The surge in ESG-centered investing is gaining momentum, driven by concerns about economic sustainability, climate change, and human survival, as well as its returns. A study by MSCI found that companies with strong ESG ratings outperformed their counterparts by 3.1% annually over a 10-year period. Analysis of investment studies reveals a positive correlation between ESG and financial performance, leading to improved risk-adjusted returns for ESG investments. It’s estimated that by 2025, ESG-mandated assets will reach $53 trillion, representing one-third of global assets under management, according to Bloomberg Intelligence.

Funds and their portfolio companies are intensifying their public-facing ESG frameworks and commitments throughout their investment lifecycle. However, businesses lacking mature ESG capabilities during critical transactions like mergers, acquisitions, divestitures, and initial public offerings face higher risks of reduced valuations or deal failures due to perceived ESG risks. To ensure fair valuations and returns, it’s essential for dealmakers to proactively identify and mitigate potential ESG risks. Nonetheless, creating a framework to monitor portfolio company ESG risks and opportunities in real-time remains a significant challenge, compounded by the lack of standardised ESG reporting metrics and key performance indicators.

Technology enablement in ESG governance

Technology-based enablers can significantly enhance an organisation’s ESG governance risk and control landscape if they improve existing capabilities. To extract value from technology, it’s crucial to define technical and business requirements. If in-house expertise is lacking, external support for vendor selection and tool implementation management is advisable. User training is essential to quickly adapt personnel to changes and support them throughout the transition.

The concept of double materiality assessment

A double materiality assessment evaluates both the impact of sustainability risks on a company’s finances and the effect of the company’s activities on society and the environment. This assessment is vital for future planning, risk management, and accountability, providing essential information for strategic decision-making. However, conducting a comprehensive double materiality assessment can be resource-intensive and requires specific expertise. Companies may lack the necessary resources or prefer to allocate them to core business functions. Integrating the outcomes of a double materiality assessment into existing business strategies and risk management processes poses a challenge for many organisations.

Transition risks in the journey to sustainability

The transition to a sustainable future involves significant challenges, requiring major shifts in consumption patterns, product design, manufacturing processes, and consumer behaviour. For example, transitioning to a low-carbon economy carries the potential for large-scale job losses and economic impacts for communities and markets reliant on fossil fuels. It also necessitates the adoption of new technologies, processes, and regulatory frameworks, which may have unforeseen consequences. Keeping consumers informed and educated about the benefits of sustainable choices is essential for driving change.

The Role of Risk Managers in the Transition

Risk managers play a pivotal role in guiding organisations toward their sustainability goals and managing associated risks. They facilitate discussions around risk and opportunity, bridging gaps between internal and external stakeholders. As companies and their boards grapple with the risk implications of sustainability, finding ways to control and mitigate these risks is crucial. Collaboration is key to managing the risks and developing solutions for the transition to sustainability.

Building a resilient future through ESG and private equity

The integration of ESG principles into private equity investment strategies represents a significant shift in the financial landscape, highlighting the growing importance of sustainable practices in business. By embracing ESG considerations, private equity can play a crucial role in fostering sustainable growth, mitigating risks, and unlocking long-term value. As the intersection of ESG and private equity continues to evolve, it will shape a more resilient and sustainable future for businesses and society at large.

The Corporate Sustainability Due Diligence Directive (CSDDD) is a significant legislative development in the European Union (EU) aimed at promoting responsible business practices and ensuring compliance with environmental and human rights standards. As the global focus on sustainability intensifies, this directive is set to have far-reaching implications, including for companies based in the Middle East. Here’s what you need to know about the CSDDD and its potential impact on Middle Eastern businesses and economies.

What is the CSDDD?

The CSDDD is an EU directive that mandates companies to identify, assess, and mitigate adverse impacts on human rights and the environment within their operations, subsidiaries, and supply chains. Inspired by France’s “loi de vigilance” and Germany’s Supply Chain Sourcing Obligations Act (LkSG), the directive aims to address issues such as child labor, slavery, labor exploitation, pollution, and biodiversity loss. Companies are required to integrate due diligence into their corporate strategy and align their business models with the Paris Agreement’s goal of limiting global warming to 1.5 degrees Celsius.

Who Needs to Comply?

The directive targets large EU limited liability companies and non-EU companies with significant activity in the EU. Specifically:

• EU companies with 500+ employees and a net worldwide turnover of €150 million.
• Non-EU companies with €150+ million net turnovers generated in the EU.

Impact on Middle Eastern Companies

While the CSDDD directly targets EU-based companies, its ripple effects will be felt by Middle Eastern companies, particularly those with business ties to the European market. Here are the key ways in which the directive may impact businesses in the Middle East:

• Supply Chain Scrutiny: Middle Eastern companies in the supply chain of EU-based businesses will need to comply with the CSDDD’s due diligence requirements, necessitating assessments and mitigation of environmental and human rights impacts.
• Market Access: Compliance with the CSDDD could become a condition for accessing the EU market. Non-compliant Middle Eastern companies may face entry barriers or lose competitiveness in Europe.
• Investment and Financing: The directive may influence investment and financing decisions, with EU investors and financial institutions favoring companies that adhere to the CSDDD’s standards.
• Legal and Reputational Risks: Non-compliance could expose Middle Eastern companies to legal risks, including fines and litigation, as well as reputational damage, affecting their relationships with EU partners and customers.
• Adoption of Best Practices: The CSDDD could encourage Middle Eastern companies to adopt best practices in sustainability and human rights, aligning their operations with international standards.

 

Preparing for the CSDDD

To navigate the impact of the CSD, Middle Eastern companies should:

• Conduct due diligence assessments of their operations and supply chains.
• Enhance transparency and reporting mechanisms.
• Collaborate with EU partners to ensure alignment with the directive’s standards.
• Monitor developments related to the CSDDD and adapt their strategies accordingly.

The CSDDD represents a significant step towards a more sustainable and responsible global business environment. Though it primarily targets EU-based companies, its implications extend to Middle Eastern companies with ties to the European market. By proactively addressing the requirements of the CSDDD, Middle Eastern businesses can maintain and strengthen their relationships with the EU, while contributing to global sustainability efforts. At Sustainable Square, we have experts in sustainability, particularly in climate change and human rights, who can support companies in navigating this upcoming regulation. Please feel free to engage with us to learn more.

 

In the dynamic world of corporate responsibility, tackling climate change has emerged as a paramount challenge. The spotlight is on managing Scope 3 emissions, which are indirect emissions linked to a company’s activities but not under its direct control. It’s like trying to solve a puzzle with pieces scattered all around – a complex but vital task.

A Look at the Global Emissions Trend: Let’s rewind and look at the bigger picture. In the past 70 years, global carbon emissions have skyrocketed, increasing almost eightfold. More worrying is the planet’s average temperature rise since 1980, with most of the warmest years recorded in the past decade. To combat this, a global goal has been set: reduce carbon emissions by 45% in the next 20 years from 2010 levels. This target is not just ambitious; it’s crucial for our sustainable future.

Businesses worldwide are not just observing from the sidelines; they’re actively participating in climate action. As part of the RE100 initiative led by Climate Group, over 400 companies have committed to using 100% renewable energy. In the food sector, companies have set objectives to reverse forest loss and land degradation by 2030. Financial institutions, managing assets worth a staggering $8.7 trillion, have taken a stand against deforestation by pledging not to invest in businesses contributing to this global issue.

However, turning pledges into action is where the real challenge lies. For instance, companies must now track the deforestation impacts of ingredients like soya, palm oil, cocoa, and coffee – ingredients commonly used in consumer goods and retail businesses. It’s not just about making commitments; it’s about making real, measurable changes.

Scope 3 Emissions: The Hidden Giant: According to CDP (Carbon Disclosure Project), Scope 3 emissions can be more than 11 times larger than a company’s direct emissions; in particular, upstream Scope 3 emissions account for more than 50% of all emissions in sectors such as fashion, chemicals, and retail. Yet, only about 41%t of companies report these emissions, and a mere 14% have included them in their targets. This gap underscores the need for more transparency and action in addressing these indirect emissions.

