ESG Series: ESG 2025 outlook

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Executive summary │ ESG 2025 outlook

Navigating the physical realities of the energy transition

Physical barriers

Reality check

Solutions

Addressing

We contextualise the ESG outlook for 2025 in a comprehensive new presentation.

Ten years after the landmark Paris Agreement and nearly halfway through what has been called a “decisive decade” for climate change, a divergent gap exists between, what is needed and what has been achieved, in scaling the deployment of decarbonisation technologies. A global pandemic, tectonic geopolitical shifts and higher-for-longer interest rates is witnessing greater fiscal-led pressure on the ability of governments to facilitate the transition.

A reality check is needed on the current (target) pace of the transition on three dimensions:

1. Short-term – time requirement. Fossil fuels took ~40-50 years to go from proof of concept to scale, and the transition will equally take decades (not years).
2. Medium-term – funding and return on investments (RoI). Transition needs to scale between ~3-4x to meet net zero targets, and critically offers subpar returns today.
3. Long-term – energy intensity. Transition itself is carbon intensive, with AI-led electricity demand set to represent an exponential growth opportunity for energy demand.

A reality check is needed on the current (target) pace of the transition on three dimensions:

1. Short-term – focus on low hanging fruit. Switching from coal to gas is a credible solution that saves ~17% in emissions, and honours the energy-intensive nature of most EMs.
2. Medium-term – a global carbon price/tax. As emissions are geographically agnostic, a global carbon price does the heavy lifting, making low carbon solutions cost competitive.
3. Long-term – balancing the climate vs social risks. Transition cannot be rushed with a  need to balance social aspects with environmental targets, to ensure a “just” transition.

Going forward, we view that 25 physical challenges – defined as barriers to switching from high emissions assets and processes to low emission ones – across 7 domains, need to be tackled to scale the transition. Understanding these physical challenges can enable corporates and policymakers to navigate where to play offense to capture viable opportunities today, where to anticipate and address bottlenecks, and how best to tackle the most demanding challenges through a blend of innovation and system recalibration.