Climate change: The picture is bleak, but there are reasons to be hopeful

The tools, knowledge and opportunities to deliver the transition to a green economy already exist, writes Penny Apostolaki

Almost a decade after the Paris agreement, with Sovereigns preparing their more ambitious, Nationally Determined Contributions, and negotiations on a New Collective Quantified Goal shedding light on the magnitude and cost of transformation, humanity is at a crucial crossroads.

Increased extreme weather events with high financial, social, and environmental costs are becoming the norm, and highlight that the impacts of climate change are felt now – by every country, every social class, and in every aspect of our life.

The financial sector (including insurance) is front and centre. It shares the responsibility for climate change and nature destruction – and will be impacted by it if remedial action continues at the current snail's pace – but is also in position to make a difference in bringing about the right solutions.

Efforts to address the big causes of climate change (e.g. fossil fuels, deforestation, marine seagrass loss) have been slow, creating a bleak picture for the economy, humanity and the entire planet.

The good news is that we have the intelligence and tools required to implement solutions and they have been perfected to such a degree that change could happen very quickly with coordinated action.

Here are some reasons to be hopeful:

a) The path to transition is well mapped

International research has produced detailed analysis on carbon and technology pathways and other interventions to deliver Net Zero (NZ)¹. We have a very good idea of the contribution required from each region, each sector, and each nation, and the speed of change needed to remain with a chance to maintain long-term temperature rise close to 1.5°C.

A number of initiatives² have also created practical guidance to help embed the transition into business-level decision making and planning.

"ESG is going through a challenging period but that might not be such a bad thing"

There is much better understanding of the opportunities the transition can create and big milestones to achieve success. In the past five years, science and technology has advanced so much that we are in a position to identify quick wins and bottlenecks to help map the most efficient ways to advance progress.

For example, significant gains can be achieved in the near-term by using existing technology and digitisation to maximise energy efficiency and increase electrification of industrial processes³. The speed of innovation in batteries and energy storage has also emerged as an area that can deliver crucial gains in the near term and support greater deployment of renewables.

On the other hand, slow progress in grid expansion and adaptability is creating challenges, and impacts decarbonisation efforts. Circularity, which is crucial for material security and efficient and sustainable development of other technological solutions and (e.g. batteries and wind turbines), is also lagging behind.

b) We know there is no magic solution that will fix everything

Technology is vital for mitigation and will also help keep the remaining carbon budget going for a bit longer, but it is not a 'get out of jail card'. For example, Carbon Capture and Storage (CCS) and technology-based carbon removal are sometimes presented as a panacea, even though they are a small (and often an expensive) part of the solution.

"Many corporations are continuing their sustainability journey, maybe with less fanfare, building momentum for the net zero transition. They will need a policy environment and financial sector that can match their ambition"

CCS can be helpful to reduce emissions from hard-to-abate energy and industry sources but it has technological, economic, environmental and other challenges. It is an example of new technology that has actually been deployed at a much slower pace than predicted⁴.

Nature-based solutions can be deployed immediately and are a more cost-effective way to deliver multiple benefits (carbon removal, adaptation, biodiversity gains, mental health benefits, 'just transition'). However, their contribution also has a ceiling, and financing such activities has proven challenging.

Reducing emissions, replacing processes and products, and changing behaviour to support a smarter, circular way of living remains the priority. However, there is now a wider and better understood range of interventions that can be combined to slow down or reverse emissions and accelerate mitigation.

c) Increased scrutiny coupled with advanced tools, frameworks, and data quality can help separate 'ESG-washing' from real action

ESG is going through a challenging period but that might not be such a bad thing. It is helping the market mature, putting more emphasis on tacking greenwashing and need for greater credibility in transition and NZ pledges, that will help distinguish the real market leaders.

Not only has transparency in ESG been strengthened by regulation (e.g. Corporate Sustainability Reporting Directive, US Securities and Exchange Commission Climate Disclosures), tools such as AI and satellite monitoring, together with an increasing number of public databases and initiatives that scrutinise ESG reports, will make it much easier to determine real progress and areas which need strengthening. A clearer picture of the delivery gap could also help put more pressure on policy makers and other key players to take action to accelerate progress.

Expectations of companies' responsibilities have also matured, and that will bring further scrutiny. The recent decision of the Swiss National Contact Point for responsible business conduct to accept the human rights complaint against UBS is an example of that; and goes to the heart of an argument used in the past – that of passive investment – to claim no ESG responsibility⁵.

d) For those that only care about the bottom line, action now will secure better growth and reduce volatility and shocks

Not only the rate of growth in a 1.5°C-aligned transition is predicted to be higher than under the status quo⁶, the capital flow that comes with the transition is in the trillions⁷. For financial institutions, this creates an enormous opportunity to finance and insure the transition across sectors and regions with new business lines, products, and customers.