Companies such as AstraZeneca, Atlassian, and Philips are pioneering efforts to tackle these challenges. Atlassian, for instance, aims for 65% of its suppliers to set science-based targets by 2025 but currently stands at 6.9%. Philips is working towards a goal of getting 50% of its suppliers to meet similar targets by 2025.

In Denmark, companies like TDC NET and Arla Foods are leading by example. TDC NET has developed innovative tools to assess the carbon intensity of its products, while Arla Foods is promoting sustainable farming practices by incentivising farmers with higher prices for eco-friendly products.

Striking the Right Balance in GHG (Greenhouse Gas) Target Setting: Companies are adopting varied approaches to setting greenhouse gas emissions targets. Some, driven by visionary leadership, set ambitious goals and inspire their teams to reach them, leveraging the momentum of bold ambitions. Others adopt a more cautious approach, investing time to ensure their targets are accurate and achievable. The optimal strategy lies in balancing these extremes, acknowledging the rapidly evolving expectations and the urgency of climate action.

To conclude, the journey towards effective decarbonisation, particularly concerning Scope 3 emissions, is intricate and multifaceted. Companies like AstraZeneca, Atlassian, Philips, TDC NET, and Arla Foods are not just committing to change; they are actively pursuing it. This collective movement towards reducing emissions is transforming not just business operations but also contributing to a global effort for a more sustainable and resilient future. As more companies join this mission, the narrative of corporate environmental responsibility becomes richer and more impactful, driving positive change in our world.

In 2009, at the 15th Conference of Parties (COP15) of the UNFCCC in Copenhagen, a historic commitment was made. Developed countries pledged to a collective goal of mobilizing USD 100 billion per year by 2020 to support climate action in developing nations, rooted in the principles of meaningful mitigation actions and transparency on implementation. This pledge was not just a financial commitment but symbolized global solidarity, an acknowledgment of the shared responsibility in addressing the pervasive challenges of climate change.

Yet, more than a decade later, as I reflect upon the progress made since that pivotal moment, a lingering disappointment surfaces. The optimism and collective will that marked COP15 seems overshadowed by the stark reality – the ambitious $100 billion annual commitment remains largely unmet. The Global South, particularly vulnerable and resource-constrained nations, find themselves navigating the tumultuous waters of climate change with limited support, amplifying the urgency for meaningful, tangible actions.

In this landscape of unfulfilled commitments, the Climate/SDGs Debt Swap Mechanism, a brainchild of United Nations Economic and Social Commission for Western Asia (ESCWA), emerges as a potential lifeline. Many nations, especially in the Arab region, are caught in a fiscal snare, where escalating debts are channeling crucial resources away from the urgent needs of climate resilience and sustainable development. The compounding effect of the COVID-19 pandemic accentuates this challenge, rendering the debt swap mechanism not just relevant but essential.

The mechanism offers a dual benefit – it alleviates the debt burden while channeling resources into climate-resilient projects. For indebted nations, this initiative is a breath of fresh air, offering fiscal relief and enhancing public investments in alignment with the SDGs and the Paris Agreement. For the creditors and particularly the large carbon emitters, it’s an avenue to honour the COP15 commitment, transforming each dollar of debt into a step towards a sustainable and resilient future.

As the anticipation for COP 28 in the UAE mounts, my mixed feelings of hope and apprehension are ever-present. The echoes of the unfulfilled $100 billion commitment serve as a stark reminder of the imperative for the Global North, and all stakeholders, to rekindle the spirit of solidarity and collective action that marked COP15. Each unmet commitment is not just a financial shortfall but a missed opportunity to advance global climate action.

I’m holding onto hope that COP28 in the UAE will usher in a renewed era of commitment and action. I hope it serves as a platform where the global north reaffirms pledges with unwavering resolve and where innovative solutions, including debt swap, are embraced to accelerate the journey toward a world where the challenges of climate change are met with the resources, collaboration and urgency they demand. In this intertwined fate of our shared planet, let every promise made be a promise kept.

See you at COP 28!

