Tangible progress is underway on the global energy transition, but far more action is needed – and at a quicker rate – to meet mission-critical targets. 

A new report Accelerating the Transition: Assessing Progress and Driving Action, from charity Accounting for Sustainability (A4S) and co-written with Aviva Investors, warns that despite an “unprecedented shift” from voluntary to mandatory sustainability reporting, emissions continue to rise.

Just six years remain to halve emissions by 2030 and keep to 1.5°C of warming above pre-industrial levels – a goal that scientists stress is vital. But we are currently on a path towards a 2.7°C world. Meanwhile, the biggest and most invaluable carbon sequestration utility we have – nature – is depleting at a rate we’ve never seen before.

Our planet’s sustainability crises, are “intrinsically linked” to the functioning of the global financial system, the report notes: “For the wholesale shift of capital that is required to accelerate the transition, corporations, investors and governments need to pull all the levers available to them.”

Narrative of risk

However, the transition finance gap is enormous, warns A4S Director, Capital Markets, Kerry King “We need to mobilise $3.5tn to $4tn of capital per year up to 2050. And we’re nowhere near that.”

King says a significant problem is that in its current form, the world’s financial architecture disincentivises investment where it is most needed and where the real opportunities lie. 

For example, emerging market (EM) economies contain the lion’s share of key minerals required to support renewable energy technologies – with Africa home to around 60% of cobalt reserves alone. Yet investors are up against higher costs of doing business in EMs alongside an entire narrative of risk that has built up around them. 

“We’re not saying that investing in EMs doesn’t have challenges that you wouldn’t find elsewhere, but we are certainly saying that many of the perceived fears need to be demystified and worked through,” King explains.

Meanwhile, there is a worrying shortfall in corporate preparedness. Around 2,000 businesses are currently reporting via the Carbon Disclosure Project (CDP) – the global charity that runs a voluntary scheme for corporate environmental disclosures. “However, few of those companies have interim commitments in place for 2030, where we really need to be targeting our efforts in the near term – and even fewer have created formal transition plans,” says King. “So, there really isn’t a great deal of evidence yet on how corporates are planning to operationalise net zero.”

King also highlights a disconnect between reporting and strategy. Under the Pension Schemes Act 2021, for example, UK pension providers were mandated to report against the Task Force on Climate-related Financial Disclosures. “We have seen many within the sector take a tick-box approach – often due to limited resources. The burden has meant that many providers are just running through one reporting process, then moving on to the next – rather than having the time to use the results from scenario analysis to make strategic changes.”

Real-world impact

Finance departments are under increasing pressure to comply with new sustainability regulations often relying on tight resources. But King says there are other issues companies are dealing with on their journeys to net zero:

A clash between institutional investors and their corporate investees

Banks and other investors, such as pension funds, have their own decarbonisation pathways. But the top-down demands they are placing on investees may not be relevant to those companies’ business models – which the companies themselves are trying to address through a bottom-up approach.

“On paper, if you’re a pension fund, you could decarbonise your portfolio by moving away from high carbon intensity sectors and assets. But that’s not the same as creating real economic changes in corporate behaviour and therefore having real-world impact,” King says. Large institutions are grappling with how to back companies in the ‘hard-to-abate’ bracket, knowing that they must do so to effect systemic change.

A need for direction from government

Next year, we are due an update to nationally determined contributions (NDCs). Meanwhile, corporates need to understand the government’s direction of travel on the NDCs, so they can feed it into their transition plans. “Government needs a sense of industry sectors’ directions of travel to steer their work on the NDCs. Right now, though, that vital two-way exchange is not happening,” King warns.

Lack of comfort with taking long-term decisions where there is less certainty

Corporates are intimidated by what they see as an inherent vagueness around net zero. There are significant uncertainties in terms of future trajectories and the implications for businesses – and executives like to think that they typically make major decisions based on large amounts of hard data.

“There are many, routine areas in which execs are required to make decisions when they don’t have all the facts,” King says. “Companies must get more comfortable with using narrative or qualitative data, which can provide more useful insights to guide decision making. That’s one area where we’re providing help.”

Holistic approach

Accountants and other finance professionals have a pivotal role in driving the transition, King says. “They have long been key players in strategic planning, budgeting, forecasting, investment decision-making, developing and interrogating management information, and reporting. That means they can leverage their existing skills, insights and experience across data analysis, resource allocation, risk reporting and controls.”

As accountants have a wide range of relationships with other business functions, they can support and challenge them to maintain robust processes. “Finance teams’ work is multidisciplinary. And the transition requires a holistic, systems-thinking approach,” King says.

However, many corporates are struggling to align transition planning with financial planning. Last December, A4S published a case study on the example that NatWest Group is setting on this front. “Our CFO Leadership Network is developing a special CFO Task Force that will guide businesses through the knotty terrain of alignment and help finance teams to unpack and tackle the various challenges.”

CPD and training options

• ICAEW Sustainability Certificate
• ESG: How should the financial statements reflect sustainability?, a virtual classroom 
• Introduction To Sustainability For Financial Professionals, an on-demand Essentials CPD course