It also helps build resilience in business strategies to reduce the impact of climate change on the bottom line. Take insurance, for example: not only has the sector been hit by record high payouts from extreme weather and increasing number of natural catastrophes, insurers are also withdrawing products from traditional business lines (e.g. in California), shrinking their market.

Banks and investors are also impacted, and, at a larger scale, financial stability could be impacted, too. The transition to a green economy opens up new business lines that can safeguard the sector's long-term viability.

Admittedly, increasing uptake of new technology and derisking the financial interventions needed remains a challenge but has become much more feasible. There is more information about past projects' success and better empirical evidence on how quickly new solutions could be commercialised. For example, in 2023, IEA reported that the number of net zero energy technologies that reached maturity level doubled within two years. This is complemented by a range of financial instruments and structures, such as public/private investments, philanthropic capital combined with return-seeking capital, and parametric insurance that have been employed to help with risk sharing.

Financial institutions and Multilateral Development Banks are also pivotal in ensuring that experience and technology are shared across regions and financing is channelled to the regions and activities that need it the most. This will create new business but could also shorten the path to net zero, for example, by helping developing and emerging countries go from coal straight to renewables and facilitate a more efficient decarbonisation.

e) The elephant in the room

"It is the governments that are dragging their feet", I hear you say. And that is indeed a big impediment.

It is governments that need to lead, legislate for, and back the transition in order to get the necessary change quickly. So far, that has not happened, as shown by the latest stocktake⁸, and in some cases, governments are backtracking from their promises.

"With coordinated action, banks, insurers and asset managers can become the catalyst to galvanise collective will"

However, given politicians wish to be re-elected, one would think they would support actions they believe are the most desirable/supported. What makes them think that inaction is the most desirable option? Hence, the spotlight turns again to the private sector, donors and others that have the ear of politicians.

If society and the corporate world advocate for a greener, more holistic approach to growth and prosperity and use their collective financial muscle, it will be much more difficult to ignore it.

Transparency in lobbying activities is also helping with that and there are already calls for such information to be publicly available from both the politicians' side and lobbying/advising side⁹.

f) We have a much clearer picture of the costs and risks of inaction

There is a second elephant in the room and that is the failure of the public and private sector to internalise the GHG (and nature) externalities and get those polluting and / or benefiting from that to bear the costs. To that, we need to add the slow progress of the financial and other sectors in adequately assessing climate and nature risks and making them part of decision making.

Again, the good news is that the analytical tools that are now available provide a very comprehensive assessment of both physical and transition risks. This is important for several reasons.

Firstly, current financial decisions are based on an incomplete picture of costs and benefits relating to climate and nature risks. By internalising the externalities and accounting for climate risks thoroughly, a lot of actions that some might claim "lack economic merit" could well emerge as an obvious necessity.

Such assessments highlight the importance of double materiality and shift the focus not only to those who contribute the most to climate change and nature destruction but to the financial losses that companies and nations will incur – a very useful insight for investors.

They also bring adaptation to the forefront and that is one more thing we now know: Climate change is already embedded in the system, so adaptation needs to progress in parallel with mitigation¹⁰– a cost-effective way to address climate change and will create opportunities for innovative new products and services.

An inevitable but quiet revolution?

We already have the capabilities, know the gaps, and have a clear roadmap for accelerating the transition. The evidence of the crisis that is unfolding in front of our eyes also makes the argument for change stronger than ever; and court rulings create new precedents on regulators and corporations' responsibility to act on climate change.

Many corporations are continuing their sustainability journey, maybe with less fanfare, building momentum for the net zero transition. They will need a policy environment and financial sector that can match their ambition.

Financial institutions are in a prime position to harness – and benefit from – this. They have the experience and capabilities to tackle complex, interlinked challenges, such as climate change, overcoming short-termism while remaining viable.

Financial institutions raised the net zero ambition a few years ago and could do the same again. Maybe not individually, but with coordinated action, banks, insurers and asset managers can become the catalyst to galvanise collective will.

Motivate regulators and society to implement the right measures for sustainable and just growth, and shield the economy from future shocks. The journey remains challenging, but much progress has been made already and the possibility of an exponential breakthrough is closer than ever.

Dr Penny Apostolaki is the founder of Strategy to Green, and ex-Head of Net Zero Solutions at Aviva.