'Climate action is no longer a choice, but a requirement'

The results underscore the urgency of the upcoming climate summit COP29, which will take place from November 11 to 22, 2024, in Baku, Azerbaijan. Roel Drost, PwC expert in climate and nature, explains the alarming figures: 'Although the situation is bleak, there are also glimmers of hope. We must seize these sparks of hope to accelerate the energy transition together.'

PwC's Net Zero Economy Index is a tool which tracks the reduction of energy-related CO2 emissions and the decarbonization of economies. Both globally as well as per country, the consumption and reduction of fossil fuels are clearly depicted using various parameters. 
 
The index shows that the global decarbonization rate has stagnated to just 1.02 percent in 2023. To limit warming to one and a half degrees Celsius, as agreed in the Paris Agreement (2015), the world now needs to decarbonize twenty times faster than we did last year. And because we have made insufficient progress for many years, there is exponentially little carbon budget (the amount of CO2 we can emit to keep climate change manageable), and we now have to work much harder to achieve the goal.

Achieving sustainability ambitions

Roel Drost and his team help companies achieve their sustainability ambitions, for example by creating decarbonization plans and linking them to concrete goals. He is not very surprised by the alarming figures from the index. It is difficult for companies to navigate as they face so many challenges: economic uncertainty, geopolitical tensions, and a shortage of technical talent. The climate agenda is one of the essential challenges, but not the only one. Additionally, in the Netherlands, we struggle with grid congestion: 'This is a significant limiting factor for the energy transition in our country. It is essential that we solve this quickly.'

One of the bright spots is the acceleration due to the obligation to report according to the CSRD, which is already relevant for many companies or will be in the short term. In total, it concerns about fifty thousand companies in the EU. The CSRD offers a transparency obligation, but not a results obligation.

Drost: 'But in practice, the CSRD puts the climate topic on the agenda: now that companies have to provide climate transparency, the level of knowledge increases, and they start working on it. The CSRD directive requires a transition plan that also asks for "Paris-alignment": Companies must show whether their plans are in line with the ambition to limit warming to one and a half degrees Celsius. In this way, the CSRD provides a lot of clarity around companies' climate plans.'

Climate goals vary by company

In practice, you see a leading group, a peloton, and laggards, explains Drost. 'The frontrunners go the extra mile: many of them make a public commitment to climate goals for the medium term, and sometimes companies commit to being 'net zero' by 2050. More than nine thousand companies have now made such a public commitment to the SBTi, the Science-Based Target Initiative.'

'The laggards often struggle with the topic. They often lack a clear sustainability strategy as a guideline to take real action. Often, the short term prevails for them: now that the economy is not doing so well, short-term financial results take precedence over long-term sustainable goals. This only emphasizes the need for a strong, long-term vision for both companies and governments.'

The sustainability agenda accelerates

Drost draws hope from national and EU regulations. The EU has enshrined 'net zero' in the 'Fit for 55' package. In the Netherlands, this is anchored in the national Climate Act. By 2030, greenhouse gas emissions must be reduced by at least 55 percent through a broad package of measures. This has been translated into concrete goals for industry, mobility, and buildings.

One of the most important measures is the ETS system, according to Drost, because it sets a cap on emissions from high-emission sectors such as steel production. This system has been in place for years. 'Companies are only allowed to emit up to a certain level and must buy emission rights if they exceed that cap. At the same time, companies that achieve more than the required reductions can trade their remaining emission rights.

'In the coming years, these "free allowances" will go to zero. This means we will see a significant acceleration in emission reductions through the ETS system. The ETS system works very well and is a positive signal for further sustainability. The system is now being further rolled out by the EU to more and more sectors and is also being enriched with the CBAM (Carbon Border Adjustment Mechanism) system. This system ensures that we do not lose our competitiveness in Europe due to the costs of the ETS system. CBAM provides EU import tariffs on CO2-intensive products to prevent us from importing climate-unfriendly products and also ensures that our industry does not leave the EU.'

Digital Product Passport

CSRD, ETS, and CBAM are just a few of the many measures taken by the EU and member states. And it doesn't stop there. Around 2027 and 2028, the Digital Product Passport (DPP) will be introduced. This passport ensures sustainability transparency at the product level. You will be able to 'scan' each product with, for example, a QR code to find out where and under what conditions it was produced and what the carbon footprint of that product is. Drost: 'I expect a lot from this DPP: it will make consumer choices much easier. Additionally, the DPP also contains technical information to enable circular business models. This includes manuals for properly replacing electronic components and then recycling them.'

Climate action is no longer a choice

If companies do not make sufficient progress in this area, it can have significant consequences for their business. Drost: 'Sustainability is no longer a choice, but a requirement. Fortunately, there are enough companies willing to make a real difference, even if it involves uncertainties and investment risks. They are implementing new technologies in their production processes, and although it is complex, many companies are willing to take that leap. That gives me hope.'