A Pivotal Moment in History

21 September 2022 – Generation Investment Management, the sustainable investment management firm, today released its sixth annual assessment of the global state of sustainability. Against a backdrop of a seminal year in the transition away from fossil fuels, The Sustainability Trends Report analyses the core drivers of the shift to sustainability across the global economy – from the power sector and industrial emissions to buildings, land, food and climate finance.

Al Gore, Chairman of Generation Investment Management, said: “We find ourselves at a tipping point in the Sustainability Revolution. Geopolitical events of the past year, including the devastating war in Ukraine, have highlighted the urgent threat that fossil-fuel dependency poses to global security and democracy. We must embrace this moment as a global epiphany – and indeed, this year, world leaders are beginning to rise to meet this moment, with the EU taking critical steps to rapidly scale-up renewable energy capacity and the United States passing ground-breaking investments in climate solutions with the Inflation Reduction Act.”

“Amid the reasons for optimism, we cannot afford complacency in our efforts to confront the climate crisis. The report outlines those areas of the global economy, particularly in the most highly-emitting sectors, which still require ambitious leadership, tangible action and robust finance. If progress is to be made, the momentum must accelerate, yet it continues to be threatened by a challenging economic and political environment.”

Two major developments this year have raised the chances of a rapid acceleration in the transition to clean energy. The war in Ukraine has thrown the risks of European dependence on Russian fossil fuels into focus, prompting the EU to raise its goals for renewable energy. Meanwhile the Inflation Reduction Act in the United States promises to help cut emissions by as much as 40 percent below 2005 levels.

While these are encouraging signs, the report demonstrates how policy, technology, public opinion and capital allocation decisions could all influence the long-term outcome of this pivotal moment:

A CONVERGENCE OF AMBITION – THOUGH RISKS REMAIN

The war in Ukraine poses a threat to Europe’s clean energy transition as urgent investment into fossil-fuel infrastructure independent of Russian supplies risks locking in dependency on dirty energy (e.g., new pipelines and new import terminals for liquified gas). Simultaneously, the dangers of fossil-fuel dependency are more starkly revealed than ever. How Europe resolves the tension between its near-term supply crisis and its long-term interests will determine whether the EU remains a world leader in battling the climate crisis.

Since the invasion of Ukraine, the EU has pledged to accelerate its already ambitious goals to reduce greenhouse gas emissions. Meeting the new targets will require a radical, rapid scale-up in renewable energy. This acceleration will be supported in the United States by the Inflation Reduction Act which commits hundreds of billions of dollars to the development and deployment of climate solutions.

RAPID POLICY AND LEGISLATIVE CHANGE IS NEEDED – BUT THE PLAN IS IN PLACE

The sense of urgency means there is a need for speed in the European energy transition. However, barriers remain, even in the roll-out of developed technologies such as onshore and offshore wind projects, where significant regulatory and technological obstacles remain for both. The financing mechanisms to support the development of large renewables projects are a work in progress and require urgent public policy attention. The EU has a plan to solve many of these bottlenecks, and the speed at which these are tackled will show the commitment of the bloc to the energy transition.

POLITICAL & ECONOMIC TURBULENCE REMAIN THREATS TO A JUST TRANSITION

Developments in policy and public climate investment funding are highly encouraging. The energy security crisis in Europe sets the region in a position to develop cost-effective climate solutions that will benefit not only member states but also can be exported, resulting in significant economic gains from becoming a main supplier of the climate solutions the world needs. However, these gains remain fragile. The past has shown that public concern about the environment weakens in times of economic distress. In Europe and the United States, the newfound commitments will need to be defended as the political and economic environment becomes more difficult.

Other accelerating trends highlighted by the report include:

Power: Good news wrapped in bad news

• As emissions from the power sector hit an all-time high, the first and most important task of the energy transition is to clean up the power grid.
• Significant progress has been made in highly developed economies. Meanwhile, in places where emissions continue to rise, they are doing so more slowly than previously.
• The report highlights that emissions from global electricity production are almost certainly going to peak, possibly as soon as 2025, and then begin to fall.

Transportation: Ready for lift-off

• The rising popularity of electric cars might be the single best piece of news for the energy transition in 2022. There is no longer any doubt that the world’s automotive fleet will be electrified.
• However, the transition is being slowed by shortages of critical minerals like lithium. Continuing issues around government policies and charging infrastructure remain.

Buildings: Fresh ideas needed

• Buildings are responsible for 6% of global emissions. The building-energy problem has become urgent, if only because so little progress has been made solving it.
• Governments have yet to find the right mix of policies to speed up the transition to a greener stock of buildings. Rates of renovation and energy retrofitting remain low all over the world. For example, at the rate the United Kingdom is installing heat pumps in old homes, the retrofit will be completed in 600 years.

Industry: Building blocks of civilisation

• Emissions from industries like steel, cement and chemicals remain a major unsolved problem, with few government policies in place to speed the transition. The earliest stages of a green transition in steel manufacture are occurring, with plants under construction that will use clean hydrogen as their energy source.

Land & Food: Saving nature

• Rates of forest destruction and species extinction remain at worrisome levels as developed countries fail to come up with suitable financing mechanisms.
• Repeated promises by Western corporations to eliminate forest destruction from their supply chains have delivered little progress.
• To confront the issues of food supply amongst a rising population, and the challenge of reducing emissions from the agricultural sector, the environmental performance of the food system is more important than ever.

Financing the Transition: All the wrong places

• Annual investment in the clean economy will soon surpass $1 trillion. However, to limit global warming to 1.5C will require $2 trillion annually by 2025, and $4 trillion by 2030.