Author
Recently, at the COP28 meeting, over 150 heads of state met in Dubai for two weeks to take stock of the world’s efforts to address climate change as laid out in the Paris Agreement, and in particular its main goal of limiting global warming to 1.5OC by the end of this century. This COP28 meeting was a particularly important moment of self-reflection, but the outlook following this reflection was not encouraging to say the least.
Commitments made in different areas of climate action (ranging from reducing greenhouse gas emissions, strengthening resilience to a changing climate or getting financial and technological support to vulnerable nations) were not achieved. We also witnessed an increased emphasis for governments to speed up the transition away from fossil fuels to renewable energy such as solar power and wind. However, many African countries argue that this discussion of the transition from fossil fuel should be more nuanced; in particular, they question why they should be precluded from exploiting their rich deposits of fossil fuel given the low carbon footprint in their countries as compared to developed countries.
All these climate related challenges are commonly packed under the umbrella of ESG, which stands for Environmental, Social and Governance. It refers to a breadth of non-financial factors (many of which have demonstrable financial impact) that organisations are increasingly incorporating into their decision-making processes. Although ESG is becoming the acronym of choice, many also use alternative terminology such as corporate responsibility, sustainability or sustainable development.
Climate change is one area of the Environmental pillar of the ESG equation that has received a lot of attention, with a focus on managing climate change risks.
Organisations across all sectors of the economy are now expected to demonstrate how they are managing climate change risks. What are these risks?
- As countries and organisations transition to a low carbon economy, not only is there a need for adoption of, and investment in green technology, but also for accompanying significant legal and regulatory reforms. Switching to alternative sources of energy will significantly affect the cost of production for most manufacturers in our parts of the world. All these risks represent what are known as transition risks.
- Another class of risks are physical risks, being risks associated with acute and chronic impacts from climate change, ranging from rising mean temperatures (heat waves), rising sea levels, flooding, wildfires, storms, cyclones and severe droughts.
Climate change has now taken a centre stage of the ESG agenda and other equally important topics have been relegated as an afterthought to this agenda. As a Risk Management practitioner, one area I receive questions from many executives is about CO2 emissions, in particular; why should Tanzania organisations care about these emissions while they are contributing the least to this phenomenon? In other words, do climate change risks warrant the attention of the directors (and those charged with Governance) in the context of Tanzania and indeed Africa? A tough question indeed. It should be noted that Africa, as a continent, contributes less than 4% of GHG (GreenHouse Gas) emissions; according to CDP (Carbon Disclosure Project) data.
In attempting to answer this question, I look at four factors for consideration. Firstly, much as our communities contribute the least to CO2 emissions, we are also the least prepared to respond to the adverse effects of severe and drastic weather changes. Our current Business Continuity and Incident / Emergency Response programs may not be adequate to deal with this climate change physical risks, therefore those charged with governance still have a responsibility to provide oversight on climate change resilience initiatives and preparedness.
Secondly, ESG and climate change also present business opportunities. For instance, we have seen leading banks in Tanzania launching ‘green’ products in the form of green bonds or climate fund; with incredible success. In the mining and manufacturing sector, we have seen technology innovations in water desalination solutions, carbon sequestration, green packaging material, just to name a few. Board of directors are paying close attention to these opportunities to shape the Strategic Director of their organisations.
Thirdly, the regulatory environment is constantly changing to embrace global trends. The Capital Market and Securities Authority of Tanzania endorsed DSE rules in 2022 requiring listed companies to report on how they are addressing sustainability through their own strategic plans and actions. The Bank of Tanzania, likewise, issued a similar directive (BoT Guidelines on Climate Related Financial Risk Management 2022).
Lastly, international investors and development partners view organisations which are actively participating in climate change risk management as preferred investment opportunities. Tanzania has rich natural endowments and is strategically positioned to promote green economy initiatives. There are opportunities for eco-tourism, blue economy through conservation of marine biodiversity and hydro power generation. These initiatives can position Tanzania as a preferred green destination and a target for foreign investments.
These are four good reasons for directors to keep ESG on the radar. Furthermore, beyond climate change, the Environmental pillar of ESG also addresses issues of water (whether human activities contribute to scarcity of freshwater, water pollution), biodiversity (wildlife population, their habitats and ecosystem), waste (factors that contribute to the production and disposal of hazardous and non-hazardous wastes, packaging material).
Under the Social pillar, we talk about dignity, equality and inclusion, health and safety, social benefits, labour relations, community relations, consumer protection, responsible sourcing.
The Governance pillar is perhaps one we can most relate with because of the focus on good leadership, transparency, accountability and business and organisational ethics. These have been a call to action in all fronts of the government, public institutions and the private sector alike.
Other aspects of ESG have always been considered good business practices in our country and our communities way before the Paris Agreement of 2015.
There is an opportunity for organisations and directors to take a deeper look at the ESG agenda and identify ESG topics that are relevant to them, also known as ‘material’ sustainability topics and then come up with strategies and purpose based initiatives to take advantage of the opportunities ESG presents while managing associated risks. This is a strategic way to manage organisational risks.
