The Sustainability Imperative

1 The Climate Crisis

In my 25+ years of finance career, I have witnessed sustainability become a top strategic concern across the corporate world. The reason is clear – we face an environmental crisis that is fundamentally altering economies globally.

For 800,000 years pre-industrialization, the carbon dioxide level in the atmosphere oscillated between 200 to 300 parts per million. For a long time, it existed within quite a static range and any significant change between these levels happened over a period of thousands of years. As such, it gave time for Mother Earth to adapt to those changes. 

However, since industrialization began just 70 to 80 years ago, atmospheric CO2 levels have rapidly increased from 200-300 parts per million to over 420 parts per million today. 

This dramatic 40%+ rise in CO2 levels is linked to more frequent extreme weather events that destroy vital infrastructure and wipe out crops. For example, in India, heat waves last year led to 50% lower crop yields for cotton and wheat in some regions. Apart from that, floods in Pakistan also caused losses of up to 25% of the country’s GDP. Similar impacts have occurred across Mozambique, Bangladesh, Australia and other places across the world.

Now, if you look at the World Economic Forum's annual Global Risks Perception Survey, it clearly highlights the rising priority of climate change and environmental threats worldwide.

In 2007, none of the top five global risks pertained to climate or the environment. Yet by 2020, all of the top 5 highest impact risks were climate-related. This includes extreme weather events, climate action failure, natural disasters, biodiversity loss and human-caused environmental damage.

This dramatic shift over just 13 years underscores how climate change has become the most pressing threat facing humanity. In 2021, climate risks still accounted for 4 out of the top 5 risks, with infectious disease being the only non-environmental risk in the top 5 due to the COVID-19 pandemic.

In addition, those born today face a much more climate-disrupted world compared to past generations. People born in 2020 will experience three times as many climate-related disasters over their lifetimes compared to those born in 1960.

For instance, heatwaves are now 7.5 times more likely compared to pre-industrial levels. The frequency of river flooding has risen 2.8 times. Wildfires now occur twice as often as before.

This data clearly shows the climate crisis future generations will inherit unless urgent action is taken. World leaders have recognized this through efforts like the Paris Agreement COP21 that aims to limit global warming to 1.5-2°C.

2 The Top Sources of Greenhouse Gas Emissions

As a start, understanding who the major emitters are is key to driving meaningful change. Currently, the top 10 emitters account for 64% of the global greenhouse gas emissions. The top 5 - China, the US, India, Russia and Brazil - contribute to 55% of the total emissions.

China emits 30% of the world's emissions alone at 16 gigatons. The US emits 11.2% at 6 gigatons, India is at 3.9%, Russia 2.5%.  Brazil is 1.3% and the next five are Indonesia, Japan, Iran, Mexico, and Saudi Arabia. However, on a per capita basis, India emits the least among top 10 countries at just 3 metric tons per person.

To illustrate global emissions at 54 gigatons annually, that equals 54 billion three-story building sized balls (1 ball being 1 metric ton) entering the atmosphere each year. To curb this immense volume of greenhouse gasses, urgent collective action across nations, companies and individuals is necessary and vital.

Overall, based on the historical data, we find that developed nations and China have contributed most to climate change through early industrialization. Meanwhile, developing countries in Africa emit less than 5% of the greenhouse gases combined, despite having over 50 nations. All in all, fossil fuels used across sectors caused 75-80% of the emissions. Fossil fuel is the real culprit. Therefore, the focus is on transitioning to renewable energy sources like wind and solar. 

However, the current country pledges only limit projected warming to 2.4-2.9°C, falling far short of the target set by the Paris Agreement. More ambition is needed across countries, companies and individuals to avoid leaving an unmanageable climate crisis for youth worldwide. Hence, safeguarding their future requires keeping global warming below 1.5°C through rapid economy-wide decarbonization.

That also means that it's a collective effort that each of us - country, corporates, and individuals - have to play so as to limit global warming. As such, the focus on the climate crisis has called for a focus on sustainability. 

So, what is sustainability exactly? Sustainability involves integrating environmental health, social equity and economic vitality to create thriving, resilient communities for current and future generations.

It focuses on humans and nature coexisting productively to support both present and future needs. Sustainability means not borrowing resources from future generations to meet today's needs. For example, India currently exceeds its sustainability targets by August, borrowing resources from the future for the remainder of the year.

To drive sustainability in an organization, the ESG framework is commonly used to provide guidance across three pillars:

• Environmental - focused on greenhouse gas emissions, energy use, water use, waste generation and other environmental impacts.

• Social - focused on gender and age diversity, employee training, health and safety and community wellbeing.

• Governance - focused on board composition, management's sustainability commitment, ethical behaviors and diversity.

Under this ESG framework, companies and countries are reporting on sustainability performance across environmental stewardship, social responsibility and governance. This reporting increases transparency on how businesses are adapting to the climate crisis through responsible operations, equity and ethics.

Moreover, stakeholders like investors, customers, employees and regulators are increasingly supporting and demanding action on ESG and sustainability. 

Studies show that companies with a strong ESG approach outperformed weak ESG companies by up to 5%. On the side of regulators, regulation on ESG topics is tightening and the number of disclosures is increasing. In response, over 2,300 new climate laws and regulations have been implemented globally in recent years. 

When it comes to customers, they favored brands with a good ESG story. In fact, customers would refuse to purchase a product if the company supported an issue contrary to their beliefs. In addition, good ESG is helping firms win the competition for talent. Progressive ESG-thinking companies see a 16% increase in productivity for employees with measurable impact on shareholder value. 

However, ESG reporting remains fragmented, with companies using different frameworks like SASB, GRI, TCFD, among others. Although 90% of Fortune 500 firms now report on ESG, the lack of standardization in frameworks prevents comparability across different organizations.

To address that, ESG ratings agencies like S&P Global, Moody’s and Bloomberg help to provide assurance on corporate disclosures. However, with no single standard, companies can cherry-pick favorable frameworks that benefit them in terms of disclosure and also portray themselves in a positive light.

In conclusion, while ESG interest is surging from stakeholders, achieving consistent transparency and comparability remains a challenge until disclosure standards are harmonized globally.

1 The Climate Crisis Is WorseningAtmospheric CO2 has dramatically increased in just 70-80 years since industrialization began, leading to more frequent extreme weather events. This is reflected in the World Economic Forum's Global Risk Survey, where all top 4 out of 5 risks are now climate-related.

2 Sustainability Is Crucial but Faces ChallengesFrameworks like ESG aim to drive sustainability across environmental, social and governance factors. However, sustainability reporting remains fragmented with no single standard, hindering transparency.

3 Stakeholders Are Demanding SustainabilityCustomers, employees, regulators and investors are increasingly expecting and rewarding companies with strong sustainability performance. But inconsistencies in disclosure prevent comparability and accountability.