The end of the Covid-19 pandemic is seen by some as an ideal opportunity for a global ‘reset,’ ensuring that the worldwide recovery prioritises sustainability, protecting the environment and the planet, and using finite resources efficiently. The 26th UN Climate Change Conference (COP26), held in Glasgow in November 2021 against the backdrop of the pandemic, seemed to create some impetus for just such a global shift in priorities.
The conference also brought to the forefront the fact that a number of fundamental issues around tackling climate change remain unresolved. With preparations for COP27 now underway and the sustainability and climate change agenda still very much in focus, we take a closer look at some of the most challenging of these issues.
Whether it is BlackRock militating for sustainable investing, BP attempting to hit its net-zero emissions target, or Suntory strengthening its water sustainability commitments, it is readily apparent that there is closer alignment between government and large business on the need for action on climate.
However, the fact that big businesses are increasingly trying to reduce or even eliminate their contribution to climate change and their impact on the environment by reducing their carbon footprint does not always lead to outcomes that are positive for the environment.
Reporting requirements
In other words, a large business exiting the carbon generating activity does not mean that the activity itself stops. All it means is that the relatively stringent standards, processes, and reporting requirements that global enterprises are held to by their stakeholders and shareholders are now absent.
An excellent example of this is the divestiture by big oil companies of their holdings in Canada’s oil sands in Alberta. Because the extractive activities themselves remain necessary to the global economy and therefore profitable, the larger players have simply been replaced by smaller ones whose ESG performance is unlikely to be much better, and could be worse, but is definitely not scrutinised as closely on the global stage.
In an analogy to the pandemic, a global climate crisis has brought to the forefront the deep regional divides and inequality that constrains progress in any area where international collaboration is critical.
Developed economies, whose relatively wealthy and older populations broadly support climate change action, are in a far better position to implement such measures without their people suffering significant hardship than are countries that are still industrialising.
The priority for these developing countries is understandably economic growth that would alleviate widespread poverty. And yet they are being asked to bear the burden of action on climate change in what they view as an inequitable way.
The rules are being made by Western countries without real consideration of the realities on the ground in, say, South America or Africa.
To be totally blunt, the rules are being made by Western countries without real consideration of the realities on the ground in, say, South America or Africa with their youthful, growing populations focused on escaping the poverty endemic in many of their countries.
According to researchers at Our World in Data, these continents are respectively responsible for 3.2% and 3.7% of global emissions of CO2and yet are most vulnerable to the impact of climate change. In effect they are already experiencing many of the effects of rising temperatures, such as water scarcity, that developed countries, particularly those in the northern hemisphere, are not likely to experience until the global average temperatures rise even higher.
Because most countries of these continents have not yet industrialised, and are often dependent on carbon-generating extractive activities to drive economic progress, holding them to net-zero targets effectively means that they are also being asked to shoulder a significant and disproportionate burden of action on climate change.
A Wood Mackenzie report published in January focuses on the economic consequences of a rapid energy transition and does an excellent job of illustrating this inequality. Africa, for example, is expected to see a forecast GDP growth decrease of up to 4% from a 2050 base case scenario versus a forecast GDP growth decrease of only about 1% for the US and EU. GDP figures can often feel abstract, but there is no getting away from the fact that such a significant shortfall means another generation of Africans mired in poverty.
And, of course, Africa is not alone. Other developing countries are similarly exposed with the Middle East, as a result of its dependency hydrocarbon extraction and its youthful and growing population, being particularly vulnerable.
Is it really so difficult to understand that these countries view the demands for action by the developed countries without some form of redress as inequitable? At the very least, it is not right to ask developing economies to stop doing things that are contributing to their economic growth without offering adequate financial support or investment.
New standards, old tensions
Common wisdom has it that the absence of clear, comparable standards and the plethora of ESG reporting frameworks out there are hampering progress on climate change, particularly when it comes to investor decision-making.
One of the announcements at COP26 welcomed by many commentators was the establishment of the International Sustainability Standards Board (ISSB) by the International Financial Reporting Standards (IFRS) Foundation. This may well be a step in the right direction for publicly listed companies and investors who wish to use their funds to reward companies that are proactively pursuing a decarbonisation agenda. However, there is a certain degree of naivety on display in the reporting of this development.
At the moment, the IFRS Standards, a close analogue to the ISSB Sustainability Standards of the future, have not actually been adopted by the US or China, representing 15% and 27% of global cumulative CO2 emissions respectively. Their adoption of ISSB Standards of the future is rendered less likely by the linking of climate change and the environment to social and governance factors (the ‘SG’ in ESG), which are viewed with deep distrust by both these global powers.
It is not very clear what the Chinese position might be, but the reaction from the US has been more explicit. The SEC’s response to the IFRS Foundation’s consultation on the founding of the ISSB included the following warning shot:
“…a set of globally accepted and consistently applied sustainability standards – is well-intentioned but unrealistic… a single set of sustainability standards is an even more difficult task… centrally determined, universally applicable, inflexible standards can impeded the global economy’s ability to effectively address climate change…”
This illustrates something else that is worth noting, namely that standard setting is neither an easy nor a quick process, particularly where the standards must prove palatable to as many global stakeholders as possible. And reaching consensus on anything that needs to be accepted globally takes a significant amount of time.
Timing
And this last point about the arduous nature of the standard setting process brings us very neatly to the timing of all of these commitments. The 2030 goals for decarbonising the global economy are just as important as those in place for 2050, and yet the focus of COP26 was firmly on the latter date. This is despite everyone agreeing that the pace of transition away from a carbon-centric world is probably one of the most important factors in averting a climate catastrophe.
There is no doubt that human activity is harming the environment and changing the climate. And that something needs to be done about this is not in question, either. However, one of the most critical aspects of addressing a risk or a problem is recognising the fact that it exists. And it does feel like the narrative around ESG, COP26, and climate change is currently full of vague platitudes instead of recognising and addressing the fact that some tough conversations and choices are needed to steer the world away from disaster.
COP27 is due to take place in Sharm El-Sheikh in Egypt on 7-18 November 2022. It remains to be seen whether the conference being hosted by an African country, one whose leadership has been very vocal about the challenges, will encourage its attendees to have those tough conversations and make those difficult – but necessary – choices.