Climate change is an escalating global issue with profound implications for businesses, affecting everything from physical assets and supply chains to market dynamics and regulatory frameworks. Therefore, it’s essential for businesses to undertake scenario analysis on climate change, preparing and planning for a range of possible futures. But how can this critical task be made more approachable and engaging? By gamifying it.

What is Scenario Analysis?

At its core, scenario analysis is a process that allows organizations to explore and prepare for uncertain future events. It involves creating and analyzing multiple plausible future scenarios, assessing the potential impacts and risks, and formulating strategies to navigate these possible futures.

With climate change, uncertainties are considerable, involving both physical risks (like severe weather events) and transition risks (such as policy changes aimed at mitigating climate change). Thus, conducting scenario analysis can be a crucial tool for businesses to build resilience and adaptability.

The Game Plan: Gamifying Scenario Analysis

By thinking of this process as a game, we can infuse fun, engagement, and excitement into scenario analysis, making the process more interactive and less overwhelming. Here’s a simple four-step guide on how to gamify the process of scenario analysis:

Step 1: Set the Game Board – Define the Scope

Like any game, you need to establish the rules and boundaries. For scenario analysis, this involves defining the scope of the analysis: timeframes, climate events to prepare for, and parts of your business to be affected. Once you have the ‘game board’ set, you can start identifying the key uncertainties related to climate change that could affect your business.

Step 2: Create Your Characters – Identify Stakeholders

Identify your ‘game characters,’ or the stakeholders involved in or affected by your business’ climate change strategy. These can include employees, customers, suppliers, investors, regulators, and the local community. Assign roles to different teams or individuals to represent these characters, ensuring a well-rounded approach to the scenarios.

Step 3: Craft Your Storylines – Develop Scenarios

With your characters and game board, create your ‘storylines,’ or the different scenarios that your business could face in the context of climate change. Each storyline should have unique challenges and implications for your business. These scenarios should not be predictions, but rather plausible futures that your business needs to consider.

Step 4: Play the Game – Analyze and Strategize

With your characters and storylines in place, it’s time to ‘play the game.’ Teams will analyze the potential impacts on their business, discuss potential responses, and strategize on how to navigate the challenges. This encourages creativity, collaboration, and critical thinking.

Building Scenarios: 1.5°C and 2°C Warming

Let’s include the specific climate scenarios reflecting the targets of the Paris Agreement, aiming to limit global warming to well below 2 degrees Celsius, preferably to 1.5 degrees Celsius, compared to pre-industrial levels.

Scenario: 1.5°C Warming

In this storyline, global efforts to combat climate change are largely successful. The physical risks are relatively moderate, but the transition risks are high. Teams will need to consider how they can reduce their carbon footprint, leverage green technologies, and navigate stricter environmental regulations.

Scenario: 2°C Warming

This storyline represents a world where some measures have been taken to combat climate change, but not enough to keep warming to 1.5°C. It presents a balance of physical and transition risks. Teams need to consider both resilience and adaptability, exploring strategies to protect physical assets and supply chains, as well as ways to adapt to new regulations and market demands.

To conclude, with climate uncertainties on the rise, businesses must stay ahead of the curve. Scenario analysis, especially when gamified, serves as an engaging tool to prepare for potential climate impacts and build strategies for various futures. Playing out scenarios such as the 1.5°C and 2°C warming scenarios helps companies navigate possible challenges and seize opportunities in a changing climate. The ultimate victory in this game is not merely survival, but the creation of resilient and sustainable businesses that contribute to a healthier planet and a sustainable future for all. 

In the global fight against climate change, the concept of carbon credits has emerged as a potential solution to mitigate the harmful effects of greenhouse gas emissions. However, this approach has sparked a contentious debate, with critics arguing that carbon credits grant a “permission to pollute” while proponents claim they are pivotal for progress. So, what exactly are carbon credits, and do they offer a viable path towards a sustainable future? 

