IMHO: Leading the transition

A generation has passed since governments established the United Nations Framework Convention on Climate Change in 1992. I was living in the UK, and was a member of the British government delegation to the Earth Summit in Rio de Janeiro.

At the time, it was the largest conference ever held, with the promise of concerted action to avert climate chaos – by governments, business and civil society. However, we have collectively failed to take preventative action and global emissions have continued to rise over the past three decades.

As a result, climate impacts are increasing faster than predicted. Unprecedented increases in ocean temperature and extreme weather events are occurring across the globe. These threaten to breach multiple tipping points and trigger destructive feedback loops.

Fortunately, there are signs of positive change. Technology development and the growing scale of production continue to lower the costs of renewable energy and battery storage in a rapid transition of global energy markets. The adoption of wind and solar energy is growing exponentially, far outpacing most forecasts based on the linear extrapolation of past trends.

This is encouraging, but is not enough. We are in a race between exponential growth curves. If we do not accelerate action to reduce emissions, we will face dire consequences.

There are sound business reasons to prioritise climate action, including the importance of brand. Trusted brands attract customers who are aware of their climate credentials. Conversely, the costs of a loss of reputation are high, especially in the concentrated food and agriculture supply chains.

Companies like Nestlé have taken on their own climate commitments and are raising the bar to require verification of environmental sustainability and low emissions from their suppliers. It is not a new message, but climate change makes it even more urgent to orient New Zealand’s primary sector towards higher-value, low-carbon food and agricultural products, and smart climate know-how.   

The financial industry is not a bystander. Investors can drive change towards low emissions through capital allocation and investment stewardship. An example is the fossil fuel sector. There has been a spate of bankruptcies in the coal sector, leaving a legacy of rusting infrastructure and toxic waste. The far larger oil and gas sector is trying to hang on, using political influence to keep regulation and market forces at bay.

Many investors have responded by avoiding the risks of ‘stranded assets’ – the production infrastructure and reserves that will be almost worthless as the industry declines. So far, investors with assets of over US$40 trillion have divested from fossil fuel companies. This is a contributing factor to the decline in the value of US oil and gas companies over the past decade compared to an increase of 280 per cent in the overall US sharemarket. The investors chasing short-term returns after Russia’s invasion of Ukraine are exposed to high risks.

As Sheikh Ahmad Zaki Yamani, the former Saudi Oil Minister, predicted: “The Stone Age did not end for lack of stones, and the oil age will end long before the world runs out of oil.”

Currently $8.2 billion in KiwiSaver and NZ managed funds is invested in propping up fossil fuel companies, most of it in global oil and gas companies that are still expanding their production rather than investing in the transition. A far smaller proportion is invested in renewable energy or companies on a pathway aligned to 1.5 degrees. Investing more of this capital in New Zealand private companies that are accelerating the climate transition would make a huge difference, as well as offering attractive opportunities for high returns.

Climate change is accelerating the integration of environment, social and governance (ESG) factors into investment. ESG is now mainstream in global finance, primarily in active fund management, but also increasingly in passive investment using smart indexes. Although ESG approaches have been criticised for greenwashing, inconsistent ratings and ‘wokeism’, it is widely accepted that including ESG risks and opportunities is sound financial practice.

This does not mean that ESG is always sound ethical practice. Many companies with high ESG scores, like Philip Morris or Exxon-Mobil, are far from ethical. Importantly, ESG approaches are now maturing to also include the impacts of companies on the climate, society and the environment. This would help orient finance towards climate solutions.

Leadership cannot be achieved solely by the business sector. Long-term investment for the climate transition needs a clear policy direction and predictable regulatory settings, including a defined pathway for carbon price increases. The voice of business is crucial in shaping government policy to both accelerate the transition and retain our international credibility.

New Zealand’s clean green reputation has been a major strength for our exports, tourism, international education and our ability to attract talented people. It is arguably our most valuable economic asset. However, this reputation is under threat as the world sees the evidence that New Zealand is retreating from our commitment to climate action. The potential costs are high.

Leadership is needed, not more promises and slogans. The role of directors is crucial. We need business leaders who can look beyond short-term profits and pursue a compelling business purpose for the long term benefit of their enterprise, our society and future generations.