Utkarsh Majmudar

Why decarbonising so tough?

Everyone agrees that decarbonisation is essential. The IMF estimates that global decarbonisation would have a net value of $85 trillion. The IPCC reports have consistently pointed to the pernicious effects of greenhouse gases (or carbon, in common parlance) and that we have probably missed the bus in achieving the goals that we set out in Paris. Despite the criticality of decarbonisation, the results are not particularly encouraging. So, why is decarbonising so tough?

Photo by Laura Penwell: https://www.pexels.com/photo/photo-of-windmills-during-dawn-3608056/

Incentives for decarbonisation: Companies bear the cost of decarbonisation – improving energy efficiency, new equipment, and payment of carbon price/tax. The benefits accrue to the local communities and often to whole regions and may often be cross-country. So, why should businesses pay when they do not benefit? Companies do it for several reasons – the belief that they can earn higher profits due to distinctiveness, moral reasons, due to peer pressure, or simply because they want to “look good.” Except for the first reason (higher profitability), there is a conflict between private profit and social profit, with private profit winning in most situations. The high cost involved acts as a barrier. A recent Morgan Stