Category: Sustainable Finance

Risk and Sustainability in Supply Chains

Investigating how firms can protect and decarbonise the arteries of the global economy

Modern Supply chains are both a major source of greenhouse gases and highly exposed to climate risks. Progressively minded companies should critically assess their supply chains and ask two questions:

➡️What are the climate risks inherent their supply chains and how can they be mitigated?

➡️How can supply chains be decarbonised to help push the world towards net-zero.

Below I will delve into how companies can assess and attempt to reduce the carbon emissions in their supply chains. Companies need to reduce carbon emissions to slow the impact of climate change. A warming planet means more incidents of extreme weather. These climate risks will impact supply chains more frequency and with greater ferocity as climate change accelerates.

Climate Risks

⛓️2021 and 2020 were unprecedented tests for supply chains. The impact of the pandemic meant volatile demand for products and energy as well as political turmoil. The result was disruption, inflation and many companies reconsidering their supply lines.

🔥🌊Extreme weather events also disrupted supply chains. Typhoons in Asia, a deep freeze in Texas and flooding in Canada and Germany, plus many other events interrupted trade across the world.

Climate change is already increasing extreme weather events. Over the next decades the world can expect more frequent hurricanes, flood, and extreme heat. Supply chains will be tested by ever more frequent, random, and intense acts of nature. Likely scenarios include:

🌊Flooding of a major export centres such as ports and cities. The flooding of Vancouver in 2021 effectively cut off large parts of Eastern Canada to road traffic. Floods like this will become a regular occurrence causing billions in damages and interrupting the transportation of goods and people to afflicted areas.

🔥Extreme heat resulting in drought and the failure of a major crop across multiple geographies at the same time (Rice, wheat, barley). This scenario would see supplies of staple goods fall and prices rocket. Countries will ban export of staple food products to feed their own populations. The result would be starvation, political unrest and food price inflation across the globe.

🌊Heavy rain in South-eastern China could disrupt the supply and production of rare earth metals. Rare earth metals are a key ingredient in the production of electric cars and many other modern electronic devices. Other countries like the US are now increasing the production and supply of these metals to reduce dependence on China.

⛏️Currently China is responsible for around 80 percent of the world’s production of rare earth metals. Disruption to one region could severely damage the supply chain for the likes of battery makers like CATL, car manufacturers or smart phones.

Identifying Climate risks along the supply chain. Climate risks can be either acute or chronic.

Chronic risks are long term trends such as changing rainfall patterns and long term rising temperatures that impact the environment. These are long term shifts damaging crop yields or industries which in turn impact supply chains.

For example, rising temperatures are already threatening the international coffee sector. A changing climate will cut coffee production, causing many existing suppliers to collapse or experience reduced production. This in turn will force producers to look to alternative suppliers.

Widespread droughts and desertification will force many farmers out of business. Climate impacts will be especially hard hitting in Africa, the Middle East and the Indian Sub-continent. Supply chains will be forced to shift in response to this by finding other sources of coffee or disappearing altogether.

Acute risks are one off or recurring incidents

💨Acute risks include hurricanes, extreme heat and rain and flooding. Extreme weather is already becoming more frequent and intense. Disruptions are already hitting supply chains. Weather related insurance claims have rapidly increased over the last decade. This trend will accelerate over the next decade.

Companies are ill prepared for these disruptions partly because understanding how climate risks are changing the world is a relatively new concept for most of the corporate sector. Most organisations are only now discovering and measuring the risks that climate change poses through application of the TCFD principles.

⛓️Companies will also face problem because they do not fully understand how their own supply chains operate. Companies will need to tackle the complexity and opaqueness of supply chains to discover how risky they really are.

💡Understanding supply chains in more detail will allow companies to identify sectors particularly vulnerable to extreme weather events. Armed with this understanding companies can make contingency plans, consider alternative supply routes or even using dual suppliers.

Other ideas are disaster proofing supplier facilities or production, allowing more stockpiling to be build a buffer for delays and taking out insurance to allow for losses. Of course, it is impossible to forsee how complex unpredictable weather events may play out. But it is possible to be well prepared.

Threat Multiplier

🪖Climate change will also act as threat multiplier, increasing the risk of conflict, uncontrolled migration, and political instability. In turn this places pressure on supply chains. Political violence in the Sahel and Sahara regions have been linked to increasing pressure on scare resources such as water.

