If companies are to be major players in efforts to achieve net zero emissions by 2050 while positioning their businesses to thrive in the low-carbon transition, they should move beyond go-it-alone approaches that only focus on their own operations or even their own value chain. Instead, organizations should consider adopting a “systems thinking” mindset and work across industries and countries to speed the transition to a low-carbon economy, said Jules Kortenhorst, former CEO of energy transition research organization RMI, at a panel session of the Techonomy Health + Wealth of Our Planet conference during Climate Week NYC. “If we’re going to act in time to prevent the worst impacts of climate change, it’s going to take radical collaboration among companies, governments, finance, and customers in a way we’ve rarely seen in the global economy, including in high-emission industries like steel, petrochemicals, shipping, and aviation.”
During the panel session, “Disrupting Climate Change with Systems Thinking,” Kortenhorst; Bridget Fawcett, global co-head of Sustainability & Corporate Transitions, Banking, Capital Markets and Advisory at Citi; and Scott Corwin, chief strategy and commercialization officer of the Deloitte U.S. Sustainability, Climate & Equity practice discussed how a systems approach can drive global stakeholder participation to fast-track the clean energy transition, finance’s critical role, and the importance of working with developing nations to support their low-carbon transformation.
What do you mean by systems change, and why is it important for combatting climate change?
Scott Corwin: In systems thinking, companies and industries take a holistic approach to transformation, focused on how a system’s parts are intertwined and work together within the context of a larger whole. Applied to speeding the low-carbon transformation of the economy, instead of trying to transform it in a serial or linear manner, or by concentrating on one area to create change, organizations simultaneously look for tipping points in major economic systems, including energy, transportation, food, and heavy industry, to help transform them at the scale and speed needed to achieve net zero emissions by 2050.
In an earlier panel, we heard a statistic that about 50% of companies have made a statement about their net zero pledges, but only 2% globally actually have a plan. Looking at the sheer magnitude and pace of transformation that’s needed to achieve the targets of the Paris Accord, that is likely not enough. I believe A nonlinear, disruptive approach to massively transform these systems can help change the trajectory of organic markets like renewable energy. It has taken us over 20 years to make solar and wind economically viable. We don’t have 20 more years to develop scaled markets for green hydrogen, direct air capture, sustainable fuel, and carbon capture and storage. Done right, a systems approach brings together companies along the entire value chain—upstream and downstream—to drive those markets and leverage them to transform our economic systems.
How do we overcome challenges to system-led climate action? For instance, how do we get competitors to move together on clean energy transformation, when so many companies are hesitant to get out in front because it may be disadvantageous to their income statement and their balance sheet?
Bridget Fawcett: We’ve seen systems thinking executed effectively with COVID and how all the different players around the world—governments, corporates, non-governmental organizations—came together to develop a vaccine to fight this disease. Similarly with climate change, we have a common existential threat to everyone. That is a motivating factor for different parties to think and act differently at scale. And Jules, I was struck by your comment when we were in Glasgow last year for COP26, the UN climate conference, that this was the first time you saw all the systems—actors from the private sector as well as government and nongovernmental organizations—convening to help solve this global problem.
Kortenhorst: I agree that we have coalesced around this common narrative about the urgent need to fight climate change, and it’s a fundamental requirement for us to take the next step, but it’s not enough. We need to work together and to do it with urgency. We need to bring together technology providers and industry participants, along with their fuel suppliers, regulators, and financiers. We also need to mobilize to bring in their customers. And I believe that only if we bring all these stakeholders together can we shift markets at the speed and scale that’s necessary to get us to 2030 and 2050 net zero goals. As an example, think about whether you’d pay $100 extra for your next automobile if it were made without embedded carbon in its steel. I think most everyone would agree that’s a good idea. The problem is that your pricing signal does not land at the desk of steel manufacturers, who are trying to sell their steel at the lowest price in the market, because that’s the only way they can convince automakers to buy it.
So, we have to stitch the value chains together and radically collaborate across these chains to make that happen, to tip the markets by delivering those pricing signals directly to the manufacturers and energy producers. That is critically important, especially with all the money at stake now in the United States with the Inflation Reduction Act of 2022.
What role does finance play in implementing a systems-thinking-led approach to rapidly achieve low-carbon transformation across economic systems simultaneously?
Fawcett: The financial service sector is helping corporations and governments execute the change they need. But we’re also going through a transition ourselves. For example, Citi and many other banks have joined the Net Zero Banking Alliance, organized by the Glasgow Financial Alliance for Net Zero (GFANZ), a financial services coalition that was formed last year in the run-up to COP26. All members have committed to becoming net zero banks and, importantly, we will report progress on these goals and will produce a report card every year showing how we’re deploying capital towards the low-carbon transition. GFANZ is now over 550-strong globally and controls about $150 trillion of assets. That means GFANZ bank members control and deploy a significant portion of bank financing globally.
If we can align that capital to support and enable low-carbon business models, that will help create a tipping point greater than anything we’ve seen. I think the financial services sector can play more of a differentiated, disruptive role than it ever has historically, in part because of this systems thinking effort with the development of GFANZ. To make that happen, we need financial services organizations to outline very specifically what their lending requirements are for energy and power and other high emissions sectors. At Citi, for example, we are executing on our commitment by asking every one of our clients: What is your transition plan? What is your pathway? What are your metrics? What are your capital expenditure requirements, and how are you allocating those to achieve a low carbon business model?
How can systems thinking be applied to help finance a pivot to clean energy in the developing world, where greenhouse gas emissions are expected to rise as those economies continue to grow?
Fawcett: We must be mindful that developing countries are in different stages of development with different energy and social needs. Developing markets should be allowed to grow, and I believe they should have more leeway to transition to clean energy than the developed markets. But there does need to be more investment and innovation to help those economies become part of the clean energy transition, and we are seeing pockets of it in certain countries.
Many of them do have longer net zero commitments, whether it’s 2060 or 2070, but in China for instance, their solar and wind investments far outpace that of any other country. India is positioning itself to champion the global energy transition. Those ambitions need to be financed, and a lot of the financing is for new, innovative technologies to help us get there.
Kortenhorst: To Bridget’s point, the economics of the energy transition are now so overwhelming around the world that we should not be thinking about this as something we’re going to do in the developed world and then one day convince developing countries to do it, too. For example, we recently analyzed the economics of power generation in one of the countries negotiating with the G7 on retiring their coal fleet. It became clear that it’s possible to build wind and solar there much more cost effectively than new coal. In fact, that country could shut down its existing coal plants, replace them with new wind and solar, and have a positive impact on reducing emissions rates while also making the country better off economically.
We need innovative financing to make these transitions work, because many countries may be hampered by a limited ability to borrow. We are seeing that happen with the Just Energy Transition Partnership (JETP) between South Africa and G7 members Germany, France, the United Kingdom, the United States, and the European Union, which provides $8.5 billion to transition South Africa’s energy system from coal to lower-emission technologies. This movement is now happening around the world: The G7 recently announced it is launching a JTEP with India, Indonesia, Vietnam, and Senegal this year.
I believe we are going to see more of these collaborative efforts between developed and developing countries to help fight climate change, and the faster they come together, the faster we reduce the cost of renewable energy. Then, I believe, we will see the positive systems feedback loops kicking in to really accelerate the transition.
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