A lot happened in the climate change space in 2021 – and many believe that the awareness around the urgency and magnitude of this issue went mainstream, somehow, at the turn of 2021.
This is (hopefully) no surprise to those that have spent some time in the climate and sustainability space, but the momentum seems undeniable now. 2021 of course culminated in the COP26 conference in Glasgow. While some progress was made – particularly in the area of market-based mechanisms – there is still much to do to support the achievement of our global temperature goals of limiting temperature increase to 1.5°C by 2100.
In 2022, we expect to see this momentum continue and more work being done to achieve decarbonisation across the economy.
Net-zero targets: From Goals to Plans
In the last couple of years, countries and companies have been increasingly setting net-zero targets. According to the Net-Zero Tracker, 136 countries and 682 of the 2,000 largest companies in the world have set net-zero targets (normally with the target year of 2050 – which is aligned with some decarbonisation pathways to the 1.5°C thresholds). In addition, a further 1,134 companies have made commitments to achieving 1.5°C under the Science-Based Targets Initiative – which implies the achievement of net-zero emissions, with minimal use of offsets, by 2050.
It is almost certain that the number of companies making commitments to net-zero emissions by the middle of the century will increase in 2022 and beyond. Further to this, there will be more scrutiny on these targets and there will very likely be increasing interest in how companies intend to achieve these targets – as well as their roadmap/short-term targets. It’s one thing to set a target by 2050, how that turns into actual action in the short-term will be critical to disclose as soon as possible. Stakeholders, which includes investors and lenders, will increasingly request detail on these roadmaps.
Supply chains: The Most Mysterious Part of All
There has been a focus on sustainability/ESG within supply chains and more recently, a view that larger organizations should have visibility of the emissions intensity of their upstream and downstream value chains – exploring their total impact from not only their own emissions but those resulting from their value chain activities. We expect to see more demands for transparency in supply chain impacts and increasing requirements to both estimate emissions and set targets for them also. At an enterprise level, this will mean more calls for target-setting for Scope 3 emissions and/or inclusion of upstream carbon intensities in product carbon footprint calculations. This will, in turn, impact smaller organizations that exist within enterprise supply chains as there is already evidence that enterprises are seeking to get information on GHG emissions from their key suppliers and using procurement as a lever for decarbonisation.
This isn’t limited to enterprises as Government procurement is also looking at how to incorporate detail of emissions intensity into decision-making processes.
This area is particularly difficult with CNBC reporting it as ‘the toughest carbon emissions for companies to capture”. Unravel’s a method to enable this measurement and carbon abatement done with ease, speed and at scale, will hopefully alleviate the pain and difficulties in getting this piece done.
Transparency and disclosure: Money owners and makers join forces
By far, the biggest change in the area of climate risk in the last 15 years has been the development of the framework for disclosure developed by the Task Force on Climate-Related Financial Disclosures. Formed by the Financial Stability Board, this task force released the disclosure framework back in 2017 – informed by the hypothesis that the world’s financial markets were exposed to significant risk from climate change. In particular, potential risks associated with the transition to a zero-carbon economy and those associated with the physical impacts of climate change. There is a view that investors, lenders, and insurers did not have a clear idea of which companies might be best placed to endure or flourish through the imminent changes resulting from climate change and decarbonisation efforts. Without this information, markets were unable to price the impact of climate-related risks and opportunities correctly. The framework provided a way for the finance industry – and as a result, all industries – to document and disclose exposure to climate risk to the market.
Incorporating governance, strategy, risk assessment, target setting and metrics, the framework suggests that climate response should be disclosed via avenues such as annual reports or sustainability reports and that the financial impact of climate risk and opportunity should be incorporated into company financial data.
In the last two to three years, the TCFD framework is starting to be used more widely and has been acknowledged as a key decision support tool by the finance and investment community in particular. While they try to determine whether their investments are at risk long-term, they are encouraging their customers (the rest of the economy essentially) to improve transparency and disclosure around climate risk. At the same time, regulators and stock exchanges are moving to make disclosure of climate risk mandatory for listed or regulated companies. A number of countries, including New Zealand, Singapore and the United Kingdom have released mandatory disclosure frameworks – and discussions are continuing in the US, Australia, Malaysia and others. The combination of both the investment community and regulators requesting this information will usher in an era of increased transparency in 2022 and beyond.
