What a roller coaster ride 2022 has been! As we race towards the end of the year, crossing off as many tasks as possible on our to-do list before we hurriedly close this chapter and move on to the next, it feels appropriate to pause and cast our minds back to the events that have defined the last 12 months.
Each of us will have our own list of highlights and lowlights, but this year, perhaps more than in the past, some major events have rocked our world in a way that underscores just how interconnected we all are, causing us to realize that whatever our political or business leanings may be, we are all in this together.
This blog explores the major themes of the year with a focus on Sustainability and ESG and probes the significance of the events that have taken place and where, on balance, they leave us. Are we teetering on the edge of disaster or poised on the verge of a breakthrough?
Domino Effect of Russia’s Invasion of Ukraine
The scene was set early in the year with Russia’s invasion of Ukraine, triggering a domino sequence of shocks so unexpected and surreal that they almost seemed to have been choreographed. As a FT article recently put it, “welcome to the world of the polycrisis” in which “disparate shocks interact so that the whole is worse than the sum of the parts.” The geopolitical and macroeconomic backdrop quickly evolved to become one of the most challenging in decades: the energy crisis precipitated by Russia’s stranglehold on gas and the West’s sanctions affecting access to oil precipitated a sharp rise in inflation, which had been waiting in the wings, its pumps primed by the breakdown of supply chains and the abrupt uptick in economic activity following the Covid lockdowns.
We could almost hear the creaking of the infrastructure of the global economy under the weight of these extraordinary pressures, which seemed to be questioning the very premise on which the business models of countries and companies alike have been founded. Our unhealthy dependence on fossil fuels came sharply into focus as business-as-usual gave way to emergency measures, and central banks around the world slammed on the brakes with interest rate hikes designed to head off the conflagration of hyperinflation. The wildfires that swept across so many parts of the world as the year went on, and which firefighters struggled to contain, aptly mirrored the fiery economic conditions and the indignation triggered by Russia’s blatant act of aggression.
In the meantime, the war had set off another cascade of dominos that threatened to lead us into an unprecedented food security crisis. It became starkly apparent that Ukraine’s contribution to food and agriculture commodity markets, notably in the form of grain and fertilizer, are vital to the current economic scheme of things. The shortage of food triggered by war unveiled the fragility of many countries, including Sri Lanka, Somalia, Libya, Lebanon, and Sudan, not just in terms of their dependence on these food supplies, but also, critically, as a result of unsustainable levels of debt, not to mention the ravages of climate change, which became painfully obvious as the year rolled on. The devastating floods in Pakistan became a symbol not just of the extreme weather that has become the norm around the world, but also of the disproportionate impact of climate change and global inequalities on vulnerable nations and communities.
The impact of Russia’s war on Ukraine has been a shock to the collective psyche, serving to question long-held assumptions ranging from the appropriateness of the de facto ban on weapons in ESG investment strategies to the belief that the risks of war in Europe had been relegated to the history books. In 2022, a deep sense of insecurity has cast a shadow over our lives and somewhat brutally cut short the relief and joy that many of us had been feeling following the end of the worst effects of the Covid pandemic. Could there be a nuclear catastrophe? Would Ukraine be strong enough to weather the perfect storm? Would Europe be able to maintain its unity? Would the US stay in for the long haul? And would governments, businesses, and households be resilient enough to make it through the high peaks of inflation and the big dips of a dire recession that many were already predicting?
Global Response to the Events of 2022
The term ‘resilience’ had already taken its place in the lexicon of business and economic affairs, but our collective ability to put it into practice was seriously put to the test in 2022. The moral fortitude of the Ukrainian people and the outstanding leadership of their president, Volodymyr Zelenskyy, certainly played – and still play – a key role in inspiring the rest of us (well, most of us) to dig deep into our inner resources and find the courageous integrity to stand up for what we believe is right.
This year has given us many examples of the emergence of a steely resolve on the part of politicians, business, civil society leaders, and citizens to rise to the challenges we face, starting with the determination to support Ukraine in its moment of need, come what may. Many companies set ambitious Net Zero targets. Citizens increasingly spoke up and self-organized to protest against fossil fuels and unsustainable business practices. Scientists united the world over to hammer home the perils we face if we continue to overstep the limits of our planetary boundaries, offering a survival guide to steer ourselves away from ecological and social catastrophe. They reiterated the urgency of the climate crisis in the IPCC reports they published, and the need to re-design our economic system and change our consumption patterns to drastically reduce and draw down our greenhouse gas emissions.
The message also filtered through clearly that we cannot only think in terms of the Climate, we have to ensure we take a broader, more holistic view of Nature in order to avert the total breakdown of the natural ecosystems that sustain our planet and our lives. We need nature-based solutions for the Climate, but also to regenerate our land, our economies, and ourselves. As we await the outcome of COP15, the UN Conference on Biodiversity in Montreal, expectations are growing among the business community and its stakeholders that after the significant momentum of the TCFD (the Task Force on Climate-related Financial Disclosures), which has been adopted as the basis of regulations across the world, TNFD (the Task Force on Nature-related Financial Disclosures) will follow hot on its heels.
