22 minute read 28 Oct. 2022
Woman in lab coat walks through a garden inside a yellow frame in the middle of an empty city road

How can sustainable finance transform 2050 pledges into real-world impact?

Authors
Tom Groom

EY Global Client Service Partner

Corporate finance professional. Enjoys running. Father of three wonderful children.

Will Rhode

EY-Parthenon EMEIA Sustainability and ESG Solutions Leader

Passionate about creating a legacy in capital markets. Proud father.

22 minute read 28 Oct. 2022

Financial institutions (FIs) need a framework that allows them to anticipate seismic economic transformation and adapt their strategy accordingly.

In brief
  • Understanding and anticipating the transition pathways of key industries is crucial to imagining how the global economy will look 10, 20 or 30 years from now.
  • A framework based on the proximity and clarity of different sectors’ transition plans will allow FIs to respond to, and enable, a generational shift.
  • Firms can then identify the capabilities and structures needed to provide investment, finance and insurance in 2030, 2040 and 2050.

Our collective understanding of how the world needs to decarbonize has improved significantly in recent years. That is enabling all of us – acting as investors, customers, employees and citizens – to ask better questions about the decarbonization plans of the public and private institutions we interact with.

However, the answers we receive are hard to appraise critically. The magnitude and complexity of the required transformation, stretching over decades and relying on new and unproven technologies, is hard to visualize. Even sector experts can struggle to predict industry pathways (such as the prospects for hydrogen aircraft), or the drivers of success or failure (such as the best battery technology for electric vehicles).

Uncertainties over the outlook for sectors, sub-sectors and individual organizations are further aggregated for financial institutions (FIs). Financial firms’ investors, leaders and staff want to understand how their organizations can create value in the future, for business, society and the planet. But the way FIs’ activities cut across every sector of the real economy creates a multilayered decarbonization picture full of contradictions and interdependencies.


As a result, appraising decarbonization plans is fraught with challenges for banks, insurers, asset managers and private equity firms.


Fortunately, FIs are not powerless to predict how key industries will change – or to begin planning how they themselves are likely to be transformed. Working with industry experts and a range of real economy players, we have sought to develop a methodology to help FIs cut through the noise and clarify their decarbonization pathways. This has allowed us to imagine a potential future for financial firms as they and the real economy decarbonize:

Transition in financial services: emissions over time

Sustainable finance outcomes of 4 stage approach timeline
2024
Climate risk management is genuinely embedded at most FIs, and mandatory transition plans are used by the industry to appraise risk with increasing sophistication.

2025
As conflicts between topics such as decarbonization and energy security have played out, the “supporting all through transition” strategy starts to become more nuanced, with investors, finance providers and risk carriers starting to screen out players and sub-sectors beyond the immediately obvious (e.g. fossil fuels).

2027
First waves of greenwashing redress commence.
2028
Easier-to-abate industries complete decarbonization transitions, and with it, have access to the broadest pools of liquidity.
2030
Technologies currently going through R&D processes emerge, are considered safe, and first-time financing commences (e.g. hydrogen aeroplanes, ammonia ships, etc.).
2032
Those who have deployed active balance sheet management since 2025 (using all four areas of the quadrant actively) start to demonstrably trade a premium valuation.
2035
Industry investing in non-core loans, investments and real assets (that don’t meet decarbonization requirements of mainstream FIs) reaches peak liquidity.
2038
Removal of liquidity (at any price) for those clearly behind the generally accepted transition pathway and for legacy assets. 
2040
Valuation differences for those with different approaches to decarbonization start to close (except for those operating at the extremes).
2045
Wind-down financing and insurance for legacy assets starts to get mothballed (e.g. financing of planes and ships built in 2022).
2050
Decarbonization is complete, and carbon topics cease to become part of balance sheet management, rather a threshold requirement at origination.

