The private sector’s role in fighting the climate crisis
In just under a month’s time, the eyes of the world will be focused on Scotland, as senior politicians from across the globe convene in Glasgow to negotiate the acceleration of efforts to tackle climate change. The 2021 United Nations Climate Change Conference (or COP26) will be the most important climate summit since the landmark Paris Agreement was ratified at COP21 in 2015.
To limit global warming to 1.5 °C, as agreed in Paris, carbon dioxide (CO2) emissions must fall by about 45 percent by 2030 from a 2010 baseline. As the figure below shows, there are significant financial repercussions of increasing temperatures. More so, such changes will not be uniform, with developing countries expected to bear the brunt of climatic changes.
Global GDP will be significantly impacted by climate change in the coming years, especially if no mitigating steps are taken
Source: Swiss Re Institute, MP Analysis
Note: The range in values can be attributed to the presence of “(un)known unknowns”, i.e., factors such as disruption to global supply chains and trade, migration, and biodiversity, which cannot be exactly quantified, yet will undoubtedly impact GDP as temperatures rise.
In order to understand the magnitude of the problem at hand, it is important to understand the immediacy and gravity of the situation. According to a recent report, global average temperatures were 1.1° Celsius above pre industrial average by 2019. The consequences of such a development were:
The 1.5° Celsius limit has been recognized as the defining limit to prevent catastrophic changes to the environment. In order to achieve this aim, emission need to be reduced by 7.6% every year till 2030. If the relevant stakeholders had acted a decade ago this figure was only 3.3%. Nations agreed to a legally binding commitment in Paris to limit global temperature rise to no more than 2°C above pre-industrial levels but also offered national pledges to cut or curb their greenhouse gas emissions by 2030. This is known as the Paris Agreement; an extension of the Kyoto Protocol.
If countries cannot agree on sufficient pledges, in another 5 years, the emissions reductions required will leap to a near-impossible 15.5% every year. The unlikelihood of achieving this far steeper rate of decarbonization means the world faces a global temperature increase that will rise above 1.5°C. Every fraction of additional warming above 1.5°C will bring worsening impacts, threatening lives, food sources, livelihoods and economies worldwide. Above 1.5° Celsius:
Research has shown that the climate change-induced loss of wheat and rice crop production by 2050 would be USD 19.5 billion on Pakistan’s real GDP, coupled with an increase in commodity prices followed by a notable decrease in domestic private consumption. The important climate change threats to Pakistan include considerable increase in the frequency and intensity of extreme weather events, coupled with erratic monsoon rains causing frequent and intense floods and droughts. Projected recession of the Hindu Kush-Karakoram-Himalayan (HKH) glaciers due to global warming and carbon soot deposits from trans-boundary pollution sources, threatening water inflows into the Indus River System (IRS), pose a further worry.
Rising temperatures resulting in enhanced heat and water-stressed conditions, particularly in arid and semi-arid regions, could lead to reduced agricultural productivity. Meanwhile, increased intrusion of saline water in the Indus delta would adversely affect coastal agriculture, mangroves and the breeding grounds of fish. Threat to coastal areas would also increase due to projected sea level rise and increased cyclonic activity due to higher sea surface temperatures, potentially causing increased climate change-induced migration. These threats pose major survival concerns for Pakistan, particularly in relation to the country’s water security, food security and energy security.
Considering the impact that climate change would have, the public and private sector need to improve resource efficiency while ensuring investment in environmentally and socially sustainable projects. Although the government is a key stakeholder in any discussion on climate change, the role of the private sector is equally important.
The following six sector solution plan focused on private sector interventions will go a long way to achieving the mitigation aims of the world collectively:
There have been a number of studies looking at the relation between companies’ environmental, social, and corporate governance practices (ESG) and their financial performance. The vast majority of them find a direct link: companies that do good by the environment, their labor force, and communities, do well financially. IFC recently looked at the performance of 656 companies in its portfolio and found that companies with good E&S performance tend to outperform clients with worse environmental and social performance by 210 basis point (BPS) on return on equity (ROE) and by 110 bps on return on assets (ROA.). IFC also found that reporting really matters: firms with a well-established practice of reporting on more than half of SASB material sustainability indicators outperform firms with a weak reporting culture. This is in line with the findings by Harvard Business School that reporting on material issues is associated with increases in firm value.
A strong ESG proposition links to value creation in five essential ways:
|Strong ESG proposition||Weak ESG proposition|
|Top-Line growth||Attract B2B and B2C customers with sustainable products
Achieve better access to resources through stronger community and government relations
|Lose customers through poor sustainability practices or a perception of unsustainable/unsafe products
Lose access to resources because of poor community and labor relations
|Cost reductions||Lower energy consumption
Reduce water intake
|Generate unnecessary waste and pay correspondingly higher waste disposal costs
Expend more in packaging costs
|Regulatory and legal interventions||Achieve greater strategic freedom through deregulation
Earn subsidies and government support
|Suffer restriction on advertisement and POS
Incur fines and penalties
|Productivity uplift||Boost employee motivation
|Deal with social stigma which restricts talent pool
Lose talent as a result of weak purpose
|Investment and asset optimization||Enhance investment returns by allocating capital for the long term
Avoid investment that may not payoff in the long term because of environmental concerns
|Suffer stranded assets as a result of premature write-downs
Fall behind competitors who are energy efficient
On a countrywide scale, GDP is usually cited as the most fundamental metric of economic performance. However, its parochial nature has been criticized for its inability to take stock of natural capital. A measure of inclusive wealth is thus imperative; a measure that combines the accounting value of produced, human and natural capital. Work in this regard has accelerated significantly in the last two decades with China adopting a measure termed the ‘Gross Ecosystem Product’. Similar metrics are in the works in different countries across the globe. But, with natural capital accounting still in infancy and significant design and measurement challenges remaining, work needs to be done to boost reporting and assessment frameworks that better tally the worth of soil, trees, water, air, minerals and other resources.
As for the private sector, “sustainability” measures by companies need to go beyond mere optics. They should be an enduring long-term investment, not just because it is the right thing to do, but also because it leads to substantial returns in the long run. As this movement escalates, we hope that companies in Pakistan are on board to take steps that might not only be imperative for their respective organizations, but for the country as a whole.