Capital reallocation key to net zero, global sustainability experts say

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The biggest challenge faced by companies developing a 2050 net-zero transition plan is cost and the huge scale of capital expenditure, according to a global survey by Zurich featuring extensive input from Australian businesses.

The insurer’s report, called ‘Accelerating the Climate Transition: Long-term thinking for near-term action’, also identified three related roadblocks – a lack of feasible technological solutions, regulatory challenges and difficulties in measuring and monitoring impact.

Zurich group head of political and government affairs Matt Holmes said policymakers could support businesses’ climate transition by making large-scale economy-wide interventions, such as carbon-pricing mechanisms to harness the power of capital markets and incentivise innovation and decarbonisation.

“The discussion so far suggests three priorities for action for governments – creating policy certainty, facilitating investment in mitigation and adaptation, and turbo-charging innovation,” Mr Holmes said.

Cost and an unprecedented reallocation of capital – most significant challenges

The survey’s findings came from interviews with industry experts and 668 sustainability executives at companies with more than $US100m in annual turnover, of which 30 were in Australia.

There were six participating sectors – financial services, heavy manufacturing, consumer goods, energy, oil and gas, transport and agriculture.

Half of respondents nominated cost and an unprecedented reallocation of capital – an estimated $US275 trillion of investment in physical assets – as the most significant barrier to development of a net-zero by 2050 plan.

The Zurich report emphasised that neither the public nor the private sector could bear the cost of the transition alone.

The second main challenge was the lack of scalable technological solutions, with the scaling up of existing technologies, such as renewables, expected to drive emissions reduction to 2030.

In subsequent decades, acceleration and roll-out of new technologies were expected to be key.

Finally, 44% of companies surveyed raised the issue of regulatory challenges.

“The lack of clear standards, methodologies and policy certainty were seen as key challenges in the net-zero transition,” Zurich said in a statement.

“Public policy advocacy plays a critical role in breaking down barriers to transition.”

The role of insurance in the transition is to help protect companies from increased risk, driven by concern about physical assets associated with a 1.5C or more increase in global warming, or risks arising from the net-zero transition.

The potential business risks include an inability to keep up with transition plans, supply-chain disruptions, and reputational risk.

Zurich’s outspokenness on climate change follows its withdrawal earlier this year, along with global rivals such as Allianz and AXA, from the Net Zero Insurance Alliance (NZIA), which operates under the umbrella of the Glasgow Financial Alliance for Net Zero (GFANZ).

Members of the NZIA, which was set up under GFANZ in 2021 by former Bank of England governor Mark Carney, have faced pressure from some Republican party politicians in the US over their climate commitments, as well as anti-trust fears.

Companies want to deliver a resilient transition

Companies which have withdrawn from the NZIA have broadly said they would continue to pursue their net-zero strategies but on an individual basis, and concentrate on helping their customers to decarbonise.

The Zurich survey also highlighted that companies wanted to deliver a resilient transition and were concerned about increased risks from climate change.

Without effective risk management and resilience measures, climate change could impact their bottom lines and delivery of transition targets.

Respondents pinpointed supply-chain disruptions as the biggest climate-related threat to their operations, prioritised by 20% of respondents, followed by reputational risk (16% overall, and top in the energy and agricultural sectors), compliance risk (16%) and transition risk (14%).

The survey found that that 85% of companies planning adaptation measures intended to implement their plans within the next five years. NAB, for its part, has been working with insurers to build knowledge and resilience in the face of extreme weather events as the climate becomes increasingly volatile.

Becoming future-ready

Last year, the Asia-Pacific region suffered $US80bn in economic losses from natural disasters, with about one-third of this related to Australia, according to global professional services and data analytics firm Aon.

Peter Cheesman, head of APAC data analytics at Aon, said the insurance industry had a key role to play in mitigating climate risk to support the community and the economy.

“Natural catastrophe analytics should be a fundamental component of business strategy planning, both in the short and long term,” Mr Cheesman said last month.

“Being able to understand the impact of climate on business enables organisations to adapt and increase resilience to be future-ready.

“Through a more robust understanding, the insurance industry can also be better positioned to ensure there is sustainable access to required capital to support current and future business development.”

NAB global insurance sector lead Lyuba Tarnopolsky said the bank was overlaying bank and insurance data to get a more complete picture of risk and help build climate resilience.

This enabled a better assessment of climate risks and opportunities.

“The scale of the climate challenge means no single organisation can solve this alone, so we are pleased to be leveraging our relationship with insurers to help better-informed decisions for the bank,” Ms Tarnopolsky said.

Transition planning

Elsewhere in the Zurich survey, it was revealed that 77%of respondents already had a transition plan in place, with the strongest performing sectors including finance (88%) and energy (85%).

The heavy manufacturing, consumer goods and agricultural industries were not far behind at just under 80%.

“The firms surveyed around the globe are starting to deliver on the net-zero transition, with technology advancements the key delivery lever,” Zurich said in the report.

“Boards and investors are seen as the most important influencers for the transition.

“But there is no room for complacency as greenhouse gas emissions continue to run ahead of a net-zero trajectory.”

‘All Systems Go’ in Australia

A recent report commissioned by NAB from Deloitte Access Economics, called ‘All Systems Go: Powering Ahead‘, found $435bn economic opportunity awaits Australia if it transforms its industrial base and establishes a clean energy platform.

NAB Chair Philip Chronican said Australia has two challenges: getting to net-zero and replacing our existing export industries as global demand falls away.

“All Systems Go: Powering Ahead demonstrates how we can go further and secure our nation’s future economic prosperity by becoming a major exporter of what the world needs to decarbonise,” Mr Chronican said.

“The scale, complexity, and cost of these challenges is profound and the timeframe for achieving them is becoming increasingly pressurised.

“But we can and we need to. The cost of inaction or too little action is far too great.”

 

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