The future of financial services we have imagined, based largely on the Paris Agreement adopted in late 2015, assumes that:

  • While the challenge is significant, in theory the world and businesses will have reached net zero by 2050. Therefore FIs at that stage will no longer be thinking about how to help facilitate transitions. Creating further financed emissions will simply be outside the risk appetite of the vast majority of firms.
  • By 2040 many industries will have transitioned, but hard-to-abate sectors will still be working intensively to complete the effort. By that point we predict that an industry specialized in acquiring and safely running down financed emissions will have emerged. The decarbonization challenge will be well understood and in the hands of a few, rather than the hands of the many.
  • By 2030 genuine embedding of climate responses will have been achieved throughout the life cycle of all financial products – translating corporate level objectives into real actions by every business, product, service and desk. This is of course already well advanced in some areas. However, not all actors will get this right first time. As a result we anticipate a period of greenwashing led remediation to peak around 2030.

These predictions may or may not be accurate, and their timing is clearly open to debate – there are many reasons why some effects could accelerate. Importantly though, all potential futures show that FIs’ success or failure will be determined by their ability to understand, enable and respond to industry transformation. We have therefore developed a structured framework that provides tangible, dynamic insights into sectors’ decarbonization pathways – allowing FIs to engage constructively with the real economy long into the future.
 

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1

Chapter 1

What needs to change — and how finance can anticipate and enable it

A return to first principles is key to preparing for the complexities of the future.

Our framework is not intended to replace financial firms’ existing strategic modelling tools for investment, credit or underwriting. Instead, its goal is to help FIs and their corporate clients understand and engage with the high-level climate transition pathways of key economic sectors, and begin transforming themselves in response.

To do this, the framework goes back to first principles. It examines the drivers of the proximity and clarity of different sectors’ transitions. It develops transition archetypes, recommending a sustainable finance lens through which FIs can view the future needs of each industry. And it charts potential futures, to illustrate how sectors and their financial needs may develop over time — and how FIs themselves will need to evolve as a result.

FIs can use this concept to cut through short-term noise and understand the evolving transition pathways of any sector or sub-sector. This will allow them to begin transforming themselves for the future, by developing sustainable finance strategies that:

  • Move beyond simplistic binary decisions between “divest or engage”
  • Use insight and collaboration to help high-carbon businesses transition, while scaling up climate solutions
  • Mitigate the second- and third-order economic and social effects of decarbonization
  • Discharge FIs’ fiduciary duties by meeting the needs of customers, investors and the environment

FIs seeking to apply the framework need to follow four key stages. These build on each other to construct a well-argued vision for decarbonization pathways, providing the basis for visualizing how individual FIs and the financial industry as a whole will be transformed during the decades leading up to 2050.

Sustainable finance analyze to imagine diagram

Stage one: Analyze

Analyze the proximity of each sector’s transition.

Proximity is a combination of urgency and capability, which are shaped by four key groups:

  1. People: Individually and collectively, we all exercise a significant influence on the speed and urgency of each industry’s transition. Grassroots climate activism is proving powerful, and spiraling costs are fueling greater energy awareness. Whether they’re consumers, employees, activists or investors, people are demanding faster climate action, and public scrutiny is likely to increase over time. However, there are also major sensitivities over the costs of decarbonization. Public opinion in the social media age not only varies significantly between different regions and markets, but can change rapidly and unpredictably.
  2. Governments: Whether responding to public opinion or shaping it, governments and other public bodies have critical roles to play in influencing the pace of transition. This includes addressing legacy problems such as market failures or the stranding of assets; facilitating the future by enabling new technologies and techniques through co-investment, subsidies, fiscal incentives or regulation; and ensuring that social risks are addressed. However, national variations on key issues like nuclear power and the potential for politicization and polarization could also become major obstacles to a global transition.
  3. Technology providers: The availability of technology is often the biggest influencer of proximity. Simply put, the technologies required to decarbonize many industries are not yet available. In the long term, however, technology has the greatest game-changing potential — whether by scaling up capture and sequestration, or by entirely reimagining industry norms.
  4. Industry bodies: Trade bodies, professional bodies, single-issue groups and other collaborative initiatives can have significant influence on the speed of transitions – for example, by coordinating change, organizing investment, or agreeing on shared standards.

Needless to say, the reality is more complex: decarbonization is everybody’s business. Each group influences the others, creating blockages and feedback loops. Collective action can cancel out individual choices. Citizens can exert influence over companies and governments, but those institutions also have significant power to frame and reframe the debate. Looking ahead, innovations in the metaverse, 3D printing and bioscience are likely to have a profound impact on the nature of consumption.

