I was very fortunate to spend time at COP 26, engaging with many leaders from business, government, finance and NGOs. My overriding impression? Any complacency that may have existed in the past is gone. There's a shared understanding that time is running out and decisive action to mitigate climate change is both imperative and time-critical.
The need for things to happen fast is all too real. Even if all the initiatives and pledges agreed at COP26 are achieved, we'll still miss the target to keep warming to 1.5°C or under. In fact, estimates suggest that we'll be well above 2°C. And the window for bending the curve to get back on track to 1.5°C is closing fast.
CEOs taking action
In research that Accenture carried out with the UN Global Compact, this sense of urgency is evident among CEOs around the world. Most (74%) say that they've started to change their business models to become more sustainable, and 81% are developing sustainable new products and services. But while that's encouraging, the targets that we need to reach by 2030 and 2050 remain extremely challenging. These include a 40% reduction in emissions by the heaviest polluting industries – in less than a decade.
To achieve that, businesses need to drive action themselves and many are ready but it is also clear that they need strong support from governments. But only 18% of the CEOs we surveyed say they believe they’re getting that today from policy and regulation. And only 30% of CEOs believe governments have a good understanding of business opinion on climate policy. Bertrand Schmitt, CEO, BDR Thermea Group, sums up the sentiment of many CEOs: “From COP26 we would like to see more clarity from governments and proliferation of measurable targets, if the pressure is there and the money is there, we are capable of doing unbelievable things.” 1
Reading the insights and perspectives from CEOs, it becomes clear that there is a major disconnect that has to be closed. And part of the solution to achieve that is to ensure that business leaders are engaged in policy development and regulatory process, where they view themselves as partners, rather than at the receiving end of stringent regulations, which will inevitably follow. We could certainly envisage this collaborative process starting with the heavy emitters – energy, steel, concrete, chemicals, automotive – and then expanding to other sectors.
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Only 30% of CEOs believe governments have a good understanding of business opinion on climate policy.
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So, what are some of the areas that I believe an effective policy response will need to address? One of the clearest for me is the recognition of the scale of capital investment that will be needed to transition from heavy carbon industries to net zero.
Industries such as oil & gas, cement and steel manufacturing have invested billions in capital assets over many years. These can't simply be decommissioned or repurposed overnight. To avoid them becoming stranded assets, government support in the form of assurance on investments and ROI, tax credits, other accounting mechanisms, and offset schemes will be needed to align to the net-zero trajectory and de-risk some of the investments.
Reflecting real prices
We also need a way to price in the true environmental cost of the goods and services that we consume. The depletion of natural assets involved in the production of countless everyday items is not currently reflected in the price we pay for them. A regulatory regime that enforced the true cost would change the calculus of value and drive a shift in behaviour. Projects that may have been financially feasible when natural capital is not taken into account might look very different once it is factored in.
When this happens, behaviour will change in one of two ways. Either consumers will need to pay more – but passing on the higher price of non-sustainable goods and services to them is unlikely to be palatable. Or the producer will try to absorb those extra costs, meaning they’re likely to rethink their production processes and raw materials to achieve cost and capital effectiveness. As Börje Ekholm, President & CEO of Ericsson, puts it: “To realize the promise of true multi-stakeholder climate action, governments must move beyond aspiration and put enabling policies in place to catalyse and support real societal change — from consumer behaviour to industrial transformation.” 1
Adoption of the Paris Rulebook and Article 6 provisions on carbon markets and international mechanisms will go some way to implement consistent carbon pricing mechanisms and creation of an emissions marketplace with stronger accounting frameworks, but we need to make a lot more progress on this front.
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“From COP26 we would like to see more clarity from governments and proliferation of measurable targets, if the pressure is there and the money is there, we are capable of doing unbelievable things.” 1
-Bertrand Schmitt, CEO, BDR Thermea Group
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Bridging the North-South divide
For economies in the global south, the challenge is even more acute and complex. Thirty-one percent of CEOs in the global south say their inability to access capital is a major risk preventing their business from shifting to a low-carbon economy, in comparison to just 16% of CEOs in the global north. T.V. Narendran, CEO & Managing Director of Tata Steel Ltd, describes the challenge “At COP26, the developing world and developed world need to come to a common understanding on the way forward. Capital flows from the developed world to the developing world, and thus policies, must be understood uniformly across the world.” 1
So financing is going to be critical. And the $100 billion Climate Finance goal is only the beginning. To effect the changes that will enable the global south to achieve economic growth and net-zero targets simultaneously will require trillions of dollars. That $100 billion has to serve as the seed capital for far higher amounts of private sector investment running into the trillions.
Frameworks for financing and accounting have to be in place to help facilitate that investment. And there’s some good news here. The IFRS Foundation has announced new standards for sustainability disclosures through an International Sustainability Standards Board (ISSB). Once implemented, the standards will enable comparisons and insights into performance that we simply have not had until now. That's going to help investors to identify the most promising opportunities and where progress is being made.
It's likely that we will see demands for far more frequent reporting too – and I expect to see a requirement for annual disclosures become the norm. Indeed, in the UK the government has already said it will require all companies listed on the FTSE to provide reporting on sustainability.
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The clock is ticking
As the clock runs down and pressure to act mounts, businesses and governments will have to work ever more closely to achieve real progress to net zero. The resolutions made at COP26 represent a start. But countries are expected to return with detailed action plans at COP27 in Egypt next year and adhere to an annual checkpoint process. This will certainly raise the pressure to act fast and improve accountability in the process.
Governments understand all too well that mitigating the impacts of climate change is a must-do. If they don't see rapid progress, it's possible that we will see a much tougher, mandated approach to curbing emissions. It needn't come to that. With government and business working together, it should be possible to develop the blend of regulatory frameworks and incentives that can accelerate progress and get us where we need to be. That will be the best way forward for government, business – and the planet.
1 UNGC-Accenture (2021) CEO Study Special Edition: Climate Leadership in the Eleventh Hour