And From ESG Theory to Sustainability Reality
A little less conversation and a little more action, please!
Financial stakeholders are eager to redirect their investments into sustainability-related ventures, and since 2018 the momentum of this capital migration has been accelerating at full speed. As of the end of 2020, the UN-backed Principles for Responsible Investment (PRI) reported Assets Under Management of more than $103.4 trillion and 3,300 corporate signatories. This is a signal of the growth of the responsible investment.
We are observing a constant increase in regulations and investor consciousness about societal, environmental, and governance (ESG) matters, and the urgency of climate change. Indeed, climate change is on the top of the list. There is also a lot of urgencies demanded by regulators and capital markets to bend the temperature curve to 1.5°C (above pre-industrial level temperatures) and plan a more sustainable and livable future for the planet.
The spirits are high and the concerns are high. However, what is missing is the definition of sustainability and more.
- How can regulators and capital markets define sustainability?
- What are the right measurement criteria for sustainability?
- What is the taxonomy for sustainability?
These questions are still unanswered.
However, the important point that I want to make here is that world has started moving in somewhat the right direction. We are observing leaps of innovation in the renewable space with the scalability of batteries, electrolyzing hydrogen, and progress on methane. Every change counts.
The IPCC latest report on Climate Change: the risk of Climate Crisis
I totally get it that we are 10 years late for these changes to achieve the desired IPCC (International Panel on Climate Change) climate scenario of 1.5°C. The 1.5°C target relies on negative carbon emissions that are enhanced uptake. The enhanced uptake here refers to the greenhouse effect based on human activities that are adding to the warming of the atmosphere, this includes gases that increase the atmosphere’s retention of the heat energy of the sun. You can explore an IPCC interactive version as well.
First, this assumes some combination of increased land and ocean uptake, when science suggests that overall uptake, especially on land, is decreasing. Increasing overall land uptake by more than baseline assumptions in models is challenging, with background sinks (A carbon sink is anything that absorbs more carbon from the atmosphere than it releases – for example, plants, the ocean, and soil. In contrast, a carbon source is anything that releases more carbon into the atmosphere than it absorbs – for example, the burning of fossil fuels or volcanic eruptions.) declining and some even changing to sources.
Second, “net-zero” and 1.5°C assume some form of industrial sequestration, for example, BioEnergy with carbon capture storage. However, these are new, expensive and unproven technologies.
We still have hope that we can still reach under 2.0°C with the power of regulations, innovations, and capital markets. However, we do not have 10 more years to solve this puzzle of defining the sustainability taxonomy.
What we have now is a power of choice. Financial markets process complex information each and every day. The impact of climate change is no exception. The concerns of squaring out the taxonomy should not stop innovation. Instead, we should empower the innovators to build diverse workable solutions throughout the regions and sectors. We are out of time in a climate emergency and code red is upon us. We cannot wait for the perfect solution.
What we need is a series of imperfect solutions that can make our planetary future perfect for us all. The real focus should be on avoiding the climate pitfall. This can be done with real live performance rather than commitments and promises.
Tackling Climate Crisis: some simple suggestions
– We do not need any more false promises from investors and companies. We need understatements and overperformance. Keep the targets real and achievable. We cannot afford any missed emission targets in accountable global emissions So keep the targets real.
– Frame future plans rather than goals. We need more action-based plans. Keep the future closer to today 10 -50 years is too long. We need quarterly and yearly quantified, measurable standards to monitor climate progress.
– We need to crack the climate puzzle from both a macro-level, top-down validation approach and from a micro-level bottom-up approach. The bottom-up approach has self-reported data on emissions reductions, both expected and achieved, which is more important than just carbon accounting. The carbon trajectory is more important than just the carbon footprint.
– We need more power and clarity on scope, reach, and measuring progress towards climate targets. This may vary across sectors, regions, and investment strategies.
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Let us get to terms with this, but let us not forget that it is crucial for companies and investors to achieve their definition of sustainability. Show what you can promise and promise what you can show. It is high time that we changed our approach. We need more action and reality and less conversation and theory to drive sustainability!
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