Years of declining investment in oil and natural gas, along with a post-pandemic economic rebound, meant that even before Russia’s invasion of Ukraine, energy prices had been on the rise. Those trends were exacerbated by a conflict-initiated supply shock, triggering a global energy crisis. [1]

Even as high fossil fuel prices made renewables more cost-competitive, countries scrambled to replace lost Russian imports and address the energy supply crunch. Immediate concerns over energy security and affordability took priority, but they also underscored the long-term risks of fossil fuel dependence and prompted action to accelerate transition. [2] In 2022, governments worldwide adopted policies to address energy security and sustainability, including the US Inflation Reduction Act (IRA), the EU’s Green Deal Industrial Plan for the Net-Zero Age, and China’s 14th Five-Year Plan for Renewable Energy. [3] Countries are continuing to roll out such initiatives, including Brazil, where a green transition package incentivizing the low-carbon transition of firms is imminent. [4] While these policies are geared towards emissions reductions—for example, through green tax breaks and subsidies [5]—they have also contributed to lower forecasted global demand for fossil fuels, which is now expected to peak by mid-decade. [6]

The energy crisis has also underscored the importance of regulatory regimes that will foster a global low-carbon transition. With the Corporate Sustainability Reporting Directive coming into effect in the EU earlier this year,  the US Securities and Exchange Commission’s (SEC) climate-related disclosure rule on the horizon—both of which apply to foreign companies domiciled in the regions— and most recently, the passage of Climate Corporate Data Accountability Act in California’s state assembly, [7] an increasing number of firms will be required to take stock of their carbon footprints. [8] Scope 2 emissions from energy use are squarely targeted and will have the most direct impact on the crisis, but as debate about including scope 3 emissions continues, institutions are already preparing to account for them. This presents a strong mandate for action for the 127 out of 160 firms evaluated in our Decarbonization Progress Benchmark that are not currently measuring and tracking all material sources of emissions throughout their value chains. Firms also need to recognize that regulators will not stop at reporting requirements: future regulations in high-value markets are likely to clamp down further on permissible emissions.

Yet, in a year of record earnings, oil and gas firms broadly slowed their decarbonization efforts. Profits for North American and European firms doubled compared with 2021, totaling about US$270 billion. [9] But those gains seem to have come at the expense of the low-carbon transition, as firms grapple with competing pressures to reform their business models while satisfying investors and politicians looking to keep returns high and prices low. Many integrated energy companies from all regions backtracked on their interim emissions reduction goals. [10] They also curtailed investments in research, development, and scaling of low-carbon energy alternatives. While elevated energy prices are likely to persist, oil and gas firms’ hesitancy towards emissions reductions could be to the detriment of their own long-term business interests, as well as the global transition.

The energy crisis has also impacted manufacturers, inflicting adverse macroeconomic conditions and driving a fear of deindustrialization across Europe. Astronomical energy and feedstock bills in 2022 caused chemical firms to rethink their dependence on carbon-intensive fuels. Even so, rising costs of capital, inflationary pressures and lack of easy access to renewable alternatives have made the transition to low-carbon inputs difficult. [11] In Asia, where industrial energy supply remains coal-dependent, [12] natural gas is a key transition fuel. [13] However, Europe outbid the region on natural gas cargoes, and demand for coal remained robust through 2022. [14] Accordingly, the benchmark reveals that manufacturers across all regions continue to maintain ties with their most carbon-intensive upstream suppliers and energy providers.

Under the pretext of supporting adequate access to affordable energy, the financiers of high-emitting sectors have also slowed their decarbonization efforts. Our benchmark finds that banks are not addressing their financed emissions at the speed and scale needed to meet net-zero targets. In 2022 alone, 60 of the largest banks by assets provided $669 billion to fossil fuel companies in lending and underwriting for bonds and equities. [15] This was only about 10% below 2021, in a year when most oil and gas firms could simply invest from their balance sheets. [16] Yet over the same period, financing for renewables as a share of total bond underwriting and lending activity declined from 6% to 3% among banks in the Glasgow Financial Alliance for Net Zero—a club of financial institutions committed to transitioning the global economy to net-zero greenhouse gas emissions. [17]

The energy crisis has created short-term winners and losers. But this should not deter firms from seizing decarbonization opportunities and mitigating the structural risks of maintaining business-as-usual in the face of climate change. Our findings show that, particularly when it comes to reducing value chain emissions, firms are not doing nearly enough, leading to an average overall score of 37 out of 100 in our benchmark on corporate progress towards decarbonizing. The Economist Intelligence Unit estimated that, due to climate change, the global economy will shrink by 3% by 2050 compared with what it would have been, for example, [18] and the worst impacts can be prevented only through collective action. Firms that prioritize aligning their business models with low-carbon pathways over short-term profits will enjoy early-mover advantages. Decarbonizing early can allow companies to tap into a growing number of regulatory incentives, gain a head start on the staffing and operational expertise that will enable them to align seamlessly with long-term policy shifts, and seize new market opportunities. Others risk their bottom lines, if not now, then in the future. [19]

How is your industry faring on the path to net-zero?