Stage two: Understand

Understand how ongoing initiatives and activities in the real economy are influencing the clarity of each industry’s transition pathways.

Looking across all sectors, we typically observe four potential phases of decarbonization:

  1. Changing the use of existing assets, resources and approaches – for example, by reducing usage intensity or shortening supply chains.
  2. Retrofitting existing assets and resources with mitigating technologies that improve energy efficiency – for example, by converting buildings primary energy source to solar power.
  3. Developing new technologies that entirely alter assets or ways of working – for example, through carbon capture and storage, or by harnessing new sustainable forms of propulsion.
  4. Offsetting residual emissions or pollution that cannot be eliminated by stages one through three.

In many cases, industry bodies have an important role to play in articulating the stages of decarbonization and setting common transition standards or timelines. Not every industry will need to follow all four phases, or to follow them in order. It may be appropriate to use offsetting alongside the other phases, to accelerate decarbonization while implementing changes of use, retrofitting and new technologies. However, firms must not use over-reliance on offsets to avoid permanent decarbonization, and should always ensure that offsets are of sufficient quality.

Stage three: Assess

Use insights into the proximity and clarity of the transition to appraise the risks and opportunities facing different industries, and help those industries maintain affordable access to funding and insurance during their transition journey.

As part of this process, FIs can map sectors and subsectors into one of four sustainable finance archetypes. Each archetype indicates a specific set of financial challenges and needs, with corresponding implications for FIs’ sustainable finance activities and, ultimately, for their own structures and behaviors.

Mapping decarbonization transitions by sector

Sustainable finance critical sectors quadrant graphic

 

Quadrant

 

Maintain and grow Opportunity to invest in, finance or de-risk their transition now. In some industries, major risks remain to be managed, e.g. legacy supply chains.
Risk manage and reimagine This quadrant will become more challenging over time – e.g. it contains coal today, but will contain transition laggards across all industries in the future.
Long-term innovation partner Will require financing and risk management in time, and may require FS to innovate to finance and risk manage new technologies with little track record.

Stay close and support

Over time this will move up – and may also move left. Need to stay close to industry and its developments, and then innovate, manage risk, reimagine or exit accordingly.
1. Automotive
The sector’s transition from internal combustion to electric is well defined and underway, driven by consumer demand, government support and advances in technology. However, environmental risks around mineral supplies and the disposal of batteries remain to be addressed.
2. Agriculture
The sector’s desire to decarbonize is strong but local conditions, fragmentation and owner management can make transition initiatives and their financing requirements varied and complex. The need for coordination with the closely connected retail sector could add to these challenges.
3. Energy
The industry’s transition from hydrocarbons to renewables is relatively clear, but the scale of required investment, legacy assets and infrastructure renewal make this a very long process. The current energy crisis, boosting immediate demand for fossil fuels, threatens to delay the transition further.
4. Aviation
In the short to medium term, greater adoption of sustainable fuel will allow an initial reduction in emissions. In the longer term, alternative propulsion will be needed. That will require huge, coordinated investment by manufacturers, operators, energy providers, airports and governments.
5. Advanced manufacturing
Pathways are well understood, but as well as changing its own production, the industry is highly dependent on decarbonization in the energy sector and its upstream supply chain.
6. Health, science and wellness
Decarbonization is recognized as a priority but is arguably a secondary environmental objective behind reducing the use of plastics – an area already receiving significant investment in R&D.
7. Consumer industries
In addition to decarbonization, the industry is focused on other ESG themes including the use of plastic packaging and social issues in its upstream supply chain. Decarbonizing logistics is a clear priority, but depends on the transition pathways of transportation sectors. 
8. Shipping
Shipping has a clear short-term pathway that includes optimizing routes and steaming, and retrofitting short-haul vessels with electric propulsion. In contrast, alternative solutions for larger vessels and long-haul routes are not yet clear. 
9. Metal / concrete manufacturing
These are energy intensive sectors, and therefore particularly dependent on the shift to renewable power. The technologies these industries require to decarbonize their core processes at scale are still in the R&D phase.
10. Infrastructure
Significant progress has been made in understanding how decarbonization can be integrated into future infrastructure via smart cities, digital transformation and circular economies. However, delivery will take decades and is heavily dependent on government policy and activity.

