Following a year when the world has experienced 1.5°C warming, now is the time when businesses in the real economy are scrutinising the value of their climate transition plans. Economically, what are the shifts that need to accelerate the transition? And in practical terms, what are the challenges faced by big business when seeking to deliver their net zero commitments? And most importantly, what are the plausible solutions to assist with the task?

These questions, and more, were asked at NatWest’s UK Sustainable Finance Day under the header “Decarbonisation of the UK’s Real Economy” where the role of finance in helping all industries also fell under scrutiny. 

Former Chief Economist of the World Bank and Chairman of LSE’s Grantham Institute, as well as NatWest Group’s independent climate advisor, Lord Nicholas Stern, has worked extensively on the issue of climate change and was the author of the Stern Review. He told delegates that the more the world can do now to reduce emissions, the less it will have to do by way of expensive carbon removal: “The cost of inaction is bigger than the cost of action,” he said, adding that we “no longer should think of decarbonisation in terms of a cost/benefit analysis but rather that there is a prize in cleaning up our economies, and that we are approaching times when cleaner energy generation is cheaper than the dirty.” He then reflected, “We now have in our hands an attractive new story of growth and development, much more attractive than the dirty, destructive models of the past; but we have to invest and innovate strongly to get there.”

Stern cited China as one example of the power of investments. China is expected to have 5,000 gigawatts of capacity by 2030, about 3,000 of which could be renewable (in comparison: the UK currently has 80-90GW). However, China’s renewables capacity will need to be fed into the grid: “China is a good example for a system story – you not only need to resolve increasing production, but how to feed that into the grid too. Whichever country you look at, the functioning of the grid system, its physical size and how it works are going to be major determinants of the success of the energy transition.”

According to Chris Stark, outgoing Chief Executive of the UK’s Climate Change Committee and incoming CEO of the Carbon Trust, there is a growing phenomenon of what he termed “green hushing”: namely the underplaying of decarbonisation policy progress. He believes that decarbonisation should be made as easy as possible for businesses and households alike: “For those on the breadline in this country and elsewhere, decarbonisation will not work if we simply ask them to pay for more. The next phase of this is to get back to basics on what we’re trying to do. We need to make reaching Net Zero as simple as possible not just for climate reasons but for what economists call co-benefits: jobs, beautiful landscapes, cheaper energy, and warmer homes.”

Not to underestimate the challenge, the climate expert said, but “the payback from replacing fossil fuel capital assets is getting shorter and shorter, and is something that requires careful consideration by both policy makers and corporates. Fundamentally, it’s about attitudes towards the investment strategies of corporates who need to lead the transition.”

One of those attitudes that Stark said needs addressing is ‘paper decarbonisation’, whereby corporates achieve net zero in their operations and supply chains, yet fail to generate a material benefit in the real economy: “A corporate may think it is doing the right thing, but if we don’t steer those strategies towards something more useful, we may undermine this transition pretty fundamentally. Transition planning must include “genuinely planning for the impacts of climate change. That means developing a proper foresight on the risks that a business faces in its supply chain and then implementing a strategy to reduce those risks.”

Ultimately, emissions are what matter, and businesses need to know the policy guidance around them as part of genuine transition planning. Stark: “If we know that we’ll have a fully decarbonised power grid by the 2030s, the most meaningful thing a business operating here can do is to electrify that business. Those are steps that accelerate UK decarbonisation, but they are not obvious if you have a net-zero target. So, gaining the understanding what genuine transition means for your business is really important.” 

Here our three NatWest hosts for the event – Caroline Haas, Head of Climate & ESG Capital Markets, Andrew Blincoe, Head of Corporate Banking & Structured Finance, and Stuart Foster, Head of Financial Institutions – share their highlights from the day. The agenda included a panel and two workshops that discussed a range of climate topics such as credible transition plans, decarbonisation tools and the role of carbon markets, while also delivering a deep dive into ESG disclosure requirements and best-in-class sustainability reporting:

1) The race for investment is about risk and returns
As with many investment decisions, the drivers for net zero investment are often risks and returns. On the one hand, investors increasingly recognise the risk-adjusted returns in clean energy technologies and in the clean energy sectors. As a result, year-on-year investment in clean energy and respective technologies climbed 17% last year (according to Bloomberg New Energy Finance), with electrification of transport now the largest area for investment, ahead of investments in renewables and grids. On the other, climate risk presents financial risk, and domestic policies amplified by global agreements drive innovations and patents, which then attract investments.

2) Credible transition plans result from organisational change
Businesses can only pull together a credible and deliverable transition plan if the organisation is changing, and, most importantly, is willing to change from within. The plan, which ought to be built out year-on-year, is an excellent tool to look at progress made and find out what has worked and what hasn’t, and which changes can be made to achieve commitments. A good transition plan is premised on three A’s, ambition, action, and accountability. And some good news: often companies and organisations find that a well-structured transition plan brings economic benefits.

