2023: Everything gets harder everywhere
2023 is the year that everything gets harder. The term polycrisishas gone mainstream, and it speaks to the need for a new policy paradigm that is fit for purpose to tackle, at the appropriate pace and scale, the biggest and most complex challenges of our time - most of them environmental, and happening everywhere all at once, but most of all in the poorest countries.
The World Economic Forum at Davos is happening this week, and the 2023 edition of its Global Risks Report is definitely worth a read: it puts the big environmental risks front & centre, and articulates an approach that integrates short, medium and long-term thinking all at once.
While this report alone can’t crowd out the narratives about how the green agenda has been sidelined/downgraded by the reality check of war & its economic consequences, it is actually an encouraging and hopeful sign of a new type of sustainability-positive policy discourse and agenda.
The report notes business and political imperatives tend to prioritize risks with a direct, immediate and localized impact, such as food, fuel or other commodities’ shortages or local environmental disasters.
To break the cycle, business leaders and policy-makers need to embrace complexity and adopt a dual vision that more effectively balances current crisis management with a longer-term lens.
Out of 10 severe risks identified by respondents for the next decade, more than half are related to climate and nature; furthermore, a majority of respondents view existing measures to prevent or prepare for #1, #2, and #4 as ineffective or highly ineffective.
Failure to mitigate climate change
Failure of climate change adaptation
Natural disasters and extreme weather events
Biodiversity loss and ecosystem collapse
6. Natural resource crises
10. Large scale environmental damage incidents
This month’s edition contains 3 things to look out for in 2023, a new paper that explains the transformation of the European Central Bank over just 3 years from climate-indifferent to climate-proactive, and a sneak preview of our next podcast on one of the top issues of 2023: climate litigation and a potential landmark case where a gas company’s net zero plan is being taken to court for greenwashing claims.
Highlights from the Sustainability Agenda
Three things to watch out for in 2023
👉 Complex ESG policy and political landscape will pay off in the long-term
If you thought 2022 was hard to navigate, the regulatory space for ESG disclosures is going to get harder.
On the one hand, more jurisdictions will propose or start to enforce ESG-related disclosure requirements, raising regulatory and market scrutiny into companies' practices.
Here’s a table that shows upcoming new requirements for 2023/2024
On the other hand, companies in the US will face more pressure to exclude or minimize the integration of ESG concerns in business and investment decisions if they are perceived to come at the expense of shareholder returns.
For example, the 2022 rollout of Europe's Sustainable Finance Disclosure Regulation (SFDR), which requires asset managers to provide standardized disclosures on how they integrate ESG factors into investment decisions, resulted in many asset managers reclassifying funds, leading to allegations of greenwashing.
Regulators in the US also took regulatory actions against banks and asset managers, such as fining The Bank of New York Mellon for misrepresenting the ESG credentials of some investment funds and The Goldman Sachs Group Inc. for failing to follow its ESG investment policies and procedures.
In the short term, all of this will raise compliance costs and could dampen growth in sustainable funds, but over the longer term, greater transparency will boost investor confidence and help grow the market.
👉 Without reform of the international financial system, most of the world will struggle to exit fossil fuels & adapt to climate change
After Sri Lanka’s debt crisis in 2022, many emerging and developing economies (among the most vulnerable to climate change impacts) are facing a serious debt crisis. Last month, Ghana announced that it would default on most external debt payments.
The International Monetary Fund (IMF) estimates that more than 54 countries are currently in need of debt relief. While these countries represent less than 3% of the global economy, they account for 18% of the global population and more than 50% of people living in extreme poverty.
When a country can no longer make debt payments, it seeks rescue funds from the IMF while negotiating a debt restructuring deal with its creditors. As more countries default, the availability of restructuring will shrink and/or the terms of the restructuring will be negatively impacted.
Why this matters: the WEF Global Risks report warns:
(…) as the number of sovereign defaults grow, creditor countries and companies could become more exposed to debt contagion, including systemically important banks, pension funds and state creditors.