Individual sectors’ positions in each quadrant may change over time as their transition pathways grow nearer or clearer. Some industries’ transition pathways are already relatively clear and are evolving rapidly. In contrast, other sectors and sub-sectors have barely begun to model their transitions, let alone implement change.

The four archetypes and some of their typical risks and opportunities are:

  • Maintain and grow: The sector’s transition is near, clear and already underway. FIs have an imminent opportunity to finance, invest in or de-risk ongoing transition activities.
  • Risk manage and reimagine: The transition is urgent, but challenging or complex. FIs should engage closely with the sector, encouraging laggards and managing risks while financing more advanced players or initiatives.
  • Partner in innovation: Transition pathways are relatively clear but will take time to implement. FIs should begin delivering the long-term finance, investment and risk management the industry needs to establish a robust transition pathway. This is likely to require scaled-up or entirely new financial solutions.
  • Stay close and support: The transition journey remains unclear and will take time to emerge. FIs should maintain a watching brief as clarity gradually improves, monitoring industry developments and preparing innovative solutions that can be applied when opportunities to finance, risk manage or divest arise.

Stage four: Imagine

Imagine detailed potential futures for every sector.

Potential futures help FIs to identify and anticipate likely obstacles and milestones in each sector’s transition pathway, and their probable impact on emissions.

They also help FIs to overlay industry journeys with the developments in sustainable finance that will be required at key points in each sector’s transition. This enables investors, credit providers and risk carriers to:

  • React to change — by protecting assets and minimizing liabilities
  • Enable change — by financing new technologies and assets
  • Enact change — by transforming their own structures and processes

At the highest level, mapping transition pathways will give FIs a good overview of how industries may “drift” between archetypes over time. Charting the potential evolution of an industry provides a stylized way for FIs to visualize the future of key sectors. FIs can then combine multiple client journeys, helping to formulate an enterprise-wide, cross-sector strategy and transition plan.

At the strategic level, a detailed understanding of future obstacles will help FIs match anticipated needs with solutions, as well as identify likely funding requirements, durations, timelines and partnering requirements. This includes deciding the potential roles of debt and equity, public and private finance, and primary or secondary markets in future solutions.

At the operational level, banks, insurers and investment managers can begin to drill down, identifying detailed developments that will be required in lending, investment, underwriting and advisory solutions. This will lead to the creation of short and medium-term action plans FIs can begin implementing immediately as part of their overall transition plan. A viable plan might include steps such as:

  • Enhancing understanding of specific climate solutions and emerging technologies
  • Training and educating relationship managers, risk managers and key decision-makers
  • Building new targeted datasets focusing on key industries or technologies
  • Developing multi-asset decarbonization investment strategies
  • Harnessing public money and guarantees, using blended finance to mobilize risk appetite
  • Facilitating data sharing and aligning data standards across industry supply chains
  • Changing covenants in light of emerging trends
  • Sharing estimated residual values of green assets with peers
  • Supporting client calculations of Scope 1 (direct emissions) and Scope 2 (emissions arising from energy use)
  • Planning how to finance the decommissioning of carbon-intensive assets

FIs will know they have applied the framework successfully when they can visualize the evolution of different sectors and their financial needs over a period of decades; identify tangible actions they can take now to tailor their products and services to those needs; and begin altering their own organization to deliver those altered offerings.

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Chapter 2

A deeper dive sheds light on the trajectory of four diverse industries

Analysis, risk appraisal and scenario planning will allow financial firms to meet the needs of future decades.

To illustrate the potential of this approach, we’ve applied the framework to four industries that are currently high emitters of greenhouse gases, one from each archetype. They are: Automotive (1), Agriculture (2), Energy (3) and Aviation (4). 