Carbon credits are a market-based mechanism designed to reduce greenhouse gas emissions. The idea behind them is to assign a monetary value to each ton of carbon dioxide or its equivalent (CO2e) emitted into the atmosphere. This value is determined based on the social cost of carbon, which estimates the economic damage caused by each ton of emissions. Entities such as companies or governments can then purchase these credits as a means of offsetting their own emissions. The credits represent a cap on an organisation’s emissions, so if a company goes beyond the credits purchased, they incur expense on extra credits. If they do not use up all their credits, organizations can sell credits to other organizations. 

Critics argue that carbon credits allow polluters to simply buy their way out of reducing their emissions. They claim that instead of implementing necessary changes to reduce carbon footprints, entities can simply purchase credits and continue with business as usual. This, they argue, leads to a dangerous situation where the wealthy can pay to pollute while the burden of climate change disproportionately affects the most vulnerable communities. 

However, proponents of carbon credits see them as a crucial tool in the transition to a low-carbon economy. They argue that carbon credits create financial incentives for companies to invest in cleaner technologies and practices. By putting a price on carbon emissions, these credits encourage organizations to find innovative ways to reduce their environmental impact. The revenue generated from the sale of credits can also be directed towards sustainable development projects, further supporting the global transition to renewable energy sources and fostering environmental awareness. 

One of the key benefits of carbon credits is their potential for fostering international collaboration. Carbon markets can facilitate the transfer of clean technologies and expertise from developed to developing countries. This allows the latter to leapfrog the carbon-intensive stages of development and transition directly to sustainable practices. It also creates a financial incentive for developed countries to support emission reduction efforts in developing nations, promoting global cooperation and equity in addressing climate change. 

While carbon credits have their merits, it is crucial to ensure their effective implementation and regulation. One challenge is accurately measuring and verifying emissions reductions. Robust monitoring mechanisms and standardized methodologies are necessary to avoid the pitfalls of fraudulent offset projects. Additionally, there should be transparency in the allocation and trading of carbon credits to prevent manipulation and ensure the integrity of the system. 

Moreover, carbon credits should not be seen as a standalone solution. They must be accompanied by strong regulatory frameworks, stringent emission reduction targets, and investments in renewable energy and sustainable practices. Carbon credits alone cannot solve the climate crisis, but when integrated into a comprehensive strategy, they can play a pivotal role in driving sustainable development and mitigating climate change. 

As the international community continues its efforts to address climate change, the discussion around carbon credits is expected to take center stage at the 28th Conference of the Parties (COP 28) which will take place in the UAE from 30 November to 12 December 2023. This pivotal gathering will provide an opportunity for nations to reassess and strengthen the mechanisms surrounding carbon credits. It is anticipated that COP 28 will focus on refining the methodologies for measuring and verifying emissions reductions, as well as establishing more stringent regulations to ensure the credibility and transparency of carbon markets. The conference will also aim to address concerns regarding the equitable distribution of carbon credits and the promotion of sustainable development projects. By fostering dialogue and collaboration, COP 28 has the potential to shape the future of carbon credits, ensuring their alignment with the global goal of achieving a sustainable and low-carbon future. 

In conclusion, the debate surrounding carbon credits revolves around their potential to either grant a “permission to pollute” or act as a catalyst for progress. While there are legitimate concerns about the misuse of carbon credits, their effectiveness in incentivizing emission reductions and promoting international collaboration cannot be ignored. To harness the true potential of carbon credits, it is imperative to combine them with robust regulations, emission reduction targets, and a commitment to transition towards a sustainable and low-carbon future. 

Carbon taxation is a policy tool used to reduce greenhouse gas emissions and mitigate the impacts of climate change. It works by putting a price on the carbon content of fossil fuels, such as coal, oil, and natural gas. Companies that emit large amounts of carbon dioxide (CO2) and other greenhouse gases are required to pay a tax for each unit of emission they produce. 

This approach aims to create an economic incentive for companies to reduce their emissions and switch to cleaner energy sources. The revenue generated from carbon taxes can be used to support environmental initiatives and programs, further promoting sustainable development.

