This year’s Earth Day theme shines the light on corporate action, with business leaders urged to go green in order to achieve higher profitability. Those who fail to do so are said to be putting their companies at risk.
For businesses too
This Friday, the world commemorates Earth Day. Set on 22 April annually, the day is said to mark the birth of the modern environmental movement in 1970, and became a global event in 1990. Earth Day was originally established to inspire grassroots action against pollution, but has since become a worldwide campaign platform for tackling a wide variety of environmental issues, with an increasing focus on global warming and clean energy.
This year’s Earth Day theme – Invest in Our Planet – marks a departure from previous years. As well as addressing community-based initiatives, Earth Day 2022 makes a direct appeal to businesses. The Earth Day website states, “Unless businesses act now, climate change will ever more deeply damage economies, increase scarcity, drain profits and job prospects, and impact us all.”
The statement continues, “So for both humanitarian and business reasons, it is imperative that companies of all sizes take action and embrace the benefits of a green economy. Tell business leaders to get on board with a sustainable future or get out of the way.”
Nor could this year’s Earth Day be more timely. It comes less than a month after the release of the IPCC’s (Intergovernmental Panel on Climate Change) devastating Sixth Assessment Report.
Said to contain the bleakest warning yet about the consequences of inaction, the report details how historic failures to cut emissions have already left half the world population – 3.3 billion people – highly vulnerable to the impact of the climate crisis. Going forward, global temperatures, if allowed to rise even temporarily above 1.5 degrees, will have a deep, irreversible impact on the planet, including extreme weather, food shortages and water insecurity.
Notably, the report highlights the misalignment of global capital between current levels of climate finance and what is needed to meet climate targets. While public and private funds for climate change mitigation have increased 60 percent from 2013 to 2020, ESG assets are still only around a tenth of total assets under management. More alarming is the fact that these funds remain less than that directed at the fossil fuel industry.
Prosperity or pain
It is perhaps not surprising then that this year’s Earth Day puts the spotlight on green business practices. Such practices are hailed not only as the ethical option for the private sector, but also a lucrative one. This year’s Earth Day organisers are keen to press home the message that sustainability and businesses imperatives are no longer at odds. Rather, going green secures a company’s financial profitability, stock market resilience and employee satisfaction.
This is a claim worth exploring further. To date, ESG strategies have relatively short performance records and continues to be hotly debated. That said, there appears to be a number of unavoidable truths. Firstly, the extent of damage to a company’s financials depends on the carrot and stick policies adopted by their regulators. As such, there are large variations around the world, but their adoption continues to gain momentum.
Secondly, materiality matters. The companies that are able to beat their non-ESG competitors are those that are able to integrate ESG factors that are material to the industry. Wide-ranging and unfocused ESG investments will ultimately fail to garner the support of its customers, investors, stakeholders and staff.
Thirdly, sustainability provides downside protection. Regardless whether ESG-centric companies are able to demonstrate earnings outperformance in the short term, there can be little doubt that such companies, and the funds that invest in them, are more future-ready. This ensures a level of resilience not available to their non-ESG competitors.
So what should be the priorities for businesses? The IPCC report provides the foundation for five key and urgent actions:
1. Assess your climate risks – The far-reaching implications of climate change has caused some analysts to recommend that, other ESG considerations aside, companies need to specifically assess their exposure to risks associated with climate change. According to S&P Global Market Intelligence, 80 percent of the world’s largest companies are already exposed to such risks.
2. See the writing on the wall – Based on the latest findings of the IPCC report, we must assume that the effects of global warming will only accelerate, as will the policy efforts to mitigate them. As such, a company’s profitability will be increasingly tied to its ability to align to such fast-moving changes in policy, including the costs associated with carbon taxes, and other climate-related penalties.
3. Prepare for the worst – The IPCC report warns that in some regions of the world, the impact of climate change may now be “at the point of no return”. In these regions, effects such as flooding, wildfires, erosion, drought and ecological damage are inevitable and set to get worse. Companies are urged to take the necessary steps to cope with these rather than pass them off as one-off events.
4. Be embedded – Business are already dependent on the communities that they operate in, but this will increase as the climate crisis worsens. It is important therefore that businesses partner with their local communities in their responses to the effects of climate change. The ability to support climate-vulnerable populations is expected to become a vital ESG measure.
5. Rethink nature – Earth Day 2022 provides an opportunity for businesses to re-map their relationship to the natural world. According to the United Nations (UN), more than half of the world’s total GDP is either “moderately or highly dependent on nature” across a variety of sectors – from agriculture and food, to construction, forestry and mining.
The ongoing destruction of nature has brought about a US$8.1 trillion financing gap into nature-based solutions. Closely tied to the climate crisis, private sector investments into such nature-conservation projects are small currently, but have the potential to reap large rewards.
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