Four thousand billion reasons to accelerate the energy transition – BRINK – Conversations and perspectives on world trade

If European companies don’t do more to reduce carbon dioxide emissions than they currently promise, Earth’s temperature will be on track to rise 2.7 degrees Celsius by 2100. C ‘ is well above the Paris Agreement target increase of no more than 1.5 C and more than the 2-degree C tipping point at which life-threatening climate change will be triggered. This was the conclusion of the last report of CDP Europe, a climate watch group, and Oliver Wyman on the progress of Europe’s efforts to tackle global warming.

It is worrying to say the least. But according to the report, it doesn’t have to be that way. On the hopeful side, there is the fact that the financial system appears poised to mobilize on a scale that could produce real change. An impressive 95% of bank loans to businesses in Europe come from institutions that are committed to aligning their portfolios with the goals of the Paris Climate Agreement. But for now, it is possible that a gap of 4 trillion euros ($ 4.8 trillion) will develop between loans aligned with Paris and loans aligned with Paris, with much more supply than demand. . For European banks to adjust their portfolios to reflect the Paris targets, they will need to find many more industrial companies – and large industrialists – who not only have committed to the targets but have developed a viable road to get there. The alternative would be to stop lending to them, which is not good for banks, businesses or economies.

The advantages of being a first come

European businesses, especially in carbon-intensive industries, should take two clear messages from this critical report. First, many of them need to significantly accelerate the pace of business transition to become real players in the fight against climate change.

Showing what is possible, the top quartile of companies analyzed in the document managed to cut emissions by 15% in just one year, based on data collected before the coronavirus pandemic disrupted economic activity. But progress is uneven. In key sectors, such as metals production and energy, the emission intensity of individual companies varies up to three to four times, demonstrating the chasm that exists even within the same industry. Future winners and losers are already starting to emerge, and those who don’t move with some urgency may well find themselves in the latter group by default.

Second, those who seize the opportunity can take advantage of what appears to be a massive wave of pent-up funding that is poised to help them succeed. Armed with this financial stimulus, European capital markets have already demonstrated that so-called early entrants will often be rewarded with price-to-earnings ratios three to five times higher than laggards who languish at or below a price-to-earnings ratio. of one. Orsted, a Danish oil and gas company that has become the world’s largest developer of offshore wind energy, is one example. Others are European renewable energy companies Enel and Iberdrola, which, along with Orsted, have been dubbed by Bloomberg as “The new energy giants” and “are now worth more than comparable oil majors”.

The successful management of the energy transition is by no means simple and therefore requires bold leadership and closer collaboration than ever between companies and industries.

Our report reminds executives of public companies that their investors, the ultimate owners of those companies, increasingly expect and demand more than quarterly growth and returns. They are looking for a more urgent response to the climate crisis, and when they don’t see it, they signal their intention to direct financial capital to companies that are firmly moving towards an accelerated energy transition.

Transition requirements

There is no doubt that this transition will not be painless. The boards and management teams of Europe’s largest companies find themselves on an uncomfortably narrow tightrope between the need to continue to deliver today, while simultaneously transforming their businesses to remain relevant tomorrow. But we can’t forget the uplifting accounts of companies that have failed to adapt to changing realities – retailers who have ignored the Internet revolution immediately spring to mind.

The successful management of the energy transition is by no means simple and therefore requires bold leadership and closer collaboration than ever between companies and industries. New unproven technologies, such as green hydrogen, industrial-scale battery storage, and carbon capture, need to be developed, rapidly reduce their respective cost curves, and be deployed globally, as we do. have done it with solar and wind power over the past decade.

Entire mobility systems must be rewired from traditional private hydrocarbon-based solutions to electrified and autonomous alternatives with a shared economy. Innovative financing and insurance solutions capable of supporting these commodity-intensive assets, technologies and infrastructure and services must be created and delivered. Industrial innovation and collaboration are also required in hard-to-scale sectors, such as steel production, to provide the low-carbon foundations needed for the world’s future economic development.

Raise the red flag

As business leaders and governments prepare for COP26 later this year, the report raises a clear red flag. A temperature increase of 2.7 degrees is far from the path mapped out in the Paris agreement and underscores both the need for more ambitious commitments and the respect for them. Rarely has there been such a common threat of the scale of climate change, and rarely has there been so much funding waiting for worthy takers. This represents a tremendous opportunity for companies ready to take the bold steps necessary to transform their industries. And given the goal is to halve emissions over the next 10 years, nothing less than a substantial transformation across the economic spectrum will suffice.

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Paul Cox

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