Don’t take your eyes off climate goals during the current energy crisis!
By Tomasz Gasiński, Director in the Sustainability & Economics Team at Deloitte Polska
Nowadays, it is difficult to remain indifferent to the progressing climate change. We observe the occurrence of more and more rapid and widespread weather changes – hotter summers, milder winters, and phenomena related to soil depletion and floods. Climate change also affects business, its operation and customers. Manufacturing industry, the construction sector and transport are key contributors to global emissions. From their point of view, the regulatory framework within which they operate is a permanent part of their risk assessment and reporting strategies.
Countries responsible for the majority (more than 55%) of global greenhouse gas emissions ratified the Paris Agreement in 2016, crowning the COP21 UN climate change summit. The aim of the agreement is to reduce global greenhouse gas emissions – mainly CO2, but also methane and others – to limit the increase in global average temperature to below 2C, with an ambition of 1.5C, compared to pre-industrial temperature levels. The urgent need to adapt to climate change results from trends and regulatory requirements, reflected in the package of EU Green Deal and Fit for 55, and from the evolving expectations and requirements of customers with regard to their supply chains. The Paris Agreement expects that the corporate world and public institutions should reduce their carbon footprint, including the footprint of their products, by around 50% within the next decade. More and more companies include these demands in their business strategies and communicate them widely by joining the global climate initiative, Science Based Targets Initiative (SBTi).
Companies that do not adapt to these fundamental changes will not be able to compete in the market and will be pushed out of current supply chains.
How does this process work in simple terms? The lack of effective decarbonisation will affect the results on both sides of the financial statements. Due to the limited competitiveness of products, companies that do not adapt will have to downgrade their prices. At the same time, the costs of energy and derivatives (CO2 emissions) related directly or indirectly to the production of the product (supply chain) will be significantly higher than those of the competition. In the medium and long term, such a situation means a loss of opportunities to generate capital for development and return on investment at the level expected by investors. At the same time, financial institutions already require companies from high-emission sectors clear information about their adopted decarbonisation strategy. In the near future, this will extend to all those seeking financing. KPIs will be used as financing covenants. This is important for financial institutions for two reasons. The first is the portfolio decarbonisation goals they have adopted and their desire to increase the green asset ratio; the second is the need to limit the impact of climate risks (transformation and physical) on assets.
It should also be borne in mind that geopolitics, in particular the war in Ukraine and the sanctions imposed on Russia, have reduced the availability of energy resources, contributing to the increase in inflation and slowing down the pace of growth of European and global economies. Soaring and unstable prices of energy resources generate additional risks from the point of view of current financial results and the ability to compete with Asian and American markets. This unprecedented combination of global shocks, from a pandemic to war, has meant that Poland and Europe are now facing the biggest energy crisis in history, which strengthens the arguments for a rapid energy transformation and Europe’s rapid independence from fossil fuels.
The long-term framework of the EU climate and energy policy – focused on investment priorities in the form of renewable energy sources and energy efficiency – has not changed; we are seeing an increase in ambition as to the pace of change. In response to the crisis, the European Commission, as part of the REPowerEU plan, has proposed raising targets for the development of renewable energy and energy saving. This demand has already been supported by the European Parliament, and the final shape of the EU regulations will be known within six months after the negotiations in Brussels with the participation of representatives of the governments of EU Member States.
Despite the short-term increase in the use of coal, resulting from energy shortages and the adopted gas consumption reduction targets (-15% over the next five years), energy transformation is expected to accelerate in the medium term and long term (until 2030 and beyond). In the short term, before we manage to implement the necessary investments in zero-emission energy sources and improve energy efficiency, the whole of Europe must cope with the challenge of balancing the demand and supply of natural gas – especially over this winter. This means reducing demand and increasing energy production from all possible energy sources other than Russian gas. European countries are launching reforms and investments that will lead to a rapid acceleration of investments eliminating the demand for gas and hard coal as such.
The current crisis is not a retreat, but only another counterpoint to irreversible long-term changes towards the Paris Agreement goals. Business should not treat the current crisis situation as a sign of a return to grace of fossil fuels. That would only result in the risk of being unprepared for the green wave of investments that awaits us in coming years. While the energy crisis today forces us to review the role of gas in the transformation, the answer should not be to postpone the reconstruction of the Polish energy sector, but to prepare for a swift leap from coal to zero-emission energy sources. The success of the rapid transformation will depend on the regulatory framework adapted to the specifics of business sectors, and the willingness of the private sector to strategically invest in new ways of obtaining and using energy.
What can business do to mitigate the risk of meeting climate goals? Firms should already be preparing for regulatory changes that are currently being developed at the EU level (including the requirements of the CSRD Directive). According to the provisions of the Directive, in 2025 about 30,000 firms in Poland will be required to report on their goals and policies related to the decarbonization strategy in line with the 1.5C ambition. The adoption of decarbonisation goals in line with the indicated level means the need to reduce emissions in Scope 1+2 (according to the GHG Protocol) by at least 42% over the decade from 2020 to 2030. For companies from the industrial, construction and transport sectors – electricity, heat and fuels often account for more than 60% of costs in their value chain, which means the need to switch to green electricity, as well as a pro-active search for investment and alternatives necessary for greening heat and fuels. This will result from regulatory requirements, becoming an integral part of the assessment or acceptance of suppliers in global supply chains.
Already today, many large organisations are carefully looking at the possibility of long-term neutralisation of electricity emissions under the formula of long-term contracts (PPA type), as well as considering becoming independent from macro risks and the risk of energy unavailability – through investments from their own RES sources. It is crucial that the company’s energy and decarbonisation strategy is in line with the business strategy and supports business development. However, the time window for contracting or obtaining attractive green energy will be slowly closing. In 2025 up to 3,000 companies will be compete for access to green energy, which will limit its availability to commercial customers, as well as significantly increase its price, which will translate into economic efficiency of enterprises.
Anyone who notices the ongoing megatrends and takes the necessary actions related to the development and implementation of a decarbonisation strategy on time has a chance to gain access to new and attractive green markets. It will also improve the business model’s resilience to negative external conditions and adapt its operations to the future expectations of customers, investors and financial institutions. Having a clear strategy and plan to reach the Net Zero level in 2050 with intermediate stages will soon cover all companies in the industry, not just market leaders. It will become the expected standard for high-emission sectors and all elements of the value chain based on energy from fossil fuels.