A deeper dive into representative sectors

Sustainable finance transformation ecomomic sectors quadrant
  • Maintain and grow: Automotive

    Industries in this quadrant have well-understood transition pathways that are already being implemented. That maturity level provides a range of immediate opportunities for FIs. Here we focus on automotive, a sector with a history of high emissions that is now undergoing rapid change

    Stage

     

    Key output

     

    Examples

     

    Analyze transition proximity

     

    Drivers of proximity

     

    Consumer demand, high fuel costs and the brand appeal and performance of electric vehicles (EVs), are accelerating a transition.

    Government initiatives include money off vehicles, grants for charging points and integrating charging points and battery solutions into new homes.

    Regulations (like EV100 in the UK) are further encouraging demand for EVs.

    In the future, laws could prevent the sale of new Internal Combustion Engine (ICE) powered vehicles.

    Identify transition clarity

     

    Decarbonization phases and initiatives

     

    Change of use and retrofitting have already been overtaken by new technology.

    The sector’s transition pathway is focused on replacing fossil-fueled vehicles with electric vehicles.

    Further innovation is focused on improving efficiency and endurance, and on developing autonomous vehicles.

    Appraise risks and opportunities

     

    Transition archetype

    Risks andopportunities

     

    Maintain and grow.

    The sector’s transition from ICE to EV is well defined and underway, driven by consumer demand, government support and advances in technology. However, environmental risks around mineral supplies and the disposal of batteries remain to be addressed.

    Imagine potential futures

     

    Obstacles and milestones

     

    Resolving uncertainty over battery minerals (lithium vs. nickel manganese cobalt)

    Addressing environmental risks of sourcing and disposal of battery minerals

    Overcoming growing geopolitical disruption to raw-material supply chains

    Improving public and private charging infrastructure for EVs

    Maintaining production of spares (e.g., spark plugs) for legacy vehicles

    Bridging the gap between withdrawing ICE fleets and introducing EVs

    Responding to the emergence of green alternative high-speed transportation, such as hyperloop or hydrogen powered airplanes.

     

     

    Implications and actions for FIs

     

    Encourage clients to use public-private financing structures to provide capital for infrastructure transformation.

    Monitor the emergence of a secondary market for EVs, in order to provide the most advantageous financing rates.

    Partner with innovation hubs to finance and underwrite the scaling up of new battery technologies, recycling and disposal.

    Prepare for a new landscape in which financing ICEs is prohibited or commercially impossible.

  • Risk manage and reimagine: Agriculture

    This archetype features industries which urgently need to reduce their emissions, but which face complex or difficult transition pathways. This scenario calls for close, thoughtful and innovative support from FIs. Agriculture, uniquely varied and fragmented, is a prime example.

    Stage Key output Examples
    Analyze transition proximity Drivers of proximity

    Governments are using regulation, policies, subsidies and tariffs to encourage sustainability.

    Pressure is coming from consumers, wholesalers and retailers to improve sustainability while also delivering low prices and food security.

    There is ongoing supply chain disruption from Brexit, COVID-19 and the war in Ukraine.

    Consumers are becoming more aware of their food’s carbon footprint and more open to alternative food choices such as vegetarianism and veganism.

    Identify transition clarity Decarbonization phases and initiatives

    Many transitions are needed including greener energy, equipment with fewer emissions, more recyclable packaging and less use of harmful chemicals.

    These requirements are relatively clear, but are very hard  to implement simultaneously across the whole “soil to shelf” value chain.

    There is a growing opportunity for emerging tech to reduce environmental impact, e.g. via automated soil sampling.

    Many farms have the potential to generate and sell more carbon offsets.

    Appraise risks and opportunities

    Transition archetype

    Risks and opportunities

    Risk manage and reimagine.

    The sector’s desire to transition is strong but local conditions, small size and high levels of owner management make transition initiatives and their financing requirements varied and complex. The need for coordination with the closely connected retail sector can add to these challenges.

    Imagine potential futures Obstacles and milestones

    Restoring and regenerating topsoil, increasing yields and reducing fertilizer use

    Replacing electricity using plant/generate more electricity locally

    Developing new sources of protein and new livestock rearing methods

    Using agroforestry (integrating agriculture and forestry) to boost sustainability

    Harnessing green or blue (i.e., low carbon) ammonia in fertilizers

    Minimizing non-renewable energy use

    Developing and scaling up lab-grown and alternative food sources 

      Implications and actions for FIs

    Educate key staff on industry features – localism, SME size, family ownership, etc.

