Businesses told they can’t wait for certainty in climate transition

The Bank of England’s executive director for financial stability strategy and risk has told UK businesses they face a series of challenges in their efforts to drive net zero.

Speaking at the fourth anniversary dinner of Chapter Zero, Sarah Breedan warned the world was in the midst of the decade which will be crucial to its ability to combat climate change and global warming.

“The latest IPCC synthesis report provides yet another stark warning of the impact that climate change will have on our planet,” she said. “We are now a third of the way through the decisive decade; a decade where we will need to cut global emissions by over 40% if we hope to limit warming to 1.5C.1 And yet global CO2 emissions continue to rise.”

“For us to meet this challenge, we need to collaborate and to take individual responsibility for the role we each play.

“For the Government, it is to set out the pathway to net zero. For each of you here today – and the firms you represent – it is to apply those pathways in boardroom decisions; decisions that will not only help facilitate an orderly transition, but also help ensure the long-term relevance and value of the companies you lead. For the finance sector, it is to support and enable that transition. And for the Bank of England, it is to work within its objectives to ensure the financial system is resilient to the risks from climate change and supportive of the transition to net zero.”

The challenges are clear, Breedan added.  The first challenge is that filling capability gaps in the transition finance infrastructure, although it takes time, “so we need to continue to take urgent steps now”.

“Collectively we need to equip the financial sector with forward-looking information from the real economy to allocate capital effectively and mobilise finance at scale,” she explained.  “That means the rapid implementation of ISSB standards, finalising the Transition Plan Taskforce’s framework for transition plans, and the adoption of innovations that reduce greenwashing such as product labels.

“The Government’s 2023 Green Finance Strategy sets out further detail on the timeline for Sustainability Disclosure Requirements and commits to reflect developments in international standards. It also commits to consult on the requirements for the UK’s largest companies to disclose their transition plans.”

Breedan added: “But, the responsibility for driving forward the transition to net zero is not only for governments and the authorities in building the frameworks. As NEDs, it includes all of your firms in using those frameworks. And you can, and must, make progress now whilst policy is developing – ahead of regulation and to support the development of best practice”.

She said the second challenge is that the world does not stand still.

“We have seen unexpected political and economic headwinds and it seems prudent to assume more will come.

“With unexpected headwinds and limited bandwidth, longer-term issues can end up deprioritised. Issues do not though go away – quite the opposite, they build in the background. So we all need to be nimble and adaptable in our responses to the near-term whilst continuing to make progress on the long-term.”

Breedan said: “We must also learn lessons as we go. Russia’s illegal invasion of Ukraine, for example, was a shock to our transition pathway and highlighted the sorts of disorderly transition risks we have been worried about. We saw first-hand the economy-wide costs of a necessary reduction in (Russian-imported) fossil fuels before alternative energy sources were in place – a reminder of the costs of disorderly transition.

“But we cannot ignore the broader challenges. The fallout of this crisis and the near-term imperative to tackle energy security issues has reduced bandwidth to address other issues.”

The third challenge is that it is difficult, but essential, for real economy and financial firms to make transition-driven business decisions in the absence of complete clarity on our pathway to net zero, she continued.

“It is easy for me to stand here and tell you that you should be making decisions now that stretch many years into the future, to manage the risks and seize the opportunities of net zero, without full clarity on the policy path to get there,” said Breedan. “But we need to recognise that setting clear and comprehensive policy will take time, likely years. The recent Green Finance Strategy takes us forward in a significant way, but the extent of policy making is formidable.

“We should also not be in any doubt that the transition is already building, creating opportunities and crystallising risks, and that its speed will only accelerate.”

“So firms cannot, and should not, delay taking action to better understand how transition might impact their businesses,” she said.

The fourth challenge is that system wide change is complex as the actions of one are dependent on actions of others.

“Each firm should be stretching its horizons – building capabilities now that enable action to drive long-term reductions in emissions through their value chain,” Breedan said. “That does not mean immediately ceasing to deal with high emission counterparties and suppliers. That does not necessarily remove emissions, perhaps chasing them into the shadows instead.

“Rather, economy-wide emissions reductions will come through proactive engagement with counterparties and suppliers, and decisions aligned to the transition over time. This means understanding the needs of firms up and down the supply chain and having difficult discussions about steps to reduce emissions.”

She concluded: “We know the costs of transition to a net-zero economy are lowest with early and well-managed action. And we are making good progress in supporting that transition, arguably more than we might have expected given the shocks we have faced.

“But there is still much more to do. We have not yet reached the tipping point where we have built the capabilities and the transition finance infrastructure that will support the right strategic decisions in an unavoidably uncertain transition.

We all have a role to play in driving progress. Governments globally have the key role in developing the policy paths and infrastructure that deliver the transition and draw us closer to this tipping point. Central banks and regulators can operate within their objectives to catalyse, complement and amplify those policies. And business and finance can – indeed in order to manage their future risks will need to – make progress whilst policy is developing, ahead of clarity on sectoral paths and regulatory practice. Be assured that the difficult conversations that follow are a sign of success on our pathway to net zero, not a sign of failure.

“Waiting for certainty and perfect information creates an excuse to go slowly. But this is a collective action problem where seemingly rational individual inaction makes our collective future problems much bigger. So we must not let perfection be the enemy of progress. And after all, managing uncertainty is what you do all the time. Be brave here too.”