As the world looks forward to the year ahead, it is already clear that climate change will be one of the mainstream themes that defines 2022.
After a year of unprecedented climate-related disasters across the world, and previously unseen ambition from governments, companies and investors around net zero targets and the COP26 climate conference in Glasgow, the next 12 months will see this momentum start to be translated into concrete actions.
As news emerged that the last seven years have been the hottest on record, climate dominated the list of concerns in the World Economic Forum’s Global Risk Report 2022, even as the impact of the Covid-19 pandemic continues to occupy minds in the short term.
“The climate crisis remains the biggest long-term threat facing humanity. Failure to act on climate change could shrink global GDP by one-sixth and the commitments taken at COP26 are still not enough to achieve the 1.5C goal,” said Peter Giger, group chief risk officer, Zurich Insurance Group, at the report’s launch.
Five of the 10 most severe risks the report identifies are environmental, with the three most severe being climate action failure, extreme weather and biodiversity loss. These point to three key areas for business and investors to be aware of – pressure will increase for more, and more stringent, climate policies and regulation.
There will be a greater focus on adaptation in the wake of catastrophic wildfires, floods and other events; and the links between climate change and the natural world, including nature-based solutions, will become more important for all stakeholders.
One of the most obvious manifestations of increased climate concern will be in regulation – in the US, the SEC is due to publish new rules on climate disclosure, following on from mandatory disclosure rules in the UK and Europe, meaning that companies will have to map and disclose their climate risks. And the European Union’s corporate sustainability reporting directive will work its way through the Brussels legislative machine.
Carbon markets are expected by many to remain strong in Europe. Voluntary carbon markets are also likely to continue their strong growth of 2021 as companies seek ways to offset their emissions.
Meanwhile, investors will be asking harder questions of companies about their net zero plans and how they intend to meet them. They will demand strategies that are credible and robust, because their own net zero targets depend on their portfolio companies meeting their goals. Oil and gas companies will be under particular pressure to explain how they will contribute to tackling climate change, with at least 10 climate resolutions already planned for the US earnings season.
Supply chain pressures
Companies will press their suppliers to become more sustainable, while investors and regulators will also push private companies to match the commitments of their publicly listed peers.
All of this scrutiny will become more consistent as ESG ratings become more standardised and green taxonomies are introduced in the EU, the UK and elsewhere. As a result, both investors and companies will have a clearer idea of what constitute “green” activities and what doesn’t, reducing the opportunities for greenwashing.
Climate finance will continue its surge in growth in 2022 after the green bond market reached $1tn in issuance for the first time in 2021.
This finance will continue to flow into energy storage, energy efficiency and renewable energy, with green hydrogen being one of the main beneficiaries. But the focus will also fall on the social aspects of the energy transition, including the need for new skills and retraining, diversity improvements and changing working practices.
But efforts to tackle the crisis will be hampered by the disruptions and dislocations caused by the pandemic, including supply chain disruptions, inflation, debt, labour market gaps, protectionism and greater cyber vulnerabilities, as the WEF report concludes.
And rising energy costs, even though they are caused by high gas prices, could slow the energy transition as governments look for ways to offset costs in the short term. All the indications suggest they will continue to ignore energy efficiency measures that could permanently reduce customers’ (and voters’) bills in favour of short-term fixes.
Finally, elections in important markets such as France, Australia, the US and Brazil could have lasting impacts on climate action around the world, for better or for worse.
Mike Scott will be reporting on business and climate change for Innovation Forum throughout 2022.