    Develop project and asset finance services tailored to farming needs.

    Use relationships across food supply chains to align data standards.

    Help farmers create and sell carbon credits.

    Work with industry bodies to develop standardized metrics for financing.

    Fund and insure new technologies, renewables and alternative farming methods.

  • Partner in Innovation: Energy

    This quadrant is characterized by relatively clear transition pathways and very long implementation timeframes. Several key sectors, including consumer goods and healthcare, fall into this group, but energy is the leading example. These industries require long-term support and engagement from FIs.

    Stage Key output Examples
    Analyze transition proximity Drivers of proximity

    Pressure from businesses and consumers to reduce emissions and offer green energy tariffs remains strong.

    Customers are asking suppliers for downstream solutions like air source heat pumps.

    The war in Ukraine is boosting short term demand for fossil fuels, especially in Europe, as governments push for energy security.

    Identify transition clarity Decarbonization phases and initiatives

    Reducing emissions is the primary goal, but this not only requires capacity scaleup; it also depends on a revolution in smart storage and transmission networks.

    Recycling, reusing and removing green house gases (GHGs) can complement emissions reduction. However, technologies such as carbon capture are still relatively immature.

    Many countries still need to clarify the role they want nuclear energy to play as an interim or permanent energy source. 

    Appraise risks and opportunities

    Transition archetype

    Risks and opportunities

    Partner in innovation.

    The industry’s transition pathways are relatively clear, but hard to implement. In essence, the transition is a shift from hydrocarbons to renewables, but the scale of required investment, legacy assets and the need for altered infrastructure make this a very long process. The current energy crisis, triggering immediate demand for fossil fuels, threatens to delay the transition further.

    Imagine potential futures Obstacles and milestones

    Scaling renewable capacity across a range of markets, with increasing focus on generating energy close to centers of demand

    Upgrading and improving transmission grids suited to renewable energy, in partnership with governments

    Developing cheaper, more efficient and environmentally friendly battery technologies

    Improving technology for the recycling, reuse and removal of emissions, such as carbon-cured concrete and other materials produced with carbon dioxide

    Developing coherent national strategies for nuclear, including small reactors 

      Implications and actions for FIs

    Build an understanding of innovations in generation, storage and transmission.

    Help energy firms develop new technologies – for example, by providing leverage to venture funds, working with multilateral partners on public-private finance, or requiring R&D disclosures for environmentally-linked loans.

    Scale up the financing and underwriting of renewable generation, new grids and storage facilities.

    Finance and risk manage the decommissioning of legacy emission-intensive assets, perhaps via multilateral “bad bank” partnerships involving investment managers, insurers and development banks.

    Help make green energy solutions – such as solar panels – affordable – for example, by providing subsidized financing to disadvantaged customers in partnership with public bodies.

  • Stay close and support: Aviation

    Industries in this archetype are those for which transition pathways are still relatively remote and unclear. Typically, climate solutions are hard to scale, or still in development. Shipping and concrete are two examples. Here we focus on aviation, which has so far proved hard to decarbonize. 

    Stage Key output Examples
    Analyze transition proximity Drivers of proximity

    Established travel habits disrupted by COVID-19. Video calls are reducing business travel and retail consumers are becoming more emissions sensitive.

    Climate activists and ESG investors are increasingly focused on the aviation industry’s emissions profile.

    Low carbon Sustainable Aviation Fuel (SAF) is available, but expensive. Alternative propulsion is receiving early-stage R&D investment.

    International Air Transport Association (IATA), governments and inter-governmental bodies are key to hastening the sector’s transition and fostering international standardization.

    Identify transition clarity Decarbonization phases and initiatives

    SAF can be used interchangeably with Jet A kerosene, subject to regulation and certification – but high cost is a barrier to widespread adoption.

    Retrofitting with sensors, AI and other technology can improve fuel efficiency in taxi, climb, cruise and descent, as well as optimizing speed and routing.

