Thursday 28 Mar 2024
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This article first appeared in Forum, The Edge Malaysia Weekly on December 13, 2021 - December 19, 2021

“Climate change is a complex and inherently systemic issue making it an extremely difficult risk and opportunity to manage.”  — World Economic Forum’s Principles of Climate Governance

The massive build-up of ambition, expectations and momentum prior to the two-week 26th United Nations Climate Change Conference of the Parties to the UN Framework Convention on Climate Change (UNFCCC) in Glasgow (COP26) proved too weighty for the frail shoulders of mere politicians and leaders. More than 100,000 protesters took to the streets of Glasgow alone, significantly more than anticipated, while an estimated 500 representatives were present from the fossil fuel industry alone, significantly more than the delegates for any single country.

The present outlook is a grave warning that global leaders simply do not have the capacity or political will or for other reasons, are not able to set aside their differences and priorities to be able to effectively attain consensus about the action that is urgently needed in this existential crisis, as informed by science.

This could signify various responses:

•     Governments that understand the enormity of the crisis and consequences will invest their time and resources in adaptation measures to ensure a just transition within their spheres of influence.

•     Civil society will endeavour to fill this vacuum and take the lead.

•     Business strategies will continue to bifurcate sharply between those who understand the extent of the transition and those who don’t and are essentially betting against society succeeding.

The unprecedented momentum of the past two years has been based on science and has seen both prudential regulators (central banks, monetary authorities) and capital market regulators (securities commission, stock exchange) as well as allocators of capital (institutional investors, banks, insurers) demand for enhanced reporting and disclosure so they can make better informed decisions, as capital needs to be diverted away from businesses, industries, regions and countries which still have not internalised the enormity of this transition and are not prepared for a smooth transition.

The ultimate consideration is very clear — there can be no successful business on a dead planet (“companies do not succeed in isolation”). There is increasing evidence, especially from meta studies, that enterprises with strong credentials in environment, social and governance (ESG) factors are delivering better risk-adjusted returns and financial performance. Non-ESG-focused businesses will increasingly lose access to capital markets as allocators of capital signal that business and financial stability is synonymous with environmental stability.

Some of the key challenges facing many countries are:

•     Lack of national and local climate-related data to make informed decisions, with such data needing to be accurate, timely and relevant.

•     The absence of forward-looking scenarios that are relevant for their industry and region.

•     Adequate policy signalling from legislators in decarbonising the economy and the transition strategy, specifically, necessary adaptation measures.

Emissions can be traced to sources, indicating those industry sectors and businesses which are significant emitters.

As carbon is unequivocally recognised as an environmental pollutant that is destroying the natural conditions necessary for our survival, this leads to a real and present danger that corporate earnings are mis-stated where it fails to capture the price of carbon. Further, nations that have declared climate ambitions and targets are reluctant to be accused of outsourcing their emissions.

Virtually every transition scenario is built on the pillars of electrification of multiple activities (such as transport, heating, buildings, industrial processes), increased source of green fuels (such as hydrogen, renewable energy) and preservation of carbon sinks and biodiversity (halt to deforestation, restoring degraded ecosystems).

Asia, which accounts for 36% of global gross domestic product, has made great progress in economic development and poverty reduction, but it is also responsible for around 80% of the world’s coal consumption and up to 60% of current CO2 emissions.

Thus, a critical global fault line is the lack of financing of clean energy investments in developing countries. International Energy Agency executive director Fatih Birol observed that while rich countries were cutting their emissions, some developing countries would continue to increase theirs unless they could gain more in shifting to a low-carbon economy.

The argument is that those countries which have contributed historically to the bulk of accumulated emissions have an opportunity to demonstrate leadership in limiting emissions, restoring ecosystem stability and extending assistance (whether soft loans, grants or knowledge transfer) to those countries that will be adversely and disproportionately affected, through no act of their own.

Thought leaders in business are responding decisively to help address the clear and present dangers of the climate emergency, demonstrating they can be a force for good, advocating for and supporting long-term value-accreting zero-regret investment decisions to future-proof their business and communities, as well as increasing our collective climate resilience.

First order implications which need addressing are physical and transition risks, including an understanding of what the extent of exposure is and an assessment of resilience to adverse climate events such as fire and floods.

As mitigation efforts alone are no longer sufficient, leaders need to deepen their thinking and efforts on second order implications including the availability of foreign labour, institutional stability and other significant social impacts such as mass climate migration, huge social disorders, which can escalate very dramatically and quickly.

However, while such leaders are evolving their transition strategy to be a competitive advantage, there are laggards among boards — one of the key findings from a recent Deloitte Asia-Pacific survey was that 72% of audit committees had not completed a comprehensive climate change assessment.

The upcoming International Sustainability Standards Board (ISSB) standards in June 2022 will be a game-changer, having galvanised multi-stakeholder inputs in less than a year. The prototype disclosure requirements issued by the Technical Readiness Working Group during COP26 require a level of granularity that we are certainly unaccustomed to.

It is abundantly clear that the costs of inaction are significantly more than the costs of action. However, despite the increased ambition recently demonstrated in the Nationally Determined Contributions, which signatories to the Paris Agreement are required to submit, and industry-wide commitments (most noticeably Glasgow Financial Alliance for Net Zero or GFANZ with an eye-watering US$130 trillion (RM548.7 trillion) of assets backing it), all of the stated intentions need to be translated into legislation or policies. Yet, almost none of the assets are net zero today or fossil fuel free, while new fossil infrastructure is still being supported and financed. Most famously, this was seen in the auction of a colossal 81 million acres to be leased by the US government for oil and gas production in the Gulf of Mexico, just four days after COP26 in Glasgow.

As long-term stewards of the enterprise, directors are tasked with identifying material risks and effectively managing them, as well as those opportunities which will arise as a result of the climate emergency. It will be very difficult for any director to claim they were not fully aware of the material financial risks arising from this critical transition.

Thus, directors need to balance competing board priorities against a backdrop of limited time and capacity to address all strategic topics and the constant pressure to meet expectations of all stakeholders. When responsible and conscientious directors and businesses accurately anticipate the direction of travel, we can be a force for good.


Datin Seri Sunita Rajakumar is the chair and founder of Climate Governance Malaysia (CGM), the national chapter of the World Economic Forum’s Climate Governance Initiative (CGI). This column is part of a series coordinated by CGM. The CGI is an effort to support boards of directors in discharging their duty of care as long-term stewards of the companies they oversee, specifically to ensure that climate risks and opportunities are adequately addressed.

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