Renewable energy and decarbonisation
Much of the world’s emissions come from the use of energy – over 73% of global emissions arise from the extraction, processing, and use of primary energy sources such as coal, oil, and natural gas. Huge advances have been made in recent years in decarbonised energy options and the provision of renewable energy – as well as in business models to support renewable energy tracking and sale. To fully decarbonise energy consumption, renewable energy will continue to be deployed at scale (it’s the cheapest form of generating electricity now!) with the next big areas of work being in electrification and solving intermittency. Electrification is where everything that can be run on electricity, will be. This includes transport (e.g., electric vehicles, buses, and trucks), heating and cooling (heat pumps and reverse cycle units), water heating, cooking, and industrial heating. Then, as the number of renewable energy increases, that electricity consumption will increasingly be decarbonised also.
2022 will see continued development in supporting renewable energy through energy storage and ways to transport energy from where have lots of renewable capacity to places with limited renewable capacity. Energy storage via different types of batteries pumped hydro and even novel applications of hydrogen will be key to storing excess renewable energy when it’s available. Transporting renewable energy will see further advances in the use of electrical grids – including trans-border electricity sales between countries. There may also be a role for hydrogen and hydrogen derivatives (such as ammonia) in transporting renewable electricity – though the efficiency and cost of this transport route remain a challenge.
Offsets: Avoidance vs Removal
Offsets are an important part of the decarbonisation equation – particularly in the short term as technical abatement options are being developed and scaled up. Although offsets themselves have been in existence for some time, there is an expectation that the rigor of offsets, offset providers, and governance of registries will be under increasing scrutiny in 2022 and beyond. This will build on the work being done by the Taskforce on Scaling Voluntary Carbon Markets and will provide confidence to the market – and to emitters – that offsets being utilized are high quality and represent real emissions reduction. There is also a growing divergence between offsets that represent “avoidance” and those that represent “removal”, which is also being reflected in the pricing of these units. Avoidance offsets are those which represented an avoided tonne of emissions – i.e., emissions that were being emitted (or in the case of something like renewables deployment, emissions that could have been emitted if another technology was deployed) and now are not. Removals are where GHG are actually being removed from the atmosphere; which includes reforestation projects, biochar, direct air capture, etc.
The increased scrutiny on offsets will drive the market towards units with high environmental integrity and will act to improve the integrity of markets overall. For example, both Microsoft and Stripe issued an RFP for high quality removal offsets in 2020. 236 proposals were received by these companies, representing a potential 170 Mt of CO2-e reduced. Of this, only ~2 Mt of CO2-e was considered to be of high enough quality to be used as an offset by them. It is expected that purchasers of offsets will increasingly set restrictions on the type/quality of offsets they will purchase – ultimately causing a split in the market. This is unlikely to be mainstream in 2022 but the separation of avoidance vs. removal is certainly a thing to watch in the coming year.
International policy settings
One outcome of COP26 in Glasgow was that countries were asked to come back to COP27 in Egypt at the end of 2022 with short-term targets for decarbonisation and large increases in ambition for decarbonisation by 2030. The reality is, to have a chance of achieving the goals of the Paris Agreement, global emissions will need to be drastically cut by 2030 – some science suggesting a 50% decrease in emissions by 2030 is required. With many countries still having a target to only peak emissions by 2030, this remains a large challenge to negotiate. Expect to see more pressure being put on governments and more announcements with respect to climate funding for poorer nations to assist with these decarbonisation challenges. Businesses should be also considering what strong decarbonisation by 2030 looks like and what the potential policy/cost implications of deep decarbonisation are. It would be a good idea to start to map out what a strong/high carbon price looks like for your organization.
Clearly, 2022 will see continued momentum in the area of climate change action and decarbonisation. The physical world is already seeing some very real climate impacts, and this will, in turn, drive both innovation and activism – putting pressure on both businesses and governments to have clear, realistic plans to decarbonise; prioritising actual emissions reduction over offsets in the long-term. Net-zero plans are a very good start and provide a North Star for companies and countries to head towards. Next must be the practical roadmaps – which of course starts with having visibility on your value chain emissions and using that to plan out a decarbonisation program.