⛈️Water supplies are threatened by falling rainfall and rising temperatures (connected to climate change) as well as by a growing population. These knock on, or second order effects, will become more common. However, they will be difficult to predict or even directly connect to climate change, but will contribute to a sense of a more chaotic and unpredictable world.

Firms that consider risk and address decarbonisation in their supply chains will undoubtedly gain a competitive advantage. Consumer demand, government regulation and shareholders are all pressuring companies to decarbonise their activities and by extension their supply chains. The first movers will decarbonise and (partially) derisk their supply chains before competitors.

However, whatever progress is made on decarbonisation a dangerous amount of climate change is “baked in”. Therefore, disruption to trade, logistics and supply chains are sadly inevitable and companies need to be assessing and mitigating these risks now. Of course it is difficult to mitigate many sudden and unexpected events such as hurricanes, or extreme heat waves. Firms will have to learn to live with and adapt to this more volatile, risky and dangerous world.

How should companies react

Companies should be analysing their supply chains for potential climate risk. However, modern supply chains are extremely complex and often opaque. It is difficult for even well-resourced companies to understand how all the commodities, products and components that flow across the globe to create their goods originate from. Supply chains have multiple layers stretching across different continents and run into hundreds or thousands of different suppliers.

This picture is not static, suppliers are constantly changing which adds another layer of complexity. Even a relatively simple product like an electronic toaster can have thousands of different components from hundreds of different suppliers. Despite this many companies like Unilever have tried to push systemic change through their supply chain to make it more sustainable.

Understanding Supply Chains

The first step for a company is understanding their own supply chains. Whether they are manufacturing company in China, a shoemaker in Ethiopia or a pharmaceutical company in Germany. All firms are reliant on a complex globalised supply chain to efficiently create a product. While it is probably impossible to track every step and supplier in modern trade networks. It is possible to focus on the most critical suppliers.

Companies should start with the basics. Identifying tier one suppliers of products and commodities and opening a dialogue with them around carbon emission and setting targets around how they can be reduced.

This is by no means an easy process and tier one suppliers may not want to, or easily be able to reduce emissions data. Another step companies can take to encourage suppliers to green themselves is to set transparent, public targets on emission cuts to act as a target and incentive for change.

Companies may need to take strategic decisions such as buying locally to reduce transportation (and hopefully carbon) costs. In other cases, suppliers may not be able to reduce their carbon emissions and alternative suppliers will have to be found.

Car Manufacturing

🚗The car manufacturing industry is unsurprisingly a heavy user of steel. Traditional steel production is highly carbon intensive. Swedish manufacturers have recently pioneered an innovative technique to create zero carbon steel. but this technology remains in its infancy and has not been widely adopted across the industry. Also using low carbon steel is currently more expensive – costing around 50 % more.

🏭Manufacturers will be forced into difficult choices that increase costs. The good news is that as zero or low carbon solutions become more common, costs will fall. So as zero-carbon steel becomes adopted by more manufacturers and production scales up. Over time the cost of producing steel in a sustainable way will fall making it a more viable alternative.

Second and Third Tiers

The next stage is engaging suppliers in the second and third tiers. This means the firms that indirectly supply a company. In many cases there may be no existing relationship or knowledge of these suppliers, which makes the task much more difficult. In theory there should be a cascading effect as first tier suppliers push change onto second and third tier suppliers.

As firms engage the first tier of supplier for low carbon alternatives, they will naturally turn to their suppliers to ensure they can also reduce carbon emissions. However, this is much harder to track as it relies on monitoring supply chain activity and trusting that suppliers are providing accurate information.

🛰️Improved data and analytics around supply chains can also be an ally in progress. Satellite data, the Internet of Things (which means real time tracking of products), blockchain to verify the exchange of goods can also make it much easier to track, locate and validate supply chains.

Companies have a long road ahead in terms of identifying climate risk and decarbonising their supply chains. But the firms that take the lead in decarbonising, desrisking and understanding their supply chains will give themselves a competitive advantage.

A Guide to Climate Tech: How Technology, Innovation and Entrepreneurs Can Build a Zero Carbon World

Tiny brightly coloured microbes live in Yellowstone park’s volcanic springs which can thrive in incredibly hot temperatures up to 235 C. These so called extremophiles are bright yellow, orange, blue and survive and by turning light into energy. Scientists have long been fascinated by their unique habitat and properties.

The microbes caught the eye of Thomas Jonas the CEO of Nature’s Fynd. The company now takes these microbes and with the aid of water has created a process which can turn sugar into protein. This protein can then be used as the basic building block of an artificial meat product.

