The Cost of Inaction 2024

3.1 Companies that do not decarbonize may face increasing transition risks Global climate commitments, regulations and incentive schemes have significantly accelerated in the last decade, particularly since the Paris Agreement was adopted in 2015. While the world is far away from achieving the 1.5°C ambition, significant progress has been made across the world, albeit at different speeds. The following actions are the most notable: –Over 140 countries, including China, the European Union (EU), India and the US, covering 88% of global emissions, have made national net-zero commitments.35 At COP30 in Brazil, many countries are expected to strengthen their commitments further. –In the EU Green Deal, Europe has followed up its net-zero commitment with the most ambitious emission reduction legislation globally, including initiatives such as tightening the emissions cap of its Emissions Trading System (ETS), introducing an emission trading scheme for non-ETS sectors (ETS II), banning new internal combustion engine (ICE) car sales by 2035 and enacting rules to drive the adoption of sustainable fuels and hydrogen. –The US introduced its Inflation Reduction Act in 2022, which drives billions of dollars of investments in green technologies such as electric vehicles (EVs), renewables, hydrogen and carbon capture, utilization and storage (CCUS). –China has reinforced its ETS in 2024, adding stricter penalties and a revamped emission reduction market, while at the same time pouring billions into the expansion of renewables, EVs and hydrogen. Accelerating climate action creates transition risks for companies. The Task Force on Climate- Related Financial Disclosures (TCFD) identified four main types of transition risks:36 –Policy and legal, such as carbon pricing rules and the risk of litigation. –Technological, such as lower-carbon ways to make steel or power big ships that disrupt incumbents. –Market, meaning shifts in supply and demand for commodities, products and services. –Reputation, stemming from negative stakeholder perceptions of a company’s climate actions. Similar to physical risks, transition risks can materialize through additional financial costs. They are equally difficult to predict because they depend on future government decisions, future technological innovation and other unknowns.37 Global climate commitments, regulations and incentive schemes have significantly accelerated in the last decade. The Cost of Inaction: A CEO Guide to Navigating Climate Risk 23