    Alternative sources of power – most notably, electric or hydrogen – are still in development and currently far from becoming feasible at scale.

    Appraise risks and opportunities

    Transition archetype

    Risks and opportunities

    Stay close and support.

    In the short to medium term, higher SAF adoption will allow an initial reduction in emissions. In the longer term, alternative propulsion will be needed. That will require huge, coordinated investment by manufacturers, operators, energy providers, airports and governments.

    Imagine potential futures Obstacles and milestones

    Scaling up production of SAF, improving availability and reducing its current cost

    Establishing SAF refueling capabilities at key airline hubs

    Developing forms of hydrogen-based propulsion

    Using new battery technologies that make electric propulsion feasible at scale

    Bridging the gap between existing and new forms of propulsion

    Developing the maintenance resources required for multiple propulsion types

    Scrapping old planes without creating waste or pollution

      Implications and actions for FIs

    Finance and insure the production, transport and storage of SAF at larger scale, helping airlines to mitigate the rising costs of capital for Jet A fuel operations.

    Support the retrofitting of existing fleets with technology upgrades.

    Help manufacturers establish new production lines for aircraft with electric, hydrogen or other forms of propulsion.

    Understand the implications of alternative propulsion for  asset finance – for example, how the introduction of green hydrogen might impact costs, maintenance and residual values. 

    Bring manufacturers and operators together with governments to finance the required transformation in aviation infrastructure.

Looking to the future

Vast amounts of finance must be mobilized if the world is to achieve a successful transition to a more sustainable future. The ways in which different industries undergo this journey will depend on evolving social, technological, economic and political factors. A deep understanding of these pathways is vital if FIs are to enable the transition over the coming decades, and transform themselves and their activities in the process.

Future winners in sustainable finance will be those FIs that can anticipate the transition trajectories of key industries and adapt their sector strategies accordingly, dynamically managing their portfolios in line with their chosen risk appetites. Just as FIs succeeded in the past by being sector specialists, they will succeed in the future by becoming transition specialists able to support clients on their unique journeys to sustainability.

Early communication with stakeholders, setting out multi-sector views and their implications for lending, investment and underwriting, will be crucial to success. Leading firms will then actively manage their balance sheet exposures based on the decarbonization archetypes and future trajectories of their client base.

A structured framework that provides detailed, dynamic insights into the proximity and clarity of sectors’ transition pathways will allow FIs to engage constructively with the real economy, protecting value by minimizing risk and creating value by maximizing return while achieving tangible emissions reductions.

The framework can be applied to any sector or sub-sector, not just high-emitting industries. It can also be used to identify the transition pathways of large organizations’ key divisions or subsidiaries. Although designed to focus on decarbonization, it could potentially be adapted to address other environmental risks.

This value-led approach can help FIs to balance the need for decarbonization with the imperatives of resilience and profitability during the next 20 to 30 years. It can also allow them to adapt their thinking in response to as-yet unknown advances in technology. As the decades pass, the way FIs look and operate is poised to change significantly. In our view:

  • By 2025, FIs will need to have a clear long-term view of, and approach towards, each archetype and sector.
  • By 2030, future winners in sustainable finance will have already made material adaptations to their offerings, capabilities and structures.
  • By 2040, industries in the “Maintain and grow” and “Risk manage and reimagine” quadrants will be largely decarbonized. Sustainable finance winners and losers will be clearly identified.
  • By 2050, the transition archetypes will be obsolete. The global economy will have been transformed. There will be no sustainable finance — just a financial industry that looks very different from today’s.

FIs need to start imagining the future now and developing their transition plans. Understanding the likely transition pathways of key industries is crucial to visualizing and delivering the sustainable insurance, investment and lending that will be needed over the decades ahead.
 

Summary

The long-term winners in sustainable finance will be those that understand transition pathways early, create decarbonization strategies and transform themselves in order to meet the financial needs of the future.

About this article

Authors
Tom Groom

EY Global Client Service Partner

Corporate finance professional. Enjoys running. Father of three wonderful children.

Will Rhode

EY-Parthenon EMEIA Sustainability and ESG Solutions Leader

Passionate about creating a legacy in capital markets. Proud father.