Nature’s Fynd was founded to tackle greenhouse gas emissions through food production. The company can produce “meat” with 99 percent less land and greenhouse gases than the livestock equivalent. Nature’s Fynd is part of new wave of companies focused on utilising new technologies to reduce carbon emissions.

Why Climate Tech is a Critical Sector

As the threat of global heating grows the need for solutions grows more urgent. Climate tech is an industry focused on solving humanities biggest problem. 2021 has seen record breaking temperature across the world along with more instances of extreme weather, floods, wildfires and hurricanes. From rocky beginnings as cleantech a decade ago which saw a lot of money pumped into firms but few success stories (Tesla a notable exception).

Now a new wave of exciting companies is emerging which are utilising technology to transition society to a zero carbon future.

Proterra is a leading provider of heavy electric vehicles, producing buses, trucks and shuttles all with zero carbon emissions. Founded in 2004 the company is taking advantage of the fact that more companies and governments are switching to electric vehicles for their fleet. As the number of charging points and policies favouring electric vehicles grows so will the market for these vehicles.

Each degree of warming will make climate tech a more attractive sector. As the problem of global heating grows, the solutions needed will become more urgent.

Pachama allows companies purchase carbon credits and restore nature through forest projects. They use artificial intelligence to monitor the forests and protecting older trees and growing new trees to restore habitats.

Aclima measures greenhouse gas emissions and pollutants at a local level which allows its customers to identify where and how they are contributing to greenhouse gas emissions, giving them the information they need to take remedial action.

Climate tech firms can be divided into seven broad areas:

  • Creating zero carbon transport (electric vehicles) or mass transport solutions.
  • Developing solutions around agriculture, farming and forestry which reduce emissions or even create negative emissions (this could mean a venture like Pachama or vertical farming solutions).
  • Decarbonising the built environment, firms that can decarbonise heating systems or make them more efficient. Or firms that can that make buildings with low carbon materials come under the climate tech umbrella.
  • Renewable energy companies, the most obvious solution for many observers, this can mean the production of solar panels and wind turbines or firms which can optimise energy efficiency, distribution and usage.
  • Companies which decarbonise industry through new techniques such as low or zero carbon cement.
  • Companies which utilise machine learning and artificial intelligence to make use of data sources such as satellite imagery, physical sensors and temperature readings which create a detailed information around the rise of climate change.
  • Carbon Capture and Storage is the most uncertain and unproven climate tech, but if deployed successfully could suck carbon out of the air and store it safely. Reducing the amount of carbon in the atmosphere could represent a silver bullet for climate change. But CCS has yet to be proven at scale.

The huge of scale of change required to get the world to net-zero is breath-taking. Estimates run into US$5-7 Trillion over the next couple of decades to hit current 2050 targets. The good news is that the sector is fast growing. In 2020 companies in Climate Tech raised capital three times faster than artificial intelligence. PWC put this figure at US$16 billion, a large amount but tiny compared to what it required.

How Disasters Could Drive the Climate Tech Sector

Perhaps ironically what will drive more investment and more demand for the products is each new piece of bad climate related news, every natural disaster will raise awareness about climate issues. The many pledges made at international conferences and by individual governments are also driving change.

For example, the EU recently published its sustainable finance taxonomy defining climate friendly activities. While many of the pledges are flawed and some may end up unfulfilled or ignored it does create a powerful sense of momentum.

Global giants Microsoft, Unilever and Amazon have all seen which way the corporate wind is blowing. These firms have all set up venture funds to back climate tech start-ups joining a stampede of new financial backers looking for the next growth story.

43 Unicorns and Counting

The business opportunities in this space are likely to rival previous tech booms and produce new Unicorns (tech firms worth a US$ 1 billion or more) and major new companies. Already there 43 Unicorns in the Climatetech sector, but many start-ups will get absorbed by rivals or simply not survive.

Climate tech differs from Cleantech (which experienced a boom/bust cycle a decade ago). Climate tech is focused on activities which reduce carbon emissions. Cleantech is broader and includes activities which help protect the environment such as water filtration or recycling, but not necessarily reducing carbon emissions.

