Corporate Responsibility and Climate Change

The planet is hurtling towards a sixth extinction, but concrete actions to reduce green house gas (GHG) emissions are slow and lack ambition. It has taken the world 30 years from first acknowledging the need to protect the environment at the Earth Summit in Rio, to present-day negotiations – and there are still glaring gaps between commitment and delivery.

Unfortunately, the exponential increase in risks from a warming planet does not give us the luxury of another 30 years to reach net zero.

As part of the Paris Agreement, the signatory countries had to share their declared intent for setting net zero targets in the nationally determined contributions (NDC). While the desired timeline for reaching this target is 2050, some countries have decided to extend it to 2060 and 2070. All countries need to make an effort to reduce emissions, but the onus falls largely on high-emitting countries to ensure that the footfall of fossil fuel emissions is not at the cost of risking the lives and livelihoods of millions of people who are neither responsible for the chaos in nature nor the extreme weather events and resultant climate disasters.

Finance plays a big role in emissions as investments in energy need large amounts of capital investment. It also comes into play when large-scale transitioning is required to shift from dirty to clean sources of energy. Amid today’s challenges, ranging from the war in Ukraine to the rising cost of food and energy, disruption in supply chains and high inflation, the urgency in making the shift from existing to renewable has received a setback.

Along with public and philanthropic finance, private finance has a critical role to play in enabling the achievement of the Paris Agreement’s objectives. Just energy transition as a goal can be reached faster by blending public finance with private finance for accelerating transition and reaching net zero. Climate change has now reached a stage where without shifting the alignment of private finance with net zero, achieving the target of 1.5°C may not be possible. The ultimate aim of climate action is to achieve carbon neutrality. Net zero meansstriking a balance between thenumber of greenhouse gasesproduced and the amountremoved from the atmosphere.Net zero is reached when theamount we add is no more thanthe amount we take away.

The Paris Agreement providesa durable framework guiding theglobal community towards a netzero emissions world. Makinga shift from fossil fuel and coalintensive energy systems is noteasy but not doing so is perilous.Given the slow progress andlacklustre performance of climateconferences after the hype andhope triggered by the ParisAgreement, the disenchantmentwith multilateralism is threateningto unravel the agreement reachedso assiduously in 2015.

Private finance can becomea game changer if, instead ofgreenwashing and misreporting,it takes on the role of a regulatorto ensure that all future energyfinancing will be made availableto those with demonstrabletargets, interim plans for deepemission reductions and fossilfuel phase-out strategies. This willbe a giant step forward in keeping1.5 alive and reviving hopefor meeting the mitigation andadaptation goals by 2050.

The war in Ukraine has roiledenergy markets, making it harder toclose down coal-fired power plants.Be that as it may, not achieving netzero means wildfires, droughts,floods, crop failure, famine, massmigration and the destruction ofecosystems, communities andwildlife. In other words, the end oflife on planet Earth.

Against the backdrop of thisapocalyptic scenario, it is importantto track finance as it plays anenabling role across virtually allaspects of the real economy.Financed emissions span abroad spectrum, and it is criticalto pivot away from business as usual investments in fossil fuels.It is estimated that the 60 largestglobal banks invested some $4.6trillion in fossil fuel since the ParisAgreement was signed in 2015,including $742 billion in fossilfinancing in 2021 alone.

This is akin to financing risk andinvesting in a crisis. The longerprivate finance takes to stopfinancing actions that threaten theplanet, the quicker we will movetowards extinction.

Private finance can alsoenhance its role in adaptation andresilience finance and reduce thewidening adaptation finance gap.Estimates that adaptation costsin developing countries are fiveto 10 times higher than currentadaptation flows mean gettingtrapped in a plummeting spiral of adownward trajectory. The windowof opportunity is closing fast andnow is the time to call for deeperaccountability for net zero targetsand link it with private finance tobuild a true ambition loop. It is alsoimportant to protect the integrityof net zero as a tool for climateaction and set clear standardsand criteria to differentiate goodplans from greenwashing. Not allcountries are equal emitters andtherefore net zero must embed theprinciples of equity and justice insetting the ambition targets. Highlydeveloped countries should reachnet zero significantly earlier thanlow-emitting countries to achievethe global average of net zero bymid-century.

Moving from global to national,the same principles should applyat the country level for aligningprivate finance with public andphilanthropic finance to stopmitigation and support adaptation.

The floods in Pakistan in 2022should serve as a preview ofdisasters that are likely to takeplace, as the difference betweenland and ocean temperaturescontinues to increase. The floodsfollowed soon after a deadlyheatwave in South Asia, wherethe highest temperatures in 122years were recorded in parts ofthe region. Recurring disasters willresult in an exponential increasein economic losses and at thesame time, it will also result in anexponential decrease in copingcapacity.

Projected losses from climatechange in the GDP per capita forSouth Asian countries are higherthan the global average of aboutseven percent, with Bhutan facinga potential loss of 18%, Nepal13%, India 10% and Pakistan10% in 2100.

The cascading impacts ofclimate change can prove to becatastrophic and push the regiontowards destabilisation. With 49million people in Pakistan alreadyliving in areas where life qualityindicators are expected to declineby four percent and 800 millionpeople in the region residing inclimate-vulnerable hotspots, theneed for private finance to alignwith net zero is also important froma business point of view. Investingin green growth means investingin prosperity which is good forbusiness and an opportunity forpromoting ‘Green Peace’ inthe region.

So far, private finance inPakistan has not evolved to fullyintegrate climate risks into theirmethodologies to build economicresilience and thwart investmentsthat contribute to GHG emissions.Climate solutions investmentopportunities in emerging marketsand developing countries oftendo not match investors’ risk/returnrequirements, requiring de-riskingmechanisms to enable investment.Even as some relevant assetclasses (such as climate bonds)have seen massive growth globally,their deployment is still nascentand limited in developing countriesand emerging markets. Issuessuch as currency volatility, politicaland/or economic instability andregulatory unpredictability translateinto investment risks that oftenexceed investors’ risk tolerance.These barriers can be overcome inmany instances via the deploymentof de-risking mechanismssuch as blended finance thatincludes concessional public orphilanthropic capital and financialguarantees.

In recognising the role of privatefinance and its alignment with netzero, it is important to point outthat financial institutions and theirregulators must reject the falsenarrative that acting on climate issomehow at odds with fiduciaryobligations to prioritise returns.

Aisha Khan is head of Civil Society Coalition for Climate Change. aisha@csccc.org.pk