analyse satellite images, for example, to track forest health, and to identify where trees are suffering from drought, at risk of fire, or becoming ill or infected with parasites. Technology also enables companies to closely monitor offshore wind turbines, providing remote maintenance via sensors in the system that collect and transmit data to control centres for analysis. And digital measuring systems and smart grids are increasingly playing a role in the energy sector, ensuring that decentralised generated power from solar panels and wind turbines is most efficiently routed to consumers.
If technology is the amplifier of intent, data is its foundation. Collecting it will be necessary as required by regulation and reporting standards, yes, but companies need data when rethinking where and how to compete. The data will help them understand the specific impact that climate change could have on their business—for example, the physical risk to infrastructure, or to a company’s supply chain or operations. In addition, data can help quantify the business-related transition risks that the transition to a decarbonised world would bring. These include changes in demand, impact on energy prices, renovation requirements for buildings and potential competitive effects on logistics chains.
Companies that have blazed the trail of environmentally sustainable business practices understand how to get the data, what to do with it and how to present it; and they are increasingly well positioned to verify it and, when it comes to reporting standards, to assure it. As they press ahead to even more sophisticated methods of measuring and managing data to meet ever higher standards of sustainability, they also serve as a model for companies striving to catch up.
Those beginning to develop data strategies to inform their sustainability goals can learn from those who already do it well, and it will be key to not just collect the data but to integrate it into better management and strategy. There are three things to consider: first, the cost of investment in hardware, software and upskilling. Second, the timeframe for return on that investment; and third, the scope of the data: what new types of data will be needed to make strategic decisions in the coming decades, and what traditional sources of data are no longer reliable?
GFANZ—the Glasgow Financial Alliance for Net Zero—was formed at COP26 as a key step in marshalling the resources to help companies and governments meet the cost of transitioning to a green economy. The International Energy Agency estimates that by 2030, clean energy investment will have to triple to US$4 trillion to meet the Paris Agreement commitments. So where will the money come from? As part of GFANZ, more than 450 major financial institutions from 45 countries are committing to manage their balance sheets, totalling more than US$130 trillion of assets, in line with a 1.5-degree net-zero transition. That’s around 40% of global private financial assets.
Governments are also stepping up. With offshore wind already likely to be a leading source of electrical energy as early as next year, Belgium, Denmark, Germany and the Netherlands have committed to further boost investments in offshore wind to deliver half the capacity needed for the EU to reach net zero by 2050. Expectations of clean hydrogen are also spurring action. Twenty-nine countries have adopted hydrogen strategies, up from three in 2019, and have committed at least US$37 billion to its development—on top of US$300 billion from the private sector.
Indeed, private investors’ appetite for the types of technology that can make a difference is enormous, as PwC’s climate-tech report shows. For now, though, money is going into already developed technologies and not into those with the greatest decarbonising potential. Of 20 solutions analysed by PwC, technologies that can deliver more than 80% of the emissions reduction that is possible by 2050 have received just 25% of climate-tech investment in the past eight years.
Note: Figures may not sum to 100% due to rounding. Emission data is allocated to the end sector associated with emissions. For example, energy use associated with mobility is allocated to mobility and transport rather than to energy.
Source: PwC State of Climate Tech 2021, analysis of Dealroom data
To rebalance this investment map and accelerate action requires four things:
Companies need to step up their investment in implementing decarbonisation technologies. There is enough evidence of what works to spur decision-making. Because of the momentum and innovation of trailblazers and early adopters, in fact, the low- or no-emissions alternative is already the more economically viable one. Renewables are often a cheaper source of energy than fossil fuels.
Investors need to play for the longer-term value creation. Once a technology develops a proven business model, capital flows quickly to it and can help to accelerate adoption. But longer time horizons are needed for some of the most impactful solutions, and investors aren’t yet willing to accept notably lower returns for the sake of the planet, as a recent PwC survey found.
Companies, climate alliances and governments must come together to increase funding and share insights that enable breakthrough innovations and trigger sectoral tipping points, whilst also supporting commercially ready technologies to scale up over the next decade.
A global effort requires global participation. Funding must be found to address resource disparities and imbalances among countries and ensure a just transition to a low-carbon future.
Though some of the solutions for saving the planet from catastrophic climate change might rightly be called rocket science, many of the actions that need to be taken are not. The early adopters have shown that it is possible to reduce emissions through new ways of working—and those just starting out can follow in their footsteps. Even as new crises demand global attention, working on climate change solutions must be accelerated: the risks of doing nothing far outweigh the risks of acting.