Will the Ukraine War Upend the Sustainability Agenda?
To prevent the sustainability agenda from becoming a casualty of Russia's war on Ukraine, policymakers and citizens must recognize the imperatives raised by the crisis and adjust their strategies accordingly. That means making our approach to environmental, social, and governance issues both more holistic and more granular.
PARIS – Beyond the immense tragedy which Russian President Vladimir Putin’s war has brought upon Ukraine and its people, we are starting to grasp its potentially devastating consequences for the global sustainability agenda.
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 net-zero 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 pandemic-recovery package – and a reconsideration of nuclear power.
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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 climate-friendly 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.