Interests in decarbonization among investors and governments surge
Mitigating these risks depends on nations and businesses immediately starting to pursue decarbonization strategies, as New Zealand is already doing. Many governments in Asia-Pacific now recognize this. This can be clearly seen in a flurry of recent announcements to reach carbon neutrality:
- China, the world’s largest carbon emitter, has committed to establishing peak emissions by 2030 and reaching net zero emissions by 2060 – a target that will require accelerating its already massive investments in renewable energy.
- South Korea has set a goal of net zero by 2050 with its Green New Deal investing about US$110b in renewables, phasing out domestic and overseas coal financing by public sector institutions and introducing a carbon tax.
- Japan, in a major shift, has announced its intention to become carbon neutral by 2050.
Environmental, social and governance (ESG) evaluation
75%would reconsider or walk away from investments based on climate risk.
The EY 2020 Climate Change and Sustainability Services Institutional Investor survey shows that investors are critically interested in how organizations intend to contribute to and seize opportunities in a decarbonized economy. Investors are focused on ESG performance, with 75% saying they would reconsider or walk away from investments based on climate risk. When we asked investors what ESG data they would like organizations to produce, respondents said they wanted to see reporting in line with the recommendations from the Task Force on Climate-related Financial Disclosures.
According to EY’s CEO Imperative Study, 84% of institutional investors believe that corporate reporting will shift its focus from short-term financial metrics to a long-term strategy, growth and sustainability.
The opportunities from decarbonization will appear gradually, then suddenly. Boards need to act now before the market reaches a tipping point and organizations without a strategy are left behind.
As investors clearly understand, decarbonization will be an economic disruptor on the scale of the first Industrial Revolution. As the region transitions towards decarbonization, Asia-Pacific will experience changing demand cycles for commodities and new investment patterns for infrastructure. Some commodities will be in terminal decline; others will massively accelerate. New industries will rise to support and leverage clean technologies.
Even industries that don’t appear to be carbon exposed will face transformational change. Supply chains will be shaped by different economic constraints. Carbon pricing and emissions caps could invert cost structures and transform taxation.
It’s up to boards to help their Asia-Pacific organizations to understand and start planning for this new reality. “The opportunities from decarbonization will appear gradually, then suddenly. Boards need to act now before the market reaches a tipping point and organizations without a strategy are left behind,” says Patrick Winter, EY Asia-Pacific Area Managing Partner.
Decarbonization is the priority for Generation Z
The decarbonization imperative for organizations will be further accelerated by pressure from the next generation of consumers, employees and investors – Generation Z, which is already the biggest generational cohort in the region.
As one of the first generations to be born into a world where the impacts of climate change are graphically real, Generation Zs believe business plays an essential role in addressing this existential threat to their future. Asia’s Generation Z population have been known to prioritize decarbonization and seek to buy products from manufacturers who protect the environment and have a sustainable supply chain.
As stakeholder capitalism continues to rise, Generation Z will become increasingly influential. This cohort will be the recipients of the region’s biggest generational wealth transfer in history. As the holders and directors of Asia-Pacific’s family finance, their billions of investment dollars will be directed to the organizations they trust to protect the planet.
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To address the climate emergency, we cannot wait for Generation Z to be appointed to leadership positions. I would encourage the leaders of our organizations to engage with Generation Z leaders today.
Raines says, “To address the climate emergency, we cannot wait for Generation Z to be appointed to leadership positions. I would encourage the leaders of our organizations to engage with Generation Z leaders today – and work together now.”
Addressing climate risks is a fiduciary duty
Ten years ago, board inaction on climate change was justified by the narrow assumption that climate risk was a “non-financial issue.” Now climate change poses a clear, foreseeable and material financial risk – potentially threatening assets, access to capital and market share – decarbonization has landed squarely within the board’s remit.
There is no excuse not to plan for this issue. Unlike emerging technologies whose future form and market impact are arguably unknowable, we know already about the risks and potential outcomes of climate change in the coming decade. It’s possible to look with frightening granularity at a realistic version of the future.
Yet, while most organizations do scenario planning around climate change, few of them are stress testing their business models against these scenarios. If investors are looking for assets with low climate risk exposures, boards have a clear mandate. They should start steering their organizations towards operating models, revenue streams and markets that will drive growth in a decarbonized economy, and divest or wind down operations with high climate risk exposure.
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Questions for boards to ask when exploring decarbonization
Executive teams are looking for board support to start decarbonizing their business models and supply chains. It’s time to start preparing your decarbonization story for institutional investors. Questions for boards to ask management include:
- How will accelerating climate disruptions impact our key markets and stakeholders? Which parts of the business are most exposed to climate risk?
- Do we have targets that reflect globally accepted metrics? If yes, how are we communicating them to our stakeholders? If no, what’s our plan to address this?
- What fundamental strategy shifts do we need to consider to make sure the organization is still operating in 20, 30 or 100 years’ time?
- What is the measurable value from adopting a decarbonization strategy early? Have we thought about the impacts of this on keeping and growing our customer base, attracting and retaining talent, maintaining access to institutional capital and improving operational resilience?
- How can we transform our business model to create products or services that take advantage of the transition to a decarbonized economy?
Don’t be constrained by the ambition of neutrality. Doing no climate harm will not differentiate you for very long. Ultimately, those organizations that adopt a strategy of decarbonization will benefit from the good will of investors, employees and consumers, and the growing, sustainable value that creates.
Summary
Institutional investors are pricing in the physical, market and regulatory impacts of climate change – and Generation Z is putting pressure on Asia-Pacific organizations to play their part in addressing climate change. The region’s boards will play a critical role in steering their organizations on the journey to decarbonization. Planning should start immediately. Organizations have all the information they need to start planning how they will adapt their business models to thrive in a decarbonized economy and remain attractive to investors.