Why Now? Climate Tech has hit a critical inflection point thanks to various factors:

Both demand from consumers and regulation from governments is driving the corporate sector to find new low carbon alternatives. The Paris Agreement, the EU Sustainable Taxonomy and the Task Force for Climate Related Climate Disclosures (TCFD) are all relatively new policy initiatives which

Energy is the most obvious sector for climate tech to disrupt. Solar and wind energy has already made a major impact on global energy production. Falling costs over the last decade (85 percent in the case of wind turbines) means that renewable energy is competitive with fossil fuels. But climate tech is wider than just energy production. For example, battery storage for cars or on an industrial level is increasingly a vital driver of decarbonization.

More efficient energy storage means that renewables become more effective as they can avoid the vagaries of the wind and sun. Grid management tools using machine learning and other techniques can also make for more efficient energy use. The market for electric vehicles pioneered by Tesla and the batteries which drive them is set to grow rapidly as car manufacturers shift production and governments look to ban their use.

Climate tech solutions can be divided into the vertical which deal with carbon emissions in one industry. For example, reducing the carbon loss from soil through precision agriculture or manufacturing process to make low or zero carbon concrete.

Alternatively horizontal solutions address carbon emissions across multiple sectors. Electric car batteries are a good example of this as they have allowed the car industry to shift to electric cars (EV), this encourages the use of solar and wind energy to produce the electricity to run the cars.  

Machine learning (ML) is another horizontal tool which can cut across boundaries and solve problems. ML uses algorithms which can perform a task normally done by humans, such as identifying pictures of friends on social media, act as a IT support chat bot to solve software issues or collect and identify patterns in satellite imagery.

The seven broad areas in Climate Tech are outlined below:

Transport

Moving people and goods by land, air and sea takes up a lot of energy. Most transport is run on oil products which of course leads to greenhouse gas emissions. It makes sense that many climate tech firms are looking to shift and upset this sector.

Electric vehicle production whether this be car, bus or truck is a highly visible sign of climate tech. Of course, the source of the electricity is key. If the electricity is supplied by fossil fuels, then electric cars are not climate friendly. Electric vehicles are only as green as the source powering them. The production of electric vehicles can also be problematic thanks to the need for rare earth metals in the battery which can be environmentally destructive.

NIO is a Chinese car maker which focuses on making Telsa like electric autonomous vehicles. NIO are luxurious vehicles with ultra modern autonomous driving features. With many countries promising to phase out petrol driven cars, manufacturers are shifting to electric models.

Food and Agriculture

Farms and agriculture are increasingly recognised as both major source of greenhouse gas emissions (around a quarter of all emissions) and a difficult problem to solve because of humans need for huge quantities of food and in particular methane producing livestock. Many policy initiatives are unlikely to impact on agriculture as it has been exempted from carbon pricing.

This challenge has resulted in many of the most climate friendly and innovative solutions. Meat production is a major and growing source of greenhouse gases (especially methane) and there many ethical concerns around livestock farming. The answer is a global shift to a plant based diet.

But of course this desire clashes with people’s love of meat. Food production companies such as Viva and Beyond Meat have used technology to create alternative proteins – which taste and appear like meat or fish but are plant based. These products typically represent 90 percent less carbon emissions than their meat equivalents.

The market for plant based products has grown rapidly. The number of vegans and people demanding more plant based foods has grown rapidly in many western countries. The Michelin Guide recently awarded 81 stars to vegan and vegetarian restaurants. A powerful symbol that the world is taking vegetarian food seriously.

The earth and soil and peat are also a major source of carbon storage and depleted soils and. Regenerative agriculture can mitigate climate change and involves activities which improve soil health and sequester carbon and enhance water retention.

Regenerative agriculture includes practices such as cover cropping and conservation tillage which farmers have been doing for many years but too much of modern farming has become destructive to the land and the result in billions of tonnes of carbon being released from the soil each year

Gingko Bioworks are encouraging sustainable agriculture through testing strains of microbes. These microbes can be used to fix nitrogen in the roots of plants. This  improves yields and reducing the need for nitrogen fertiliser (around 3 percent of global emissions).

Heavy Industry

Heavy industry is the fastest growing source of carbon emissions. The world’s demand for goods and products is seemingly never ending. Metals, concrete, fertilisers, plastics, and fertilisers all produce large amounts of greenhouse gases during their creation. Companies that can reduce emissions, reduce the amount of raw materials or used or make production processes more efficient can be classed as climate tech.