A sovereign debt default in a systemically important economy could result in systemic proliferation with a devastating impact on a global scale.
Further compounding the debt crisis is low global growth, which will hit the poorest countries hardest. According to the World Bank’s Global Economic Prospects report, global growth is expected to slow to 1.7% from 3% expected six months ago. The report warns that any new adverse development could push the global economy into recession - marking the first time in more than 80 years that two global recessions have occurred within the same decade.
Over the next two years, per-capita income growth in emerging market and developing economies is projected to average 2.8%—a full percentage point lower than the 2010-2019 average. In Sub-Saharan Africa—which accounts for about 60% of the world’s extreme poor—growth in per capita income over 2023-24 is expected to average just 1.2%, a rate that could cause poverty rates to rise, not fall.
The answer? Right now the only plan on the table is the Bridgetown Agenda - to learn all about this, and whether it’s sufficient to address the current crisis, don’t miss our 🎙️ interview with Sony Kapoor published end-2022.
Spoiler alert: the real problem that isn’t being addressed in this global debate is the development model that the West is offering to the countries facing this ‘holy shit’ moment of multiple crises: debt, growth and the energy transition.
👉 Corporate net zero plans will come under increasing scrutiny
Companies in sectors with high exposure to transition risk will face rising pressure to set ambitious emission reduction targets and follow through with transparent and credible implementation plans, despite short-term energy security concerns. Those that do not meet stakeholder expectations will be exposed to growing policy and market risks.
Companies with unconvincing net zero plans could see their ability to borrow get harder. Furthermore, a landmark case from Australia (see below in the podcast section) that is challenging a gas company’s net zero plans for greenwashing could set a precedent and unleash a new wave of greenwash legal cases.
How the European Central Bank embraced climate change
The story of how climate change at the European Central Bank went from being a non-existent issue in 2018 to the Board Of Governors endorsing a climate action plan in mid-2021 is an HBO-worthy tale of change & transformation, some of it brought by actors from the periphery of the central banking universe.
A new paper called “Too green to be true? Forging a climate consensus at the European Central Bank” by French researcher Jérôme Deyris explores the swift and unexpected set of factors which resulted in that change:
Conversion of some of the reluctant central bankers was driven by the combination of external pressures from activists, parliamentarians and other central bankers who pushed it onto the ECB agenda.
The appointment of new central bankers, especially inside the Executive Board, was decisive in swinging the balance of power inside the board.
Particularly noteworthy is the decisive role played by, Isabel Schnabel, coming from academia with no prior experience as a cenral banker, who arrived on the board in 2019 and quickly became a strong advocate on climate change in quite an unexpected manner during the COVID crisis.
Not coming from a central banking background, her conversion was ‘pragmatic’, approaching the problem from all angles, without preconceptions, and taking care to weigh the pros and cons in each of her speeches.
She secured broad wording of adjustments that overcame the opposition of a coalition of climate reluctant governors intent on maintaining a risk-based-only-approach.
From and Beyond the podcast
Our next podcast will look at climate litigation in Australia, which has been described as the “crucible of successful climate litigation”. Without a doubt the country has been a trail blazer in this field, and I’m excited to publish this interview with Elaine Johnson from the Environmental Defenders Office later this month. Look out for it in your inbox, and make sure to subscribe if you haven’t already.
Like everything else, climate litigation is also entering a new phase of maturity and development: some are predicting that 2023 will be a watershed year.
Here’s a sneak preview of our conversation: a big case to watch out for its potential to ripple out globally is the case bring brought against Santos on greenwashing claims in its net zero plan.
Yet another world first from down under - if Santos loses this case, the courts’ ability to challenge greenwashing aquires a whole new set of very sharp teeth.
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Any combination of three or more interacting systemic risks with the potential to cause a cascading, runaway failure of Earth’s natural and social systems that irreversibly and catastrophically degrades humanity’s prospects.