Economic difficulties pose threat to decarbonisation budgets

It’s no different when it comes to the climate which, given the certainty of physical and transitional risks, regulation and higher energy and carbon costs, begs the questions: why aren’t we better positioned to address the transition, and why so many are willing to reduce funding in the event of an economic downturn?

Upon closer inspection, one can point to a single, unavoidable cause: our inability to make short-term sacrifices for a brighter future. We struggle to delay instant gratification in favour of long-term success. Our civilisation has become fixated on immediate desires and self-interest, a stark contrast to the values we once upheld.

Take building railways, for instance. It required an upfront sacrifice because the funds needed to hire workers and machinery can’t be used for immediate consumption. However, if we make this sacrifice, we will all enjoy enhanced connectivity to drive growth in the coming years. The same absolutely applies to the long-term decisions required to drive decarbonisation.

Recent data suggests a troubling trend: economic downturns may cause businesses to slash budgets in critical areas, including their decarbonisation initiatives. According to ENGIE Impact’s 2024 Net Zero Report, which surveyed decision-makers from some of the world’s largest companies, 48% of Australian businesses indicated they would cut their decarbonisation budget if macroeconomic conditions deteriorate. And when you consider that 58% of Australian businesses believe significant changes or complete transformations of their products and services will be necessary to meet long-term net zero goals, there’s a potential for the low-carbon transition to grind to a halt amid an economic downturn.

But the issue here is that decarbonisation is driven not only by moral imperatives but also by commercial and reputational considerations – the reality is that the world’s largest organisations and investors are already driving change as they sign up to climate targets and cascade these down their value chains.

And that is before we factor in the opportunities associated with; talent attraction and retention for those who want to work in companies that share their values; demand for more sustainable products; and for preparing organisations ahead of an inevitably more rigorous regulatory environment as voluntary action is not producing the change at the pace required.

The reality is that conducting business as usual comes at a cost of higher energy costs, lost business, employee churn and missed opportunity.

In regions like EMEA and the Americas, the Net Zero Report found a significant number of organisations acknowledging that failing to address decarbonisation could inflict lasting reputational damage. In Australia, this perspective is tied for second place with compliance issues, both at 32%. Yet, the urgency to recognise the long-term reputational impact of inaction or pausing on decarbonisation efforts seems less pronounced.

Australia’s slow pace in aligning with global views on the importance of ongoing commitment to net zero initiatives could have serious repercussions. Postponing or reducing commitment to decarbonisation efforts could lead to competitive issues and higher costs as organisations find themselves locked into higher-carbon business models.

For instance, as corporate commitments to renewable energy mature, we might face constraints in availability post-2030. Delaying action also risks a ‘brain drain’, as maintaining and developing the necessary skilled workforce requires consistent effort and collaboration across various sectors. Furthermore, businesses risk falling behind on a global scale, where major companies and investors are increasingly considering emissions performance and climate risk management in their investment decisions. And poor decisions made in plant and equipment investment now will lock in emissions and leave organisations waiting for an additional investment cycle to design out their more energy-intensive infrastructure.

Ultimately, the risk of falling behind if companies pause their decarbonisation commitments is real. The sneaky truth of the finding that 48% of companies may reduce their decarbonisation budget if economic conditions worsen this year is that 52% are not.

This is critical, as even a single year of progress in decarbonisation can significantly differentiate a business from its peers and advance its net zero ambitions.

The Australian business community also has avenues for short-term relief that can support long-term sustainability goals. Government grants, green finance packages from banks (banks, for instance, offering discounts off the standard loan rate for “new and used electric or hydrogen powered cars, trucks, vans or buses up to $250,000”), loans from entities including the Clean Energy Finance Corporation (CEFC) or grants from ARENA are available for the right applicants.

These avenues can help businesses not only survive but thrive by aligning with supply-chain and consumer expectations, which are increasingly leaning towards sustainable products. This trend was evident in the last election, where the so-called ‘teal wave’ – a surge in voters supporting environmentally focused candidates – signalled a clear demand for sustainable practices.

Australian businesses face a critical choice: reduce decarbonisation efforts and potentially suffer long-term strategic and reputational harm; or view the current economic challenges as an impetus to innovate and lead on sustainability. When faced with each option, it really isn’t a choice.

It is crucial for businesses to adopt a holistic approach to decarbonisation, and this approach can’t afford a gap year or more. The benefits of maintaining momentum in decarbonisation are clear: not only does it help mitigate the risk of reputational damage, but it also positions companies to capitalise on the inevitable resurgence in consumer spending – spending that will increasingly favour businesses perceived as sustainable and responsible.

Author: James Ramsay is the Managing Director and head of Australia for Engie Impact, the sustainability consultancy arm of Engie.

The views and opinions expressed in this article are the author’s own, and do not necessarily reflect those held by pv magazine.

This content is protected by copyright and may not be reused. If you want to cooperate with us and would like to reuse some of our content, please contact: editors@pv-magazine.com.