Ahead of the 2023 Climate Group Asia Action Summit, we were pleased to speak with PwC Asia Pacific ESG Leader, Ivy Kuo, who shared insights around the state of decarbonisation across the region, highlighting the challenges, opportunities and steps ahead.
As a Spotlight Partner for the Asia Action Summit, PwC continues to play a significant part in bringing together a community of solvers for open and action-oriented discussions on important issues such as Net Zero and sustainability pathways for Asia Pacific.
1. What challenges do we face in decarbonising economies in Asia Pacific?
The biggest challenge is the pace of decarbonisation. Unfortunately, the current pace of decarbonisation in Asia Pacific and worldwide is alarmingly insufficient to address the challenge of global warming. In our most recent Net Zero Economy Index, we found that Asia Pacific’s decarbonisation rate in 2021 was 1.2%, and the world’s overall decarbonisation effort was 0.5%. Although the energy-related CO2 emissions per unit of gross domestic product generated in the region are declining, it falls significantly short of the 15.2% annual decarbonisation rate needed to limit global warming to 1.5°C by 2050.
Underlying this challenge are a myriad of other pressures: from rising energy demand and affordability, to capital, talent, inflation, policies and regulation.
For Asia Pacific, rising energy demand and affordability continue to be a challenge – especially as the region continues its reliance on fossil fuels such as coal, oil and gas. The region accounts for more than half of global energy consumption, with 85% of regional consumption sourced from fossil fuels. Although renewable or clean energy targets are in place, some economies still refrain from explicit commitments on fossil fuel-fired generation, driven out of concerns for energy security and affordability.
Most developing countries in the region are lacking in the capital, technology and talent needed to decarbonise at scale. The region's GDP per capita stands at US$8,800, merely one-tenth of United States’ average of US$80,000. This indicates a resource gap that hinders the development and implementation of sustainable energy solutions.
Also, pressures from supply chain disruption, inflation and political unrest are competing with global warming for attention. Faced with these competing priorities, it’s no surprise there is a gap between CEO’s level of concern around climate and that of investors – as revealed in our 2023 Global CEO Survey - Asia Pacific. We found that the region’s CEOs are less concerned about climate risks and actions than investors would like. They ranked climate change as sixth in the list of concerns for the next 12 months while inflation and macroeconomic volatilities took the top spot. When we asked how exposed companies will be to financial losses due to climate change over the next five years, only 27% of Asia Pacific CEOs see climate change as highly or extremely likely to expose threat to their business, compared to 40% for investors investing in Asia Pacific.
Key challenges also come from gaps in policies and regulation, which inhibit functioning markets that incentivise decarbonisation. Bureaucratic barriers, lack of infrastructure and other market inhibitors can prevent companies from entering markets or operating in ways that reduce emissions.
2. What are the key opportunities for decarbonisation in Asia Pacific?
Sustainability presents a substantial opportunity for Asia Pacific, with the potential to unlock significant economic growth. The World Economic Forum (WEF) believes Asia has the potential to unlock 43% (US$4.3 trillion) of the US$10.1 trillion revenue opportunity by 2030 from activities like the expansion of renewable power, energy efficiency in buildings, transportation and agriculture and greater circularity in producing industries. Notably, countries like Indonesia and Vietnam are to receive funding totalling US$35.5 billion through initiatives like Just Energy Transition Partnership (JETP) to support their decarbonisation efforts. Against this backdrop, there are three notable opportunities for Asia Pacific businesses to tap into: climate tech, nature and circular economy.
Climate technologies: As revealed in PwC’s latest State of Climate Tech report, Asia Pacific has witnessed a surge in climate tech investments, with start-ups receiving US$4.5 billion and venture funding reaching US$7.7 billion in the third quarter of 2022. Most (90%) of this funding has been channelled to the mobility and energy sectors. However, there is a need to strengthen the pipeline of early-stage funding to foster the growth of high-quality climate start-ups. There is also untapped potential to invest in sectors such as industry, food, agriculture and land use, which collectively account for 56% of global emissions.
Nature: Our analysis of Managing Nature Risks shows more than half the market value of companies listed on most major exchanges in Asia Pacific are those exposed to financial risk through high or moderate dependence on nature. This includes Shanghai Stock Exchange, Korea Exchange and Tokyo Stock Exchange. Nature-based solutions are increasingly recognised as an essential tool in mitigating disasters and supporting climate resilience against threats such as coastal erosion and desertification, which threaten livelihoods, ecosystems and biodiversity. The UN stated that in 2022, nature-based solutions employed nearly 75 million people, 96% living in Asia and the Pacific and lower middle-income territories. Meanwhile the International Labour Organisation estimates nature-based solutions can generate 20 million new jobs, showing further evidence of the opportunity ahead.
Circular economy is a key area of opportunity on a number of fronts. Circular economy approaches can reduce greenhouse emissions created from resource extraction and processing (50% of all GHGs globally). Also, estimates by the Economic Research Institute for ASEAN and East Asia (ERIA) suggest that adopting circular principles across Asia could lead to economic growth of US$324 billion by 2025. And the International Labour Organisation estimates that a circular economy could create 7-8 million new jobs globally by 2030.
3. What's next? What steps should Asia Pacific businesses take to navigate the road ahead?
How companies operate tomorrow will look different from today. I mentioned earlier our latest CEO Survey – this survey also revealed that more than half (53%) of Asia Pacific CEOs believe their current business models will not survive in the coming decade. This indicates the need for long-term strategic transformation and proactive planning to adapt to the future business landscape.
The next 10 years will not only be a period of action but also a time of significant transformation. And there is a lot that can be done.
Businesses can substantiate their transformation journeys by putting sustainability at the heart of business purpose. Even if companies are not aware, sustainability is interlocked with corporate purpose. All companies deliver socio-economic and externalities impact and profit is an outcome of those impacts. Embracing sustainability allows businesses to actualise their purpose, offering guidance to the board and management as they navigate sustainability issues, and integrate them into their operations.
At government level, aligning and enhancing policies and regulations will provide a strong framework to deliver Net Zero targets over time. For businesses – as noted by participants at our 2023 Asia Pacific roundtable discussion on climate tech – it is important to gain clarity on policy and regulations, and develop a forward-looking roadmap. When a business has this in place, it is incentivised to invest confidently in climate technologies.
It is also important for businesses to prioritise just transition approaches to address potential social disruptions that could undermine climate action. We must keep in mind Asia Pacific’s population of over four billion, more than half who live in low-lying coastal areas and are at risk of more frequent extreme weather events. With the region producing half of all carbon emissions globally, Asia Pacific is more exposed to transition risks. Deep and fast emission cuts that are not well-managed can lead to displaced workers, and possible negative impacts on consumers and citizens. As we transition to Net Zero, it is crucial to proactively address what the social impacts are going to be and the need for support right at the start.
Building a sustainable business takes more than setting up targets. Both the public and private sectors need to work together to turn theory into a purpose-led plan and practice, and risks into opportunities to enable a just transition pathway to Net Zero for all.