The concept of carbon taxation is closely linked to the goals of the Conference of the Parties (COP) to the United Nations Framework Convention on Climate Change (UNFCCC). COP28 in the UAE will bring together leaders from around the world to discuss and negotiate actions to address the impacts of climate change. One of the key topics of discussion at COP28 will likely be the role of carbon taxation in reducing greenhouse gas emissions. 

Proponents of carbon taxes argue that they can help achieve the goals of the Paris Agreement, which was adopted under the UNFCCC in 2015 and aims to limit global temperature rise to well below 2°C above pre-industrial levels and pursue efforts to limit the temperature increase to 1.5°C.

At COP28, leaders will discuss the potential benefits and challenges of carbon taxation, including its impact on the economy, its effectiveness in reducing emissions, its political feasibility, and its potential to support sustainable development. As the international community continues to work towards addressing the impacts of climate change, the role of carbon taxation will be a key issue of discussion at COP28 and future meetings.

Pros of Carbon Taxation in the Middle East:

 

Despite the challenges, carbon taxation is seen by many as a crucial step towards addressing the impacts of climate change in the Middle East. 

1. Switch to Clean Energy: One of the primary benefits is the potential to reduce greenhouse gas emissions and mitigate the impacts of climate change. A carbon tax would incentivise companies to switch to cleaner energy sources, reduce the region’s carbon footprint and contribute to global sustainability efforts.
2. New Economic Opportunities: Another advantage of carbon taxation is that it could create new economic opportunities. By incentivising the development and deployment of cleaner energy technologies, a carbon tax could drive investment in the clean energy sector and create new jobs. A carbon tax could also provide revenue for the government to support environmental initiatives and programs. This could include investments in renewable energy, energy efficiency, and environmental protection.
3. Boost Climate Commitments: Finally, implementing a carbon tax could signal the Middle East’s commitment to addressing climate change and demonstrate its leadership on this global issue. This could improve the region’s reputation and attract investment in the clean energy sector, further supporting economic growth and development.

While the implementation of a carbon tax in the Middle East presents challenges, its potential benefits should not be ignored. By addressing climate change and creating new economic opportunities, a carbon tax has the potential to support the region’s long-term sustainable development.

 

Cons of Carbon Taxation in The Middle East:

 

Carbon taxation remains a highly debated issue in the Middle East, with varying opinions on its potential impact – critics raise several concerns specific to the region.

1. Effect on the Economy: One of the primary criticisms of carbon taxes in the Middle East is their potential impact on the already fragile local economy. Critics argue that these taxes would increase the cost of energy, leading to higher prices for consumers and potentially causing inflation and reduced economic growth. This could be particularly regressive, disproportionately affecting low-income households that spend a larger proportion of their income on energy.
2. Effectiveness: Another criticism is the effectiveness of carbon taxes in reducing emissions. A carbon tax intends to incentivise companies to switch to cleaner energy sources, but some argue that the tax may not provide enough motivation for businesses to make the change. This could mean that emissions remain unchanged, despite the implementation of the tax.

1. Global competition: Some businesses in the region, particularly those in trade-sensitive industries, argue that carbon taxes could put them at a disadvantage compared to companies in countries without similar taxes. This could harm competitiveness and lead to job losses in certain sectors.
2. Implementation and Administration: The complexity of implementing and administering a carbon tax is also a concern in the Middle East. The process could result in high compliance costs for businesses and governments, making it difficult to enforce and manage in a region where resources are already stretched.

 

The political feasibility of carbon taxes is also a challenge in the Middle East. These taxes are often politically unpopular, making it difficult to implement and maintain them over time. The challenge of balancing the need to reduce emissions with the potential economic impacts and political realities of carbon taxation is a complex one, with strong arguments on both sides.

In summary, carbon taxation in the Middle East has both potential benefits and challenges. The benefits include reducing greenhouse gas emissions, creating new economic opportunities, providing revenue for environmental initiatives, and demonstrating the region’s commitment to addressing climate change. However, the cons include its impact on the local economy, its effectiveness in reducing emissions, its impact on competitiveness, its complexity of implementation, and its political feasibility. Implementing carbon taxation in the Middle East requires careful consideration of these pros and cons to ensure that it supports the region’s long-term sustainable development.