The invasion of Ukraine by Russia has forced a fundamental rethinking of the geopolitical landscape, including the impact of the conflict on global corporate action on climate change.
Among many factors critical to global stability, disruption to supplies of three key commodities are at play: food, fertiliser and fuel.
The continued crisis means a de facto locking away of the world’s bread baskets, with Ukraine and Russia together said to produce nearly 30% of the world’s traded wheat and 12% of its calories overall.1 Meanwhile, heavily-sanctioned Russia and ally Belarus accounted for more than 40% of global exports of potash last year, one of the critical nutrients for improved crop yields.2 When it comes to fuel, Russia supplies around 40% of the European Union’s gas, and 27% of its oil alone.3 Together, this represents the brewing of a perfect storm with the power to potentially undermine action on climate change.
With continued global disruption due to COVID, fears around the cost of living and inflation increasingly dominating policy and public conversations in Western Europe and U.S., plus nascent attempts to stoke popular opposition to net zero,4 some may be expecting a shifting perception of climate action towards ‘costly luxury’. But are we really facing a near-term future where climate action is abandoned, kicked down the road, or happens chaotically and as the result of a far more disorderly transition?
Alternatively, as the Ukraine crisis continues to cause significant pressures for corporates to reduce operational costs, energy consumption and their reliance on gas and oil, might we expect this to drive an acceleration in transition technology, encouraging corporates to go beyond their mandatory climate action requirements and use the current situation as a catalyst for creating greater resilience and sustainable profitability?
In terms of the likely outcomes of today’s crisis, while it may serve certain incumbent or would-be policymakers to move priorities away from emissions reductions, the realities of climate change, such as the extreme and catastrophic weather events that have impacted communities across the globe, are not going to stop. Positioning net zero as a ‘nice to have’ and climate inertia as an appropriate response to the cost-of-living crisis can only have a limited shelf life.
In many ways, the climate action train has already left the station, with statutory instruments including Task Force on Climate-Related Financial Disclosures (TCFD)5 already in play and the Securities and Exchange Commission (SEC) only last month releasing its draft rules compelling U.S. companies to include climate-related information in their registration statements and annual reports.6 Meanwhile, the E.U. is on the path to climate disclosure with its Corporate Sustainability Reporting Directive (CSRD), due to be implemented from 20237 and the International Energy Agency (IEA) also released its ten-point plan to reduce the E.U.’s imports of Russian gas by more than one-third within a year and still keep to a net zero pathway.8
In other words, there are wide-ranging and global moves in legislation and policy around climate action it would prove complicated and time-consuming to unwind.
All this said, calls to backslide on climate commitments and obligations or, perhaps less dramatically, retrograde moves to a ‘compliance-only’ approach to corporate climate disclosures that would fail to embrace the value and opportunities possible through transition may persist.
Should these perspectives manifest, then we might expect a lower likelihood of an orderly transition to net zero and a higher chance of more disorderly transitions scenarios characterised by abrupt, stringent and less predictable change. This feels potentially more likely and inherently carries a greater range and severity of risks.
Hopes the current conflict may catalyse the transition to net zero – with a determined resurgence in action around renewables – may be thwarted, for the short term at least. In some quarters, the crisis has led to an increased interest in fracking – currently subject to a moratorium in the UK – further discussion around exploiting domestic oil, gas and coal supplies, and diplomatic efforts to secure alternative global supplies of fossil fuels, such as U.K. Prime Minister’s Boris Johnson’s efforts in Saudi Arabia earlier this year.
Further to this, establishing the infrastructure required for renewables and nuclear is no quick fix. There are also concerns around the costs involved which appear to be prompting a level of caution.9 For his part, the U.K.’s Business Secretary Kwasi Kwarteng has pressed the case for expanding both renewable capacity and North Sea oil and gas production.10
When it comes to the question as to whether corporates should be preparing for a future with an obscured focus on reducing emissions, we would generally advise against. In the longer term, we expect those businesses positioned to go beyond climate compliance to be better placed to build both their resilience and sustainable profitability in the face of ongoing geopolitical disruption, and climate change.
One immovable current reality is that a great many corporates’ geopolitical and climate-related risk exposures have been subject to greater uncertainty and have therefore been amplified. What is not in doubt, therefore, is the urgency around having a full and dynamic understanding of these exposures.
To discuss the impact of recent events on your risk exposures, get in touch.
3 https://www.bbc.co.uk/news/business-61040424
6 https://www.sec.gov/rules/proposed/2022/33-11042.pdf
9 https://www.bbc.co.uk/news/uk-politics-60903879
10 https://twitter.com/KwasiKwarteng/status/1497121045358198784?s=20&t=jFSPVH8KYpFv4o4TuKoOGQ