For example, 3D printing companies such as EOS and GE Additive can reduce transportation costs by allowing companies to print components reducing emissions. Hybrit is a Swedish firm which is trying to develop zero carbon iron and steel production from energy source to manufacturing process. Hybrit are experimenting with using hydrogen instead of carbon or coke to aid the reduction process. The reduction removes the oxygen from the iron which is a key part of making steel. Traditionally it is done in a blast furnace and relies heavily on coke (a major carbon source).

The Built Environment

Buildings emit large amounts of carbon thanks to heating and cooling systems emitting heat. But the materials that are used to build houses, factories, road, bridges and all our other infrastructure needs also involve large amounts of energy. Just cement production alone amounts to around 8 percent of all carbon emissions globally.

Efforts are underway to try and reduce this amount by trying to capture the carbon emissions during the manufacturing process. Ideas include switching to different more climate friendly fuel sources and by substituting materials such as using coal ash and blast furnance slag instead of clinker.

Through energy efficiency measures such as modern heating systems, improved insulation, plus smart heat management (often using machine learning) emissions can be reduced. These measures can be introduced into existing homes, but of course it is easier to be put into new builds. Green construction methods cut up front carbon costs through green materials.

Airex is a UK company which uses sensors and smart ventilation to help reduce heat demand in buildings. By cutting energy use Airex can cut fuel bills and using sensors can identify poorly ventilated areas and improve air quality.

Renewable Energy and Storage

Wind turbines and solar panels are the most obvious symbols of climate tech. Across the world renewable energy options are becoming more widespread and cheaper. Widespread industrial battery storage now promises to store energy and overcome the problem of when the sun is not shining or wind not blowing.

Hydrogen promises to be an exciting new carbon free energy source. Hydrogen burns like natural gas but without the carbon emissions. Excess renewable energy created in times of low demand can create hydrogen. This hydrogen can be then stored, transported and used as a zero carbon power source. However, this technology is still in its infancy

Climate Capture and Storage

The most uncertain, controversial, and risky climate tech area is carbon capture and storage (CCS). This is seen by some as the holy grail of decarbonisation but by environmentalists as a distraction from carbon reduction efforts.

Extracting carbon from the air and storing in the ground on a massive scale could theoretically solve global heating. Environmentalists view CCS as a risky distraction from decarbonisation which offers false hope. It is perhaps no surprise that funding has been patchy in this sector. The uncertainty and long-time horizons around CCS make it unsuitable for venture capitalists which prefer faster returns and more established technologies.

However, one source namely oil companies have been the biggest backers of CCS – although results have been poor so far. Expect these experiments to continue as if successful it would potentially allow oil companies to capture the carbon they are responsible for releasing into the atmosphere. Some have speculated that the technology for injecting carbon into the ground after capture uses similar techniques to the deep underground drilling that oil companies have such strong expertise in .

Climate Data and Analysis

The launch of many nano satellites has led to an explosion in the amount and quality of earth data captured. This has led to many new companies emerge to provide data on climate risks and forecasting. Companies like Jupiter Intelligence and Sust Global provide detailed information on physical climate risks for organisations. Understanding how the climate may create risks on a granular level allows clients to how extreme weather, drought, sea level rise and many other factors impact their assets.

Firms in this space use machine learning to process and sift through the huge amounts of data and turn them into actionable insights or financial signals. As well as climate risks this information can be used to monitor crop production, deforestation or reforestation rates (which can feed into sustainability ratings) and tracking natural disasters in real time to aid recovery efforts.

What’s Next?

For the success of Climate tech to continue there are several hurdles which need to be overcome. Firstly, financing needs to continue at an even faster rate, which in turn is dependent on the success of the companies involved in the sector.

Secondly the regulatory environment needs to shift further towards climate tech. This means actions like the phasing out of fossil fuel subsidies which prop up the oil and gas sector. It also means more initiatives like the EU sustainable Taxonomy which determines climate friendly activities. However, the problem is that if the legislation or regulation is too complex there is a risk that it will prove difficult for start-ups to navigate. This gives an advantage to larger firms with existing resources and could stifle competition.

Another limiting factor is lack of talented people in the industry. Climate tech is a young industry and its use of cutting-edge concepts like artificial intelligence means that there is a limited pool of workers to drawn upon. However, as the sector grows and the demand for such skills grow, so will the number of people attracted to it and they will develop the appropriate skills.

The rise of social media industry shows us how quickly a new sector can arise and dominate. The combination of new technology, the growing urgency of the climate crisis and the shift in the regulatory environment means that Climate Tech has a bright future.

