Issue #3
ESG at War
Some weeks count more than others. On February 24th, Putin invaded Ukraine. A few days later, on the 28th, the IPCC (Intergovernmental Panel on Climate Change) published the second part of its Sixth Assessment Report. The first was an unexpected shock; the second was expected, but shocking nonetheless. How should ESG professionals adapt to this new world? What questions should we ask ourselves?
Cutting through the noise
I am not an expert on geopolitics, just a casual observer. On the 24th, I was on holiday with my family in the beautiful French mountains of the Massif Central and remembered my history teacher who stopped the class one day of September 1989. He told us to close our books as history was unfolding in front of us: the wall was falling in Berlin. He explained to our group of teenagers why this was important and probably marked the end of the Cold War and the start of a new era of international cooperation. I was a fairly inattentive student, usually daydreaming. But I remember this class vividly!
So here I was, thirty three years later, explaining to my teenager daughters why the invasion of Ukraine was going to change the world… how we might see the building of a new iron curtain and how history was accelerating once again. We are probably not going back to the Cold War, the equilibrium of powers is very different today with China and India playing major roles and with the critical issue of global warming in the background. It was hard to present such tectonic shifts without creating more angst for a generation that hears about climate Armageddon daily… But that is another subject.
A few days later, we witness a major inflection point in the European construction. It is rearming and affirming its power, arguably for the first time, enabled by the ideological shift in Germany. It is opening its borders to millions of refugees with almost no voices complaining… and it is fundamentally rethinking its autonomy in terms of raw materials, food security, technology… and, last but not least, energy.
To some extent, Russia as a country suffers from the “curse of raw materials”. The exploitation of natural ressources at scale and without very strong governance generates inequality rather than prosperity. Money flows in the country but is concentrated into a few hands. While other industries where wealth could be better distributed have difficulties competing on international markets as their products are rendered expensive by a national currency that is pushed up by raw material exports.
Europe feeds on Russian fossil fuels and minerals. It has filled the Kremlin coffers that are now used to finance the war in Ukraine. And it has become highly dependant on Russia. This was probably not seen as a major concern as Russia was (and is!) part of Europe. Like a troublesome brother that is nonetheless part of the family. We were complacent. This has changed.
Climate
On the 28th, the IPCC report was published. It is an up-to-date sum of knowledge about climate change that should guide us to action. I was expecting a depressing read; it is worse than that. Without going through the litany of upcoming catastrophes, let’s just mention that half of the global population is already exposed and that the window of opportunity to enable climate resilient development is narrowing very rapidly. Antonio Guterres, UN General Secretary, qualified the lack of leadership as “criminal".
Action has been urgent for years!
The Meadows report “The Limits to Growth” was published exactly fifty years ago. This book showed how the dynamics of our modern societies was unsustainable in a world with physical limits. It is the ideological foundation of many of today’s environmental movements. Knowledge has progressed over that period. But the conclusion has not changed: action is required and the longer we wait, the harder it will be for humans to adapt. Unfortunately, our responses have been awfully insufficient and/or inadequate. We wasted 50 years! Reason and science alone do not motivate action…
We are running out of time! And we need political action.
On the European regulatory front, nuclear and natural gas (replacing coal) have been added a few weeks ago to the European Taxonomy. These energy sources do not align with the “scientific” criteria defined by the Technical Expert Group. They have been included as “green” for political reasons. Many have complained… But as the last decades of relative inaction have made clear, we need political forces to push for action. And that means they should to have a say. Even if finding an equilibrium between what is “scientifically” desirable and “politically” feasible is very difficult indeed…
Geopolitics
Undoubtedly, our “Net-Zero” goals to keep the planet habitable are a threat for fossil fuels exporters; or to be more precise, they are a threat to the rulers of these countries. If we add to that the lack of respect for the Minsk agreement and NATO’s presence on the Russian border, one can understand Putin’s frustrations. Even if Ukraine’s wish to join NATO was unrealistic as France and Germany were clear they would have vetoed any attempt to do so. One can also wonder what other objectives Putin might pursue: better access to the Black Sea? Access to Ukrainian agricultural ressources and/or fossil fuels and/or minerals? Taking out a costly intermediary on the gas pipeline running through Ukraine? Or maybe he really believes in his version of the regional history?
Now, the urgency of war is calling for action!
The IEA (International Energy Agency) has published a 10-Point Plan to Reduce the European Union’s Reliance on Russian Natural Gas with recommendations to reduce imports by one third over the coming year. The European Union targets full independence by 2027. We will see what can be done… In the meantime, we Europeans better stock up on sweaters and blankets for the next winter! Reducing our heating by 1°C is the ninth recommendation of the IEA. It would save 10 bcm (billion cubic meters) of gas out of the 140 bcm imported. Considering the average heating temperature is 22°C today, could we dream of lowering our thermostat to the minimum “safe and well-balanced indoor temperature” recommended by the WHO (World Health Organization) of 18°C? That would be almost one third of our imports!
However, other recommendations would negatively impact the climate, like increasing liquefied natural gas imports. Indeed, LNG emits more greenhouse gases than the natural gas imported through pipelines as it requires liquefaction, storage at -162°C, transportation and re-gasification… Europe will probably use any means possible to diversify away from Russian fuels, but it will hopefully do this within the Green Deal objectives. We could imagine higher emissions than planned in the short term (using LNG for example) and much lower emissions in the medium term as other measures kick in, like the acceleration of wind and solar or the faster implementation of energy efficiency policies.
We might be tackling climate change for the wrong reasons, but we might finally be doing it seriously!
Obviously, this is only Europe... Climate is a global challenge and working all together towards shared solutions would be much better... We could even dream of world peace to facilitate international collaboration!
As usual, this is meant to be an open discussion. So please share your comments, ideas and questions!
As usual, this letter, originally published on LinkedIn, is meant to open a discussion: join it here.
Lenny Kessler