The rising and falling interest in climate change – 16 Feb 2023

No effort has been helpful to meet the net zero target — replacing fossil fuel with renewable energy

Climate change has been a topic of interest and concern for several decades. Various responses have been devised ever since to reduce global carbon footprints. However, no effort has been helpful to meet the net zero target — replacing fossil fuel with renewable energy. While every country is responsible for devising and implementing its share of climate change policies, the global warming target of 1.5° Celsius above pre-industrial levels cannot be achieved unless every organisational entity, family unit and individual at the personal level feels the obligation to make a difference.

Climate change is one of the Sustainable Development Goals that, besides highlighting the responsibility of each country towards reducing greenhouse gasses, also gives them a guideline on achieving this ambitious albeit challenging goal.

According to the MSCI’s report on environmental, social, and corporate governance (ESG) and Climate Trends to Watch for 2023, the sensitivity towards climate-induced risks has had difficulty capturing the sustained attention of stakeholders across the globe. Lately, investors have been found lacking confidence in the commitments of corporations to align their objectives with the global climate change targets. Although not every investor is sceptical about the seriousness of the corporations to give climate change appropriate weightage, the percentage of those having mixed feelings has increased from 3.1% in 2021 to 9.6% in 2022.

This dip in investors’ interest could be due to the Ukraine War, which has shifted the focus from climate projects to the energy crisis. However, this indifference might be temporary, and corporations are expected to bounce back once the situation is under control and new realities begin to sink in. The good news is that the demand for having a climate-literate board of directors open to scrutinising climate risk management disclosures is rising. The MSCI ESG research insight reveals that companies with a Board having a sustainability committee on climate and at least one director with climate-related experience is more aligned with global temperature targets.

Regulatory inconsistencies and lack of standardised reporting practices are considered some of the significant hurdles in aligning the carbon emission targets with the global benchmark.

Of the three big climate disclosure standards i.e. the International Sustainability Standards Board (ISSB), the European Financial Reporting Advisory Group (EFRAG) and the US Securities and Exchange Commission (SEC), the European Sustainability Reporting Standards (ESRS) proposed by the EFRAG, are found to be more comprehensive.

Despite all these efforts, sustaining the mood surrounding climate change has never been easy.

While deforestation has been regarded as the biggest evil of modern life, and its presence counted as one of the areas that need attention if carbon footprints are to be erased, there has been a half-hearted effort to keep the ball rolling in this direction.

According to the ESG report, in 2021, trees were rooted out of 25.3 million hectares globally. Europe had planned to propose a regulation that would stop entrance into the European market of products made or based on deforested land after the end of 2019. However, only 11.7% of listed food-products companies and 18.2% of food retailers had disclosed a deforestation policy, while the numbers for auto components (3.3%) and textiles, apparel and luxury goods (3.7%) were even lower. Even at paper and forest products companies, the figure was below 40%. Nudging the manufacturers of high capital-yielding products made from palm oil, leather goods, rubber, paper, timber, soy, etc, towards climate risk sensitivity will never be easy. Probably that is the reason for the slow progress. Only time will prove whether the European Union’s regulatory muscle will successfully enforce and implement deforestation law. If this law is implemented in letter and spirit, it might save countries like Pakistan from the ravages of climate change. However, the inability of Europe to gear up to this challenge is a question mark on its intention to enforce a policy that demands an ethical and humane approach.

Sustaining interest and commitment to climate change has never been easy. The pandemic and now the Ukraine War have taken the attention away from climate-induced environmental risks to economic disruptions. It was natural to take climate change backstage when saving lives from the virus and the lockdown-induced unemployment was more critical. However, it also indicates the tendency to take climate change down the priority list in times of crisis. Is that the right approach? Or does it indicate that, as a body of knowledge, climate change has failed to effect the desired change in attitudes?

The Ukraine War has also reversed many reasonable steps so far taken in the direction of reducing greenhouse emissions. Sanctions on Russia and the US-led blackout of Russian energy goods and services have forced Europe, dependent on Russia to provide for its 90% energy needs, to go back in time and use coal and the long abandoned nuclear power plants. Unlike Denmark and New Zealand, no other country in Europe has an energy transition plan to offset energy crises in the short term. Moreover, the simultaneous rise in the cost of renewable energy has confused investors in choosing the right mix.

The issue of climate change is important but is also tricky and complicated — there are no shortcuts to it.

At a time when financial and investment firms are lending capital and theoretical support to businesses to decarbonise the global economy, the worrying concern of priority shift during a crisis cannot be ruled out. However, the only way to save the world from the ravages of climate change is to put people before profit.

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