How Risk, Regulation and Technology are Forging a New Climate Economy

The convergence of key technologies, the existential global risks that climate change present as well as fast emerging government policies are creating a new climate economy. What does this mean? The climate economy means companies creating goods and services which drive decarbonatization. Climate will become the new lens through which all activities are viewed and sustainability will disrupt virtually every sector and industry from manufacturing to transport to energy.

The most obvious example of the climate economy are the wind turbines which increasingly dot the seas, oceans and hills across the globe. But the climate economy is far wider than just renewables, it means any goods and services that reduces greenhouse gas emissions or addresses the impact of climate change. This could mean companies that produce more efficient engines for trucks to firms focused on protecting global forests

The climate Economy is broadly connected to the rise of Environmental, Social and Governance (ESG) investing. The ESG movement attempts to tackle with the broader non-financial risks and opportunities of investing. Currently most economic activity in the modern world is entirely dependent on energy which is primarily supplied by carbon emitting fossil fuels. However, times have changed and now renewable energy can compete with fossil fuels on price, consumers increasingly favour climate friendly companies and government policies across increasingly seek to reduce emissions.

The New Drivers of the World Economy

The next few decades will see climate (decarbonisation) and more broadly sustainability (ESG) become the new driving force of the global economy. All business will eventually have to embrace decarbonisation and sustainability. Three main trends will drive this: technology, renewable energy is cheaper than ever and continues to become more efficient, but also other new technologies such as artificial intelligence (for more efficient decision making), growing meat in a lab and industrial batteries will all drive decarbonisation.

A wave of new legislation and regulation designed to encourage decarbonisation such as the Task Force for Climate Related Financial Disclosures (TCFD), the EU Sustainability Taxonomy as well as national level legislation to fulfil climate targets will shift vast amounts of capital away from carbon intensive activities. Much of this capital will need a new home, which is where new wave of innovative companies in the climate and clean tech fields will emerge as well as existing firms with the ability to pivot to the new reality.

Perhaps above all the climate economy will be sparked by the unfolding reality of climate change, each unpredicted wildfire. Each temperature record broken, each mm of sea-level rise will force change onto society and inspire new companies in the Climatetech space and force governmental and geopolitical shifts.

A Grand Opportunity

As the global economy shifts toward decarbonisation the opportunities for Climatetech firms will emerge rapidly. Some parts of the world with more favourable regulatory regimes and a technological edge will become leaders in Climatech. China despite its record emissions is a leader in the Climatetech field. Many US firms so often leaders in innovation have taken up the challenge to decarbonise.

Perhaps the key firms in building the climate economy are those which are still emerging. Start-ups could in time become key drivers decarbonisation through innovation and imaginative use of technological solutions. The new wave of climate investment is looking beyond renewables to transform agriculture, food, mobility and much else beside. For example firms such as Beyond Meat, Impossible Foods and New Wave Seafood are offering plant based meat and seafood substitutes which reduce demand for carbon emitting and deforestation causing meat ocean ravaging seafood.  

Technology Rules

Solar energy has dropped 89 percent in cost over the last decade and wind power has declined by 70 percent in the same period of time. This demonstrates the power of applied technology which is a key element to the success of many Climatetech firms. The climate economy is very much tied to the so called Fourth Industrial Revolution. Like previous revolutions before it promises major improvements in efficiency and huge upheavals in society.

The Fourth Industrial revolution promises a dramatic leap forward in the application of robotics, artificial intelligence, quantum computing and energy storage, as well as the mass connection of society and businesses through the internet of things and 5G.

These new developments bring huge global risks such as the increasing exposure of infrastructure to cyberattacks. But also major benefits, more efficient storage and distribution (through smart grids) of energy makes renewables more hugely more attractive, overcoming their traditional limitations such as windless days and night time. Artificial Intelligence advances can help humans monitor climate change risks such as deforestation as well as providing more detailed and accurate predictions and simulations of climate change.

Other new technologies will also prove vital in the decarbonisation process. These include industrial batteries for storing energy, energy efficiency measures (such as more efficient home appliances), cutting edge energy such as hydrogen as well as the electrification of cars, planes, trains, ships all of which will ease the move towards decarbonisation.

Services that employ technology such as those which measure climate risk, carbon trading platforms, measurement of ESG risks and measures will all have a part to play helping service the climate economy.

The New Regulatory Framework

The EU has led the way in providing a regulatory framework for decarbonisation, countries that follow can grow and nurture the climatetech firms of the future.

