The concept of reaching ‘Net Zero’ carbon is now at the forefront of political and commercial thinking, but if one thing emerged clearly from the COP26 climate change meeting, it is that all this will come at an enormous financial cost. So how do we go about financing the transition to a net zero future?
By now, most businesses will be accustomed to the concept of Net Zero, essentially the idea that in order to maintain an equitable climate for human existence, we must manage our carbon emissions better, to the point where they no longer contribute to climate change.
By any estimates, this going to be a long and torturous path. The exact metrics and calculations on how we get there aren’t in place, the transition required demands nothing more than a fundamental rethinking of legacy capitalism and processes, plus time is short and global accord is only beginning to come together.
A fraught task, today’s C-suite leader may ask? Well, not necessarily. Among the most potent tools in the Net Zero arsenal is finance. Finance drives today’s world and capitalist society as we know it.
The flows of cash from market to market, government to government and business to business define costs in the supermarket, the new products we see and the relationships and geopolitics that govern the world.
Therefore, utilised intelligently, these same financial drivers can be aligned to rapidly hasten the transition to sustainability and usher in a Net Zero world. So goes the theory.
What about the practice? What kind of numbers are we talking about and what are the impacts on corporates?
Net Zero: the endgame
The BBC estimates trillions of dollars (and that may be a low estimate) need to be spent every year for almost three decades to hit Net Zero targets, according to consultancy McKinsey.
This is no light measure. On top of current spending, the equivalent of half of all corporate profits will have to be invested to tackle global warming, it says. McKinsey highlights that gaining acceptance will be tough, especially from those paying energy bills.
The McKinsey report estimated that the annual cost of getting to Net Zero – when carbon dioxide emissions are completely reduced or offset – will be $9.2tn (£6.8tn). The world is already spending $5.7tn a year to lower the impact of fossil fuels and use alternatives.
Moreover, an extra $3.5tn, every year from 2021 to 2050, will need to be put towards alternative energy sources and land use including agriculture to limit global warming to 1.5 degrees, it said. That is the equivalent of half of all corporate profits in 2020. It is the equivalent of one quarter of all tax revenue, or 7 percent of household spending.
This money will be used on ‘the deployment of new physical assets and to the decarbonisation of existing assets,’ McKinsey said. ‘It does not include spending to support other adjustments – for example, to reskill and redeploy workers, compensate for stranded assets, or account for the loss of value pools in specific parts of the economy.’
There are numerous other reports out there crunching the Net Zero numbers. None are exact. But what is plain surrounds the scale of the financing shift that’s needed; huge, plus the pace we must move at; swift.
Can Covid provide a sketchpad?
This may not seem the most obvious analogy. But in the last two years a great many analysts have noted similarities between the pandemic, the global climate emergency and the role finance plays.
Consider global spending on Covid. Bloomberg reckons that from Germany to Japan, Canada to China, fiscal authorities have spent vast sums protecting their people and defending their economies from the colossal toll of the pandemic.
At the same time corporations, emboldened by unprecedented government support for markets, are selling bonds like never before. The news giant estimates that the borrowing binge has come with a hefty price tag, some $19.5tn in the last year alone, according to Institute of International Finance estimates.
Weighed up against the ‘70s oil shocks and the financial crises that kicked off following 2000, Covid trounces these elements in terms of sheer cost globally.
Let’s peek back at the BBC numbers. They set the annual global cost of getting to Net Zero at somewhere in the region of $9.2tn. Bloomberg puts the annual cost of Covid at some $19.5tn; twice as much. For further context, it points out that The Fed alone has added about $3tn to its balance sheet over the past year, similar in magnitude to its total monetary expansion in the decade following the 2008 financial crisis.
And herein lies the crux of our debate and indeed our options on driving sustainability.
Covid shows how fast finance can evolve
The lessons of the last few years have been numerous and tragic, counted in lives, lost jobs, deprivation, mental health.
But, the world proved it has a willingness and almost unbounded ability to spend in an emergency. The cash flowed freely, to protect societies and invest in solutions.
Spending was allowed to reign supreme for one simple reason; the immediacy of the crisis. The challenge was now and present. People were dying, responses were required today, not tomorrow. The ability to outsource thinking and kick debate down the line was highly limited by the pace of necessity.
Down the years, environmental goals have suffered from a distinct lack of immediacy. We may consider the analogy similar to smoking. The risks are evident and overwhelmingly proven. Yet the problem, psychologically, seems one to push back, with the immediate danger not apparent based against the enjoyment of our existing lifestyle.
This precisely mirrors the climate debate and Net Zero. The science unequivocally tells us we must act now – to be precise it says we are already acting too late.
The evidence points to only a complete reimagining of corporate models as sufficient to tackle the challenge. Yet, debate continues and naysayers haunt both the UK Parliament and governments across the world, challenging the science and seeking to delay the massive financial and strategic inputs required to enable corporates to get to work on Net Zero.
These same governments instantly found cash for Covid. Therefore it’s not unreasonable to ask whether the race to finance Net Zero isn’t about financial caution, the ability to direct money quickly nor the evidenced science. It’s about psychology and politics.
What to do next
The Committee for Climate Change advises the UK government on, you guessed it, climate change. It has produced a paper; Net Zero after Covid: ‘Behavioural Principles for Building Back Better’.
The research argues the Covid pandemic led to large and highly disruptive changes for individuals, businesses and governments. There may be three behavioural principles that explain how people have adapted so rapidly, and how we might “build back better” as we emerge from the pandemic, with a particular focus on meeting the challenge of dramatically reducing greenhouse gas (GHG) emissions over the coming decades.
The key is this; the paper concludes that our collective reaction to Covid has demonstrated, under the most adverse circumstances, we can collectively shift our lives astonishingly rapidly – far more rapidly than is required for the slower but sustained transformation needed for Net Zero.
Further, a positive vision is crucial. If we collectively recognise the appeal and likely inevitability of shifting to a Net Zero society, then we can recognise too that the apparently formidable barriers to this transition can be overcome.
What’s next on financing the Net Zero transition?
First, corporates across the UK and beyond must show an appetite for the concept. They after all are the real workhorses here, whose products, services and operations will be transformed through the necessary finance mechanisms.
Governments and banks must move with similar rapidity to that shown in the Covid example and lay out Net Zero funding streams, loans and finance markets that businesses can align with. Some of this work has already begun.
But most crucially, we must add the badly needed psychological impetus that this crisis is immediate. Price Waterhouse Coopers is the second largest global professional services network. Their comments on Net Zero financing are as follows.
‘We face two challenging truths. We can’t afford not to act. The speed, scale and cost of the transition required are posing serious challenges to policymakers, business leaders and transnational organisations.
‘The hope is that policymakers, armed with the recent International Panel on Climate Change (IPCC) report, transform dire predictions—about what awaits should we not act quickly—into meaningful global policy.’
For the unaware, the IPCC report essentially says we are out of time to act on Net Zero and climate change. Immediacy is essential.
Securing a benign corporate and human future will cost us a vast amount of money. But any other alternative will cost us much more in many horrible ways. This, surely, is the psychology corporates and governments must use to get financing open and running, today not tomorrow.