Climate Inequality and the Path to Sustainability Development
Introduction
Climate change is impacting various aspects of our lives, and the business sector is no exception. According to S&P Global Market Intelligence, “80% of the world’s largest companies are reporting exposure to physical or market transition risks associated with climate change”.[1] This arises from the physical effects of climate change, such as the rise in sea levels, and melting of ice caps. This has prompted businesses with related assets to resort to insuring them or adjusting their practices. For instance, companies dealing with carbon-intensive fuels may face increased costs as regulators aim to impose carbon pricing,[2] which helps in shifting the burden back to those who are responsible for it and who can avoid it. In addition, there are sustainability-backed loans which incentivise companies’ sustainability performance by linking the interest margin to the improvement of the companies’ Environmental, Social, and Governance (ESG) score.[3]
Moreover, it becomes essential for businesses to not only focus on their operational aspects but also to integrate ESG considerations into their core strategies.[4] This blog aims to explore the multifaceted dimensions of ESG, its significance in influencing financial markets, and its role in achieving climate goals. Further, it delves into the disparities between developed and developing countries in embracing ESG, raising questions about climate inequality and the potential impact on Sustainable Development Goals.
Image Source: WallStreetMojo
ESG and its contribution to Climate Goals
ESG ratings, which assess environmental, social, and governance, are crucial in influencing investment decisions in financial markets.[5] These frameworks help the stakeholders understand how the operations of an organisation relate to the ESG criteria and take a holistic view of sustainability. As per research conducted by PWC, nearly 80% of investors said ESG was an important factor in their investment decision-making.[6]
According to the 2022 survey conducted by Deloitte, it was found that 90% of Gen Zs and millennials are making at least some effort to reduce their impact on their environment.[7] This highlights the environment as an important area of concern for them and, consequently, emphasises the relevance for firms to understand consumer preferences and identify market opportunities.
Here is a breakdown of the individual components of ESG:[8]
1. Environmental: It is concerned with the relationship between the company and the impact it has on the environment. This includes factors such as greenhouse gas emissions, pollution levels, energy waste generation, waste management, etc.
2. Social: It connects the company with its employees and the concerned stakeholders of the community it does its business in. Labour relations, human rights, diversity and inclusion policies are some of the factors that fall under this component.
3. Governance: It relates to the internal workings of the company, such as the way it is governed, managed and controlled. It is the collection of the internal rules and practices of a company.
By mapping out their ESG priorities and reporting ESG developments, the firms can identify areas where they can significantly contribute and ultimately play a part in global sustainable development goals. The following are some of the common areas that directly relate to Sustainable Development Goals (SDGs) goals:[9]
· Ethical Supply Chain Practices – SDG 8 (Decent Work and Economic Growth)
· Gender Diversity – SDG 5 (Gender Equality)
· Carbon Footprint – SDG 7 (Affordable and Clean Energy), SDG 13 (Climate Action)
· Waste Management – SDG 12 – (Responsible Consumption and Production)
ESG is also seen as a vital step towards the path to net-zero carbon emissions.[10] In particular, the relationship between ESG and COP–26 goals show its potential to have a positive impact on a larger scale. For example, a study found that with a 1% improvement in ESG investment, China’s greenhouse gas emissions will decrease by 0.00466%.[11] China, having a net zero target by 2060, still has a long way to go before it can come to terms with its goals. labelled as "non-compliant with UN principles" by Sustainalytics, a sustainable rating agency.[12]
ESG in firms: Developed and developing countries
The incorporation of ESG considerations into firms' decision-making has indeed become a significant trend, driven by concerns such as sustainability, ethical practices, social responsibility, and reputation.While this shift brings evident benefits, there are apprehensions about its extent, as highlighted in a report for the UK government by Intellidex. The report cautions that certain ESG approaches may restrict funds to developing nations, particularly due to a reliance on risk avoidance and extensive data usage.[13] Disparities in ESG reporting levels are apparent, with a KPMG report revealing that, in 2020, only 18% of companies in emerging markets dedicated a section to ESG in their annual reports, compared to 74% in developed markets.[14] This suggests that emerging markets might allocate comparatively lesser importance to or have fewer resources for comprehensive ESG integration, possibly due to varying regulatory and development priorities, and potentially limited access to data and reporting frameworks.