Nations like Russia are likely to favour a rearguard action and continue backing oil, gas and coal for as long as possible in the hopes that the shift to renewables will be slower than hoped. Others like Saudi Arabia can hedge their bets – able to host vast solar arrays in empty deserts and even become an innovative exporter of blue hydrogen while remaining a major oil producer.

The Task Force for Climate Related Financial Disclosures is designed to push Banks into diverting financial resources into climate safe investments. By identifying the assets at most risk from climate risks in terms of either physical or transition risks banks can avoid projects exposed to climate change. The G7 recently moved towards making TCFD reporting mandatory.

This mass movement of capital will impact over time oil and coal producers who will be unable to access capital as it becomes clear that investing in these industries is not only environmentally damaging but also financially unsustainable. The launch of the TCFD has given rise to a new similar piece of regulation which attempts to measure the financial impact of biodiversity loss.

The EU has recently published its long-awaited sustainability taxonomy which will clearly define which economic activities contribute to decarbonisation. This will make it clear to investors which companies are backing climate friendly projects and which favour carbon intensive activities.

Carbon pricing or emissions trading is another instrument of change. Putting a price on carbon encourages polluters to reduce emissions. The EU is planning to extend its scheme beyond large firms to buildings and transport. This does risk a backlash if users are landed with big bills to reflect the cost of change.

Geopolitical Winds of Change

China’s Belt and Road Initiative (BRI) was built partly so China could secure oil, gas and raw materials such as iron ore. All key for feeding Chinese economic development. The rise of the climate economy could mean geopolitical battles for materials such as cobalt, copper and lithium all vital to develop electronics, batteries and cleantech (A wind turbine uses 4.7 tonnes of copper). This will be mirrored by the fall in use for fossil fuels and materials associated with that industry.

The Next Wave of Government Action

The United States has new impetus with a major decarbonisation plan for the US aiming at a 50 percent reduction on 2005 levels of carbon and international financing for decarbonisation of developing countries is underway. This legislation alone may spur other countries onto more ambitious plans. Perhaps the most critical achievement of the plan will be the demonstration effect.  

The US and other climate action leaders need to show and prove that societies and economies can continue to thrive in spite and because of decarbonisation. The success of these plans will help dispel doubts and excuses for countries still planning a fossil fuel future who can take up new targets with confidence of a positive outcome.

China Laggard and Leader

China is home to 40 percent of solar capacity and roughly one third of global wind power. Its bus fleets are nearly all electric and it is a world leader in terms of electric vehicles being sold. Solar prices have dropped 80 percent wind turbines while lithium batteries have dropped one sevenths of the cost compared to a decade ago. On these terms China is global climate leader.

This claim comes with a major caveat: China is doing little in the short term to decarbonise. The country remains hopelessly hooked on coal and oil imports to power an economy rapidly rebounding from the shock of Covid. China has promised to cap carbon emissions by 2025 but for this to happen there needs to rapid uptake of renewables, energy efficiency measures and a major unprecedented scaling down of coal use.

Countries that fail to embrace the climate economy will face a number of risks: failing to keep up with international regulation like the TCFD and EU Taxonomy leaves them open to transition risks. Continued focus on fossil fuels for countries like Indonesia, Russia, China and Iran make the shift to renewables harder and more painful when it does inevitably happen.

The Shift has Started

There is a long road ahead before the climate economy is a reality. The companies and countries that forge ahead with change now are likely to be the winners. Companies that fail to embrace new green regulation, ignore public sentiment and growing climate risk and geopolitical change will see themselves fall behind and increasingly out of sync with fast changing times. For start-ups and new ventures focused on decarbonisation the next decade will be a golden era for growth as the climate economy picks up momentum.

Quick Guide: The EU Taxonomy on sustainable finance & why it is important

Why Create a Taxonomy?

The 2015 Paris Agreement and 2030 Agenda for Sustainable Development were created to tackle world’s biggest global risk – climate change. But these agreements created a problem. Plans to decarbonise economies had to actually be put into action. So the EU Commission developed the Action Plan for Sustainable Development and then the Technical Expert Group (TEG) on Sustainable Finances to tackle this issue.

The TEG set to work and developed the Taxonomy on Sustainable Finance. The Taxonomy creates a shared language, a lingua franca for investors, governments, policy makers and anyone else interested in defining sustainable activities.

