A lack of finance is the biggest barrier to reaching net zero by 2050 but raising the investment needed will be a significant challenge.
What is standing in the way of a net-zero future? The answer is the scale of the finance needed and the challenge of raising it. Most companies (85 per cent) require medium or high levels of investment to transition to net zero, rising to 91 per cent of carbon-intensive companies. Yet more than two-thirds of senior executives (67 per cent) say that lack of capital is a significant barrier to net-zero transition. The issue is even more pressing for emerging market companies: three-quarters (73 per cent) cite a lack of capital as a significant barrier.
Investors agree that finance is an issue: 85 per cent say that lack of capital is a significant barrier to corporate net-zero transition and the investment community readily admits that attitude is part of the problem: 82 per cent of investors surveyed believe there is a lack of support for net-zero transition among the investment community.
The transition finance gap is the biggest obstacle to achieving net zero by 2050.
Corporates (67%) and investors (85%) agree that a lack of capital is the biggest barrier to corporate net-zero transition. The other biggest issues are lack of...
For the world to reach net zero, all industries need to find new ways of operating, making investment a critical requirement, especially for sectors with high carbon emissions. Almost nine in 10 investors (89 per cent) agree that if the investment community does not finance the transition of carbon-intensive industries, the world will not reach net zero by 2050. Yet more than two-thirds of senior executives (69 per cent) say investors are reducing their exposure to carbon-intensive assets, making it harder for companies to pivot to low-carbon business models. This could be an unintended consequence of increased environmental, social and governance (ESG) investment; Standard Chartered’s report The $50 Trillion Question found that investors are increasingly considering ESG issues when making decisions, and that trillions of dollars are expected to flow into ESG funds over the next three years. This could result in divestment from carbon-intensive companies at a time when investment is needed most.
To reach net zero by 2050, a global approach is needed, and emerging markets need investment the most. The majority of the world’s population lives in emerging markets, and if economies with vast populations like India and China do not transition to net zero, efforts in the developed world will have a limited impact. However, both companies and investors believe that emerging markets are currently being overlooked. Eighty per cent of companies and 79 per cent of investors say there is a significant gap between net-zero transition investment directed at developed and emerging markets. This is despite widespread acknowledgement of the focus needed, and the amount of private-sector capital that will need to flow to emerging markets.6 Eighty-one per cent of senior executives and 77 per cent of investors believe that significantly more capital must be invested in emerging markets to reach net zero by 2050.
Concerns about risk are blocking capital: 84 per cent of investors state that the high level of investment risk posed by emerging markets is a barrier to financing net-zero transition in these regions. The $50 Trillion Question revealed that concerns about emerging market risk persist despite evidence of strong returns: more than two-thirds of investors believe emerging markets are high-risk, yet only 7 per cent of investors say that these investments have performed worse than their developed market investments over the past three years.
Despite the need for immediate action, the transition to net-zero carbon is a long-term project with long-term benefits. However, companies are not set up to take the long view. Ninety-three per cent of investors believe that short CEO tenure makes it hard for leaders to tackle net-zero transition; 79 per cent of senior executives agree. And almost two-thirds of investors (65 per cent) believe that most business leaders are focused on short-term performance and profitability rather than long-term value creation. However, a leader’s net-zero transition strategy is in fact key to accessing investment. Nine in 10 investors say the net-zero transition story communicated by a company’s CEO is critically important to investment appeal and two-thirds believe that a company’s net-zero transition strategy and leadership is now a better predictor of future corporate success than its past financial performance. If CEOs become climate leaders, this may pave the way to net zero. But under pressure to deliver here and now and with COVID-19 forcing many businesses to focus on immediate survival, 52 per cent of senior executives say their organisation is postponing net-zero transition in order to maximise revenues in the short to medium term. Although they need to take urgent action, companies are struggling to prioritise and make a business case for their net-zero transition.
With a focus on the short term, more than three-quarters of companies (77 per cent) say they struggle to justify sacrificing reliable revenue from a proven business model today, for uncertain revenue tomorrow.
Companies also doubt whether the work needed to transition their organisations will be worth it: 62 per cent of senior executives believe the expected benefits of net-zero transition do not outweigh the cost.
Corporates are struggling with the scale of the net-zero challenge, finding it difficult to take decisive action. Two-thirds of companies (66 per cent) are relying mainly on carbon offset rather than carbon reduction. While carbon offsetting has an important role to play alongside carbon removals and decarbonisation in the transition to a net-zero state, this high proportion may indicate an over-reliance on offset rather than more impactful but more complex routes to net zero. However, moving beyond this approach will be difficult without affordable technology. Almost two-thirds of senior executives (64 per cent) say the lack of available alternative technology at a commercially viable cost is a significant barrier to transition. Until this technology is available, some emissions are almost impossible to eliminate. On average, companies say 32 per cent of their Scope 1 emissions (i.e. their direct emissions) are difficult or impossible to transition.
One of the greatest challenges, however, is building a net-zero supply chain. Almost two-thirds of senior executives (64 per cent) say a significant proportion of their organisation’s emissions are in their supply chain where they have little visibility or control.
Added to this, the COVID-19 pandemic has forced many organisations to put net-zero action on the backburner. Eighty-five per cent of senior executives say that COVID-19 has delayed their transition.
Sign-up is high but there is a long way to go Seven in 10 North Asian companies support the Paris Agreement, substantially higher than the global average of 47 per cent. However, 57 per cent of North Asian senior executives believe their company is not transitioning fast enough, and companies in this region need the highest level of financial investment to get to net zero: 77 per cent of senior executives say they require high levels of investment to transition, compared to 60 per cent across all markets.
Leadership challenges Of the private sector companies surveyed, 50 per cent of senior executives in Greater China say their company is not transitioning to net zero fast enough; 55 per cent believe their company requires high levels of investment to transition. The biggest barrier faced by companies in Greater China is lack of support from their leadership, cited by 72 per cent of senior executives. Another major transition challenge, according to 88 per cent of senior executives, is short CEO tenure making it hard for leaders to tackle long-term issues like net zero transition.
Increased investor support needed The biggest barrier to net-zero transition faced by ASEAN companies is a lack of support from their organisation’s investors (73 per cent of senior executives cite this challenge, 13 percentage points above the global average). ASEAN companies are also facing serious net-zero transition delays caused by COVID: 97 per cent of senior executives say the pandemic has delayed their company’s net-zero transition, compared to 85 per cent globally. Companies in ASEAN view increased operational efficiency and cost savings from sustainable practices as the most important factor that would accelerate their transition (cited by 90 per cent of senior executives).
Held back by lack of finance Fifty-seven per cent of Indian senior executives believe their company isn’t transitioning to net zero fast enough. Support for the Paris Agreement is consistent with the global average: 47 per cent of senior executives say that their organisation supports the Paris agreement.
Sixty per cent of Indian companies say they require high levels of investment to transition.
6 Opportunity 2030: The Standard Chartered Investment Map found an almost USD10 trillion private-sector investment opportunity in contributing to three of the most tangible, infrastructure-focused goals – SDG 6: Clean Water and Sanitation, SDG 7: Affordable and Clean Energy and SDG 9: Industry, Innovation and Infrastructure.