The determination and resolve of politicians and other leaders was also clearly demonstrated by the swathe of new legislations and standards that were ushered in this year. Europe led the way with the start of the first wave of reporting by financial actors on the Sustainable Finance Disclosure Regulation (SFDR), the entry into application of the climate-related piece of the European Taxonomy, and the formal approval of the game-changing Corporate Sustainability Reporting Directive (CSRD).
The United States also took significant legislative steps forward, including the SEC’s proposal of climate-related disclosures based largely on TCFD – which is yet to be approved following pushback from some quarters of the business community – and, most notably, with the introduction of the $369 billion Inflation Reduction Act, which makes the largest investment in U.S. history to combat the climate crisis and position the United States as a world leader in clean energy.
The unprecedented groundswell of global sentiment over the last few years in favor of Sustainability and responsible business behavior had already resulted in a patchwork quilt of similar-but-different legislations and standards, and of customer requirements on their suppliers. This trend continued in 2022, with companies feeling the heat when it comes to the prospect of having to comply or align with a bar (or multiple bars in the case of multinational companies) that has been placed much higher, especially in Europe. One of the most significant events of the year in this context was the swift publication of the first two draft standards of the ISSB (International Sustainability Standards Board), launched in November 2021 by IFRS to create a global baseline standard for sustainability-related disclosures.
But while these were all undeniably positive steps forward in terms of laying the foundations for a sea change in how business operates in society, with the intention to reduce its negative impacts and increase its positive impacts, there were also numerous examples throughout the year of the global community being hampered in making that all-important collective pivot towards a zero-carbon, regenerative, inclusive economy.
Obstacles on the Road to Net Zero
One instance of this, which has rumbled on throughout the year, is the question of whether countries and companies can capitalize on the extraordinary opportunity afforded by the energy crisis to accelerate the switch from fossil fuels to renewable energy sources and invest fast enough in the infrastructure necessary to do so. There is a clear need to ensure affordable energy supplies in the short-term, but the temptation for governments is to lock their countries into longer-term solutions based on new and existing fossil fuel sources that are fundamentally incompatible with the goal of staying within 1.5 degrees warming above pre-industrial levels. To make matters worse, government pledges are far from what they should be to stay within 1.5 degrees, and then of course they have to actually deliver on those pledges.
We are left wondering if there is a strong enough political, corporate, and individual will to truly disrupt our reliance on fossil fuels and commit to, and properly resource, the energy transition. There are some initial signs that this is beginning to happen, such as the exodus of several European countries in 2022 from the Energy Charter Treaty, an outdated agreement that enables energy companies to sue governments over climate policies that devalue their assets. The journey is a long one, however, since there are hundreds of bilateral investment treaties (BITs) between European and other countries that protect fossil fuel interests in a similar way.
At COP27 in Egypt in November we saw a similar dynamic playing out, where there was a historic agreement to create a new ‘loss and damage’ fund to help low and middle-income countries cover the costs of climate-change impacts, but oil producing states blocked the ambition of the vast majority of countries to phase out fossil fuels. This has raised questions about the effectiveness of the COP process and the need to re-design this and other processes and institutions so that they are fit for purpose in a changing world.
Another vivid illustration of the strong resistance to change was the debate around corporate greenwashing and the deepening of the ESG backlash, notably in the United States, where the issue has become highly politicized to the point that at least 10 states have adopted anti-ESG regulations in the form of state laws, investment resolutions, or attorney general/state treasurer opinions. Whether because of vested interests in the status quo or discomfort at the accelerated pace of change that will inevitably shake up business practices and require strategic alignment with a whole new paradigm of value creation, it is inevitable that there will be push back from some individuals, organizations, and countries.
Where Do We Go From Here
As the year draws to a close, the question of whether we are teetering on the edge of disaster or poised on the verge of a breakthrough remains unanswered. It is perhaps largely a matter of personal opinion that can fluctuate according to our mood and incoming news and events. While this may feel frustrating, it may also be a clue to our point of power. While we can’t control all of the unsettling events that have come to represent the norm in these VUCA (Volatile, Uncertain, Complex, Ambiguous) times, we can continue to build and draw on our resilience with unwavering consistency, shoring up our positive expectations of the future we want to create together and strengthening our resolve to do every day what we believe is right and feels meaningful to us. If we can become good enough at this, perhaps we can flip the “polycrisis” into a “polyresolution,” where disparate solutions interact so that the whole is better than the sum of the parts.
By Kate Cacciatore, FigBytes Head of Sustainability
