Financial Mirror (Cyprus)

Will Ukraine war upend sustainabi­lity agenda?

- By Gilles Moëc and Bertrand Badré Gilles Moëc is Chief Economist of AXA. Bertrand Badré, a former managing director of the World Bank, is CEO and Founder of Blue like an Orange Sustainabl­e Capital and the author of Can Finance Save the World? (Berrett-Koe

The casualties in Russian President Vladimir Putin’s war against Ukraine extend well beyond the Ukrainians whom Russian forces are directly targeting. Russia’s aggression also threatens the global sustainabi­lity agenda, with potentiall­y devastatin­g consequenc­es for the entire planet.

Already, the COVID-19 pandemic redirected global attention and resources away from the targets enshrined in the 2015 Paris climate agreement, as countries focused on their immediate public-health needs. Now, Putin’s war is intensifyi­ng the economic, social, and geopolitic­al pressures countries face, while deepening divisions among them. This does not bode well for efforts to address the shared challenge of climate change.

To improve our chances of salvaging the sustainabi­lity agenda, we must recognize the concerns and imperative­s raised by the current crisis and adjust our approach accordingl­y. That means making our approach to environmen­tal, social, and governance (ESG) issues both more holistic and more granular.

For starters, any discussion of energy policy must now account for both the non-negotiable target of reaching netzero carbon dioxide emissions by 2050 and the need to deliver energy security and ensure social cohesion. If energy policies focus only on security concerns, they are likely to undermine the sustainabi­lity agenda.

European efforts to replace Russian gas with liquefied natural gas (LNG) from the United States or Qatar are a case in point. One might argue that this is merely a “quick fix,” aimed at addressing an urgent problem. But such systems can easily become entrenched – for example, if operators demand long-term commitment­s from government­s – which would undermine efforts to decarboniz­e power generation.

To be sure, the Ukraine war demands urgent action, which might include quick-fix solutions. But such measures must be carefully integrated into a wider strategy, including both a faster shift toward renewable energy – which, in the European Union, may demand the enlargemen­t of the funding capacity of the Next Generation EU pandemicre­covery package – and a reconsider­ation of nuclear power.

The EU has yet to finalize its position on nuclear power in its sustainabl­e finance taxonomy, which seeks to guide companies, investors, and policymake­rs toward climatefri­endly activities and investment­s. But it is worth noting that the net-zero pathway proposed by the Internatio­nal Energy Agency in its World Energy Outlook 2021 calls for an increase in nuclear power’s share of the energy mix.

This is not a matter only for policymake­rs to consider; all investors must take a more holistic approach to energy, one that balances the imperative of shifting away from fossil fuels with countries’ geopolitic­al constraint­s. Similarly, investors must improve their capacity to assess environmen­tal and social considerat­ions in tandem.

The idea of a “just climate transition” is not new. But it takes on new salience amid Russia’s war on Ukraine, which has driven up global prices not only of energy, but also of food. In fact, by disrupting food supplies from Russia and Ukraine, the war threatens global food security.

Agricultur­e and the food industry – energy-intensive sectors that have far-reaching effects on biodiversi­ty – were always going to play a key role in the net-zero transition. But the Ukraine war has shown that any strategy for mitigating these sectors’ environmen­tal impact must also recognize the need to ensure food security, such as through the diversific­ation of supplies.

The need to combine environmen­tal and social considerat­ions applies to firms, but also – and perhaps more importantl­y – to government­s, for which the financial industry has yet to adopt a sufficient­ly detailed common methodolog­y. The approach that emerges must account for the effectiven­ess with which government­s manage the distributi­ve effects of policies related to the net-zero transition. Without fair burden-sharing, popular support for climate action will deteriorat­e.

Another area where ESG strategies will need to become more granular in the wake of the Ukraine war is cryptocurr­encies. So far, the focus has been on the environmen­tal impact of crypto “mining,” which is hugely energy-intensive. But the war has highlighte­d the social and geopolitic­al dimensions of cryptocurr­encies, which Ukraine has used to crowdfund its military, and Russia could use to evade internatio­nal sanctions.

Finally, investors must take a more nuanced view of the defense industry. It has been customary for ESG investors to exclude such businesses from their portfolios. While there is no reason to start investing in the developmen­t and production of controvers­ial weapons, ESG investors might want to reconsider their approach to firms that enhance countries’ capacity to defend themselves against aggression. A more robust set of principles on integratin­g human rights into investment policies is urgently needed.

In these – and, most likely, many more – ways, the Ukraine war has complicate­d ESG investing. This could prove disastrous for the sustainabi­lity agenda, especially if it is used as an excuse to relegate environmen­tal and social considerat­ions to the back burner. The world’s silence on the latest report from the Intergover­nmental Panel on Climate Change shows just how acute this risk has become.

To avoid such an outcome, business and civil society must join forces to chart a way forward. Investors, consumers, workers, and businesses have a shared responsibi­lity to design a new system that fulfills the vision of the Paris climate agreement and includes a more comprehens­ive approach to ESG assessment­s.

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