Environmental Investments Soar But Emissions Targets Fall Short

A recent analysis by PwC shows that global decarbonization targets are falling short to meet net zero emissions goals, with nine of 20 major economies actually showing increases in carbon intensity over the last year. At the same time, ESG-focused institutional investment is soaring. What’s the disconnect?

A recent analysis by PwC shows that global decarbonization targets are falling short to meet net zero emissions goals, with nine of 20 major economies actually  showing increases in carbon intensity over the last year. At the same time, ESG-focused institutional investment is soaring. Is there a disconnect or not?

Net zero emissions and decarbonization: tracking progress
Although there is growing worldwide consensus by governments, investors, and businesses on the need for large-scale decarbonization to meet global climate goals set by the Paris Agreement, an international treaty on climate change, no country in the G-20, representative of the world’s largest economies, is decarbonizing quickly enough to meet that goal, according to a new analysis by PwC. More than 195 countries signed onto the Paris Agreement, which sets a goal to limit global warming to 1.5 °C above pre-industrial levels by 2030. PwC’s Net Zero Economy Index, which tracks the rate of change needed to limit warming to 1.5 °C, shows progress on decarbonization is falling short, with nine of 20 major economies showing increases in carbon intensity over the last year.

PwC’s Net Zero Economy Index tracks the progress G-20 countries have made to reduce energy-related carbon dioxide emissions and decarbonize their economies. This is done by measuring levels of energy consumption relative to gross domestic product and the carbon content of that energy. In 2021, the Index showed that a global decarbonization rate of 12.9% was required to limit global warming to 1.5°C. However, in 2021, the global rate was just 0.5% while the average in the G-20, which collectively accounts for around 80% of global energy-related emissions, was just 0.2%, its lowest level in two decades. This has pushed the global rate of decarbonization now needed to 15.2% year-on-year to meet the climate goals adopted in the Paris Agreement notwithstanding any future shocks, such as the ongoing energy crisis. That rate, which is 11 times faster than the global average achieved over the past two decades, is further complicated by the current geopolitical and economic conditions, leading to real risk on future progress toward emissions reduction, according to the PwC analysis.

Looking closer at some of the world’s leading economies, China achieved a 2.8% reduction in carbon intensity, but other large economies showed increases in their carbon intensity, in part due to the recovery from the pandemic, including the US (+0.1%), India (+2.9%), Japan (+0.6%), Germany (+1.7%), and France (+1.4%). The best performing country in terms of reduction in carbon intensity were South Africa (-4.6%), Australia (-3.3%), China (-2.8%), Turkey (-2.7%), Canada (-2.2%), Saudi Arabia (-1.8%), South Korea (-1.6%), and the UK (-1.5%). Despite some progress, collectively all nations must accelerate action, with a pressing need to reduce global carbon intensity by 77% by 2030 to meet desired climate goals, according to the PwC analysis.

Businesses, investors and net-zero emissions
Businesses play an important role in that effort through the decarbonization of their own organizations, improving the performance and resilience of their supply chains, and exerting their influence over others. For example, more than 3,000 businesses and financial institutions are working with the Science Based Targets initiative (SBTi) to reduce their emissions by setting science-based targets.

The PwC analysis points out that there is a business case for net zero emissions investment. The rise in energy prices and threats to supply have placed greater demand on fossil fuels in the short term, but strengthen the case for investment in renewable energy capacity for the long term.

Similarly, the financial case for energy efficiency has strengthened, especially in high energy-consuming and hard to abate sectors, according to the PwC analysis, as businesses will be looking at ways to consume less while using energy more effectively.

“Some may argue that the current global energy crisis is a reason to slow down change. We believe it shows the opposite,” says Emma Cox, Global Climate Leader, PwC UK. “A world powered by low-carbon fuels would be better insulated from geopolitical shocks and would benefit from cheaper energy, thanks to the rapid fall in costs of many renewable energy technologies. While it is essential to consider the societal impacts of any plan to decarbonize, that cannot mean slowing down ambition.”

The financial case for decarbonization and other sustainability initiatives is also seen in higher levels of institutional investment in environmental, social, and corporate governance (ESG)-based assets. ESG-focused institutional investment is projected to soar 84% to $33.9 trillion in 2026 and make up 21.5% of assets under management, according to a PwC analysis. This is up from $18.4 trillion in ESG-focused institutional investment in 2021 and represents a compound annual growth rate of 12.9% through 2026, showing a dramatic and continuing shift in the asset and wealth management industry, according to the PwC analysis.

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