3) The use of data is changing
Data is oxygen for sustainability, but companies face many challenges retrieving the relevant data. Which data is already available? Which data is material, and what is missing? And how can data providers support? If anything, today’s sustainability data challenge can be solved more efficiently thanks to digital tools that allow businesses to process larger volumes of data at a much greater scale and support interoperability. Research has also shown that identifying the right data and adopting technology to decarbonise can save 20% of the decarbonisation costs and expedite the transition. The speakers also pointed to a step-change in approach: less than five years ago, businesses were not able to have a conversation where non-financial data was treated with the same significance as financial data.

4) Sustainability should be organisation-wide

As important as data availability is how data gets turned into information at the right time that helps to change practices by embedding sustainability targets and learnings with the wider internal ecosystem. This means that sustainability objectives don’t solely sit with the sustainability team but need to sit in the different functions. For example, a global supply team should own targets around supply chain carbon emissions and water efficiency while the HR team owns inclusion and diversity goals. Embedding that ownership across an organisation helps create positive engagement from all employees and accelerate the transition.

5) Investors are active in transition planning
Climate-proofing requires climate ownership in portfolio companies, with asset managers setting Science Based Targets (SBT) for their portfolios as value chain targets. To help portfolio companies meet those climate targets, investors are prepared to engage frequently with company boards, supporting them with the development and implementation of transition plans – and challenging them if necessary. An investor said: “The other thing we really look at, and which I think enables you to see whether a transition plan is serious enough and whether the business in question has really thought through how they’re going to reach their long-term targets, is whether they’re quite upfront about what they don’t know and how interdependencies could impact their targets.”

6) Investors and financial institutions are identifying blockers
Challenges facing a business will often be faced by the entire sector. Therefore, investors and financial institutions are holding sector-wide or value chain roundtables to discuss barriers, including what is stopping developments, and issues with faster, increasing investment volumes. Investors are increasingly proactive in proposing public policy solutions to government.

7) Businesses need to join the dots and learn from each other
As people and companies see collective progress, everyone can be encouraged to make progress via many pathways for collective net zero. It is important to discover how capital or other solutions could help a customer on their transition journey, while appreciating that different companies and industries are at varying stages and require different support. Further advanced (typically larger) organisations should learn from other businesses of any size – if only to reflect on their own practice.

8) Banks’ net zero plans will evolve  
It has taken each major institution about two to three years just to set sector-level targets. Over the next two years it will be interesting to see how banks’ portfolios get reshaped based on these targets. However, banks are relying on the natural momentum of sectors to decarbonise, and they are relying on policy being their friend. But as many policies have not delivered against original expectations, there is more work to do. Banks’ and asset managers’ net zero plans will have a significant impact over the next few years, with capital moving out of the emissions-intensive part of their portfolios into cleaner industries.

9) High-emitting sectors need decommissioning finance
When providing finance to high-emitting sectors, there needs to be honesty around the viability and speed of that transition. The finance industry therefore needs to consider providing asset-based green finance or entirely ringfenced finance for these organisations. And rather than calling it transition finance, call it what it is: financing for the managed phase out of high emitting physical assets – “decommissioning finance”.

10) Much optimism for the US Inflation Reduction Act (IRA)
While still in the early stages of assessing the IRA’s impact, green investments in the US are already growing rapidly – despite political uncertainties. For Q4 2023, about $240bn of new investment in sustainable energy was announced, representing a 37% increase from the previous year. Credible sources estimate the IRA will have a significant impact on carbon emissions: about a 44% reduction compared with 2005 levels. Furthermore, estimates show that around 90 million new jobs could be created through the act, (almost one million jobs per year) supporting industrial policy linked to decarbonisation.

NatWest’s climate transition plan includes a number of measurable actions, such as:
 

• A target of providing £100bn climate and sustainable funding and financing to our customers (£61.9bn of this has been allocated).
• Developing partnerships within sectors and across value chains. Within agriculture, for example, NatWest has a partnership with McCain’s to provide discounted lending to farmers to support them moving to sustainable farming practices.
• Working with the Supply Chain Sustainability School to help upskill the construction industry.

Rhian-Mari Thomas, CEO, Green Finance Institute; Sophie Walker, Head of Sustainability Private Capital (Europe & North America), EQT Partners GmbH; Steve Waygood, Chief Responsible Investment Officer, Aviva Investors; Samantha Boyd, Treasury Manager, Funding and Risk Management, Heathrow Airport; Scott Eaton, CEO, Carbonplace; Vera Kukik, Partner UKI Financial Services, Sustainability Lead, IBM; Cindy Levy, Senior Partner, McKinsey; Kate Levick, Associate Director, Sustainable Finance E3G / Co-Head Transition Plan Taskforce; Harriet Cullum, Global Head of ESG Insights, Diageo / Delivery Group Member Transition Plan Taskforce; Daniel Klier, CEO, ESG Book; Mark Manning, Principal Advisor, Regulatory Affairs, IFRS / Delivery Group Member Transition Plan Taskforce; and Sonali Siriwardena, Partner, Global Head of ESG, Simmons & Simmons; James Close, Head of Climate Change & Environment (Moderator), NatWest Group; Katie Murray, CFO of NatWest Group, and Alvaro Vivanco, NatWest Head of ESG & EM Macro Strategy.

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If you want to find out how we could support your sustainability journey with a wide range of sustainable finance and advisory solutions, then please get in touch through your usual NatWest contact.