This emerged into a pack including the EU Taxonomy Climate Delegated Act which came into force in April 20201 as well as a Corporate Sustainability Reporting Directive, These along with another a further delegated act will define the technical criteria for identifying the economic activities which contribute to climate change mitigation.

The Green List

Described as a “Green list” or classification scheme for sustainable activities as well as a pioneering piece of legislation. The Taxonomy will create a common language and principles for firms and investors around green investing. It will be a living document designed to change overtime to adapt to new circumstances. The Act is part of efforts to enact the EU’s Green New Deal which promises to shift the EU to a more sustainable future.

The Taxonomy dodges (for now) some critical issues such as nuclear power, natural gas and the climate impact of agriculture. Despite these shortcomings it represents a major milestone in driving Environmental, Social and Governance (ESG) driven investment. It is also likely to influence other nation’s legislation and standards as well as being used by investors across the world as a reference point and guide for their own investing plans.

The Taxonomy lists six environmental objectives which economic activities must help achieve:

1. Climate change mitigation (aka reducing greenhouse gas emissions).

2. Climate change resilience & adaptation (helping the world adapt to a changing climate).

3. Sustainable use and protection of water and marine resources.

4. Transition to a circular economy, waste prevention and recycling.

5. Pollution prevention and control.

6. Protection of healthy ecosystems.

An activity must contribute to at least one of the above points and do no harm to the others in order to be eligible for the criteria. Interpreting the full text of the legislation is likely to keep ESG financing experts, lawyers and environmental specialists busy for a long time.

Who should Use the Taxonomy?

The Taxonomy will be used by banks, insurers and other financial institutions that want to invest in sustainable activities and companies.

How will Users adopt the Taxonomy?

  1. Identify the activities conducted by the company, issuer or covered by the financial product (e.g. projects, use of proceeds) that could be eligible.

2. For each activity, assess whether the company or issuer meets the relevant criteria for a substantial contribution e.g. electricity generation <100g CO2 /kWh.

3. Verify that the Do No Significant Harm (DNSH) criteria are being met by the issuer. Investors using the Taxonomy would most likely use a due-diligence like process for reviewing the performance of underlying investees.

4. Conduct due diligence to avoid any violation to the social minimum safeguards stipulated in the Taxonomy regulation (article 13).

5. Calculate alignment of investments with the Taxonomy and prepare disclosures at the investment product level.

What Information do investors need

Investors will need data about company or issuer performance on the Taxonomy activity criteria for the taxonomy to operate. Data markets will take time to develop as issuers and ESG research and rating companies gather information and data. The data will need to include:

A. Revenue breakdown by Taxonomy – eligible activities, or expenditure allocation to each Taxonomy criteria.

B. Performance against the technical screening criteria, or environmental management data where this is an acceptable proxy for compliance with the technical screening criteria – including DNSH assessment.

C. Management data on social issues: Labour rights policies, management systems, audits, reporting.

Asset managers will then use this investment to create sustainable products and portfolios which will be able to state their levels of sustainability

Sustainable Finance Disclosure Regulation

This information can then be used to demonstrate which products are “light green” (partially sustainable development as objective) or those which are “dark green” – investments contributing to an environmental or social investment.

What do Companies Receiving Investment have to do?

Large or listed firms will have to report on their sustainability risks, the impact of their business on climate and the impact of climate on their business. Firms will have to report what percentage of their future revenues and current activity is aligned with the Taxonomy.

This information will go to investors (see above) who can then use the information to develop financial products and identify in a transparent manner how green firms and financial products really are. This in turn will help the buyers of financial products, shareholders and other stakeholders to get a firm grip of how green their portfolio is.

What Comes Next?

Now the Taxonomy has been published it will come under a great deal of scrutiny as it is a major tool in delivering the Green New Deal. Firms have to start publishing their percentage of their activities which are Taxonomy aligned as soon as 2022.

Doubtless there will be arguments on what should and shouldn’t be included (for example there is a relatively relaxed view on burning wood). The true test will be how much it encourages investors to back sustainable investments. In order to meet the target of carbon neutrality by 2050, there needs to be roughly EUR 1 trillion in sustainable investment a decade. The Taxonomy needs to help investors by establishing a transparent sustainable finance market, free of greenwash for this to be achieved.

The other major achievement may be geopolitical. The Taxonomy could provide an impetus and model for other countries to create similar or complementary legislation, this could be neighbouring UK, the USA, China and Japan. If other countries follow suit this could give sustainable finance the boost it needs to help to truly decarbonise the global economy.

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