A comparative study analysed the evolved pattern of ESG trends in developed and developing countries. The sample of developed countries, including the USA, Canada, Japan, Australia, New Zealand and EU were a part of the High-Income Group bracket defined by the World Bank. The sample of developing countries, on the other hand, included India, South Africa, China, Brazil, Indonesia, Argentina and Vietnam, part of the World Bank’s middle-income group. It revealed that the level of social and governance disclosure in a country is influenced by a combination of voluntary and mandatory codes, however, relying solely on one of these factors is insufficient to enhance the overall ESG level of the country.[15]
This raises the question: why do developing countries tend to report a lower level of ESG? Is it solely due to the lack of comprehensive regulations and prioritisation of economic development, or is there a more significant issue at play, such as climate inequality?
Photo by Markus Spiske on Unsplash
Climate Inequality
Most of the underdeveloped and developing countries are ones with extreme vulnerability to climate impacts. In the past three years, India, Pakistan, Central and South America have all experienced record-breaking heatwaves, with Pakistan also experiencing devastating floods that affected over 33 million people. Meanwhile, East Africa is facing its worst drought in over 40 years, contributing to widespread hunger. Oxfam estimates that up to two people are likely dying from hunger every minute in Ethiopia, Kenya Somalia, and South Sudan.[16] Businesses in these nations are also significantly impacted by climate change. According to the British International Investments (BII) Emerging Economies Climate Report, 58% of respondents in Africa expressed serious concern about the potential impact of climate change on their organisation's viability.[17]
The international law principle of common but differentiated responsibilities recognises the differences in socio-economic conditions between developed and developing countries, considering that industrialised nations emit less than their non-industrialised counterparts.[18] This principle serves as the foundation for global climate agreements.
In 2009 at the 15th UNFCC Conference of Parties (COP 15), the Copenhagen Accord was signed. It outlined the goal of mobilising $100 billion per year by 2020 from developed countries to assist developing countries in coping with the impacts of climate change, as well as in mitigating greenhouse gas emissions.[19]
Rich polluting countries are now three years overdue on their promise. To make things worse, the real value of the $83.3 billion that they claim to have provided is at most $24.5 billion. Their claim is an overstatement as it also includes loans cited at their face value. Furthermore, these loans can harm local communities by increasing their debt burden, especially during high-interest rates,[20] such as the relationship between China and debt-distressed African countries.[21]
Developing countries often find themselves reporting lower ESG data owing to their inadequate resources and infrastructure. Unfulfilled promises from developed countries can diminish developing countries' access to funding for essential development projects and their ability to improve environmental conservation practices, social welfare, and governance structures. As a result of this, an air of uncertainty looms over the fulfilment of the SDGs by 2030. Of the roughly 140 targets with data, only about 12% are on track to be achieved by 2030. [22] A report goes so far as to say that SDGs won’t be achieved until 2092.[23]
Image by Unilever.com, accessed on- https://www.aim.be/insight/the-unilever-sustainable-living-plan/
The Way Forward
While it is true and essential that developed countries should honour their commitments, it is also imperative that some urgent action takes place a little lower down the chain - through the firms, particularly their ESG policies. They have the agility to swiftly implement and adapt such practices across borders due to their flexibility in operations.
The firms in developed countries can engage in cross-border collaborations with counterparts in developing nations, or through launching relevant initiatives in their subsidiary companies, offering expertise, resources and support, thereby levelling out the inequalities in expertise and technical facilities between developed and developing countries that affect their ability to meet ESG goals. These could ensure a more thorough disclosure of ESG through joint ESG projects which can provide tangible data and results for reporting and analysis. In turn, these disclosures can increase public awareness and unlock further growth opportunities.
An example could be Hindustan Unilever Limited, which is a subsidiary of the British company Unilever. By launching the Unilever Sustainable Living Plan (USLP) and consistently reporting progress in their annual Sustainable Living Report, Unilever demonstrates the power of sustained efforts in ESG reporting. While some goals were not met, it made some remarkable achievements such as achieving 100% renewable grid electricity across sites and reducing its greenhouse gas emissions from its own manufacturing sites by 65%.[24]
Similarly, Olam Group's decision to list its $3.5 billion agricultural arm in Singapore and potentially Saudi Arabia aligns with the growing global concern over issues like the conflict in Ukraine and the impact of climate change.[25] This move not only reflects increased investment interest in food security but also underscores the potential for international collaboration to address critical global challenges.
These examples elucidate the importance of ESG reporting and how its significance extends beyond individual companies, necessitating the collaboration of investors, consumers, governments, and corporations to drive meaningful change and pave the way for a more sustainable future.
Conclusion
The intersection of climate change and business practices, and the importance of ESG considerations, has become critical in our way forward to a sustainable future. Fostering cross-border collaborations and launching initiatives with firms can play an important role, in addition to the fulfilment of past commitments by developed countries.
The transparency and accountability brought forth by ESG disclosures or Sustainability reports enable the company to be more transparent in addressing climate inequality and advancing sustainable development goals. Intergovernmental regulation appears to be catching up as evidenced by the Regulation of the European Parliament and of the Council on the establishment of a framework to facilitate sustainable investment, and the Corporate Sustainability Reporting Directive.[26]
Therefore, by embracing ESG principles and collaborating across borders, businesses can play a pivotal role in mitigating climate change and building a more sustainable future.
[1] Richard Mattison and Molly Mintz, ‘Accounting for Climate: The next Frontier in ESG’ (2019) <https://www.spglobal.com/_division_assets/images/special-editorial/iif-2019/accountingforclimate_-.pdf>.
[2] ‘ESG and Climate Change | Insights | Torys LLP’ (Torys.com, 2021) <https://www.torys.com/en/our-latest-thinking/publications/2021/03/esg-and-climate-change> accessed 10 November 2023.
[3] ‘Sustainability-Linked Loans • ING’ (Ingwb.com, 2017) <https://www.ingwb.com/en/sustainable-finance/sustainability-linked-loans#:~:text=Sustainability%2Dlinked%20loans%20incentivise%20companies,improvement%20on%20tailored%20sustainability%20KPIs.> accessed 10 November 2023.
[4] Lucy Pérez and others, ‘Does ESG Really Matter—and Why?’ (McKinsey & Company, 10 August 2022) <https://www.mckinsey.com/capabilities/sustainability/our-insights/does-esg-really-matter-and-why> accessed 10 November 2023.
[5] HM Treasury, ‘Future Regulatory Regime for Environmental, Social, and Governance (ESG) Ratings Providers’ (GOV.UK, 30 March 2023) <https://www.gov.uk/government/consultations/future-regulatory-regime-for-environmental-social-and-governance-esg-ratings-providers#:~:text=Environmental%2C%20Social%2C%20and%20Governance%20(ESG)%20ratings%20are%20assessments,investment%20decisions%20in%20financial%20markets.> accessed 10 November 2023.
[6] PricewaterhouseCoopers, ‘ESG Investor Survey: The Economic Realities of ESG’ (PwC, 2021) <https://www.pwc.com/gx/en/services/audit-assurance/corporate-reporting/esg-investor-survey.html> accessed 10 November 2023.
[7] Deloitte, ‘Striving for Balance, Advocating for Change’ (2022) <https://www2.deloitte.com/content/dam/Deloitte/at/Documents/human-capital/at-gen-z-millennial-survey-2022.pdf>.
[8] Witold Henisz, Tim Koller and Robin Nuttall, ‘Five Ways That ESG Creates Value’ (McKinsey & Company, 14 November 2019) <https://www.mckinsey.com/capabilities/strategy-and-corporate-finance/our-insights/five-ways-that-esg-creates-value> accessed 10 November 2023.
[9] Youssef Nohra, ‘ESG Strategies to Achieve the UN’s Sustainable Development Goals!’ (Blog-qhse.com, 17 July 2023) <https://www.blog-qhse.com/en/esg-strategies-to-achieve-the-uns-sustainable-development-goals#:~:text=By%20mapping%20their%20ESG%20priorities,measure%20progress%20towards%20specific%20SDGs.> accessed 10 November 2023.
[10] ‘Why Incorporating ESG Data Is Crucial for Your Net Zero Strategy | UKGBC’ (UKGBC, 2023) <https://ukgbc.org/news/why-incorporating-esg-data-is-crucial-for-your-net-zero-strategy/> accessed 11 November 2023.
[11] Xiaoyuan Wang and others, ‘Role of ESG Investments in Achieving COP-26 Targets’ (2023) 123 Energy Economics 106757 <https://www.sciencedirect.com/science/article/pii/S0140988323002554> accessed 11 November 2023.
[12] Edward White and Leo Lewis, ‘China ESG Reckoning Looms for Investors’ (Financial Times, 4 January 2023) <https://www.ft.com/content/55058f28-8c47-40c8-9919-8ded9daa53e9> accessed 11 November 2023.
[13] ‘Some Approaches to ESG Investment Could Restrict Funding for Developing Nations’ (Financial Times, 13 October 2022) <https://channels.ft.com/en/ft-moral-money/some-approaches-to-esg-investment-could-restrict-funding-for-developing-nations/> accessed 11 November 2023.
[14] KPMG, ‘The KPMG Survey of Sustainability Reporting 2020’ (2020) <https://assets.kpmg.com/content/dam/kpmg/be/pdf/2020/12/The_Time_Has_Come_KPMG_Survey_of_Sustainability_Reporting_2020.pdf>.
[15] ‘Institutional Framework of ESG Disclosures: Comparative Analysis of Developed and Developing Countries’ [2023] Journal of Sustainable Finance & Investment <https://www.tandfonline.com/doi/full/10.1080/20430795.2021.1964810> accessed 11 November 2023.
[16] ‘G7 Owes Huge $13 Trillion Debt to Global South | Oxfam International’ (Oxfam International, 17 May 2023) <https://www.oxfam.org/en/press-releases/g7-owes-huge-13-trillion-debt-global-south> accessed 11 November 2023.
[17] ‘British International Investment’ (British International Investment, 18 November 2022) <https://www.bii.co.uk/en/african-climate-conversation/what-impact-is-the-climate-crisis-having-on-businesses-in-africa-and-how-are-they-rising-to-the-challenge-british-international-investments-emerging-economies-climate-report-2022/> accessed 11 November 2023.
[18] ‘Common but Differentiated Responsibilities’ (Oxford Public International Law, 2021) <https://opil.ouplaw.com/display/10.1093/law:epil/9780199231690/law-9780199231690-e1568> accessed 11 November 2023.
[19] ‘Climate Finance and the USD 100 Billion Goal - OECD’ (Oecd.org, 2020) <https://www.oecd.org/climate-change/finance-usd-100-billion-goal/#:~:text=At%20the%2015th%20Conference%20of,actions%20and%20transparency%20on%20implementation.> accessed 11 November 2023.
[20] ‘Climate Finance Shadow Report 2023: Assessing the Delivery of the $100 Billion Commitment - Oxfam Policy & Practice’ (Oxfam Policy & Practice, 2023) <https://policy-practice.oxfam.org/resources/climate-finance-shadow-report-2023-621500/> accessed 11 November 2023.
[21] ‘Climbing out of the Chinese Debt Trap’ (Chatham House – International Affairs Think Tank, 3 August 2022) <https://www.chathamhouse.org/publications/the-world-today/2022-08/climbing-out-chinese-debt-trap> accessed 16 November 2023.
[22] ‘How Can We Get the Sustainable Development Goals Back on Track for 2030?’ (Institution of Civil Engineers (ICE), 2023) <https://www.ice.org.uk/news-insight/news-and-blogs/ice-blogs/the-infrastructure-blog/how-can-we-get-the-sdgs-back-on-track-for-2030> accessed 11 November 2023.
[23] ‘Palladium - New Report Says SDGs Won’t Be Achieved until 2092 - Now Is the Time for Action’ (Thepalladiumgroup.com, 2020) <https://thepalladiumgroup.com/news/New-Report-says-SDGs-Won't-Be-Achieved-Until-2092-Now-is-the-Time-for-Action> accessed 11 November 2023.
[24] Unilever PLC, ‘Unilever Celebrates 10 Years of the Sustainable Living Plan’ (Unilever, 6 May 2020) <https://www.unilever.com/news/press-and-media/press-releases/2020/unilever-celebrates-10-years-of-the-sustainable-living-plan/> accessed 12 November 2023.
[25] Mercedes Ruehl, ‘Olam Explores Listing Agricultural Arm in Singapore and Saudi Arabia’ (Financial Times, 10 January 2023) <https://www.ft.com/content/1e0733a9-9da9-4d35-a343-0e2770023966> accessed 12 November 2023.
[26] PricewaterhouseCoopers, ‘ESG Reporting and Preparation of a Sustainability Report | PwC Slovakia’ (PwC, 2021) <https://www.pwc.com/sk/en/environmental-social-and-corporate-governance-esg/esg-reporting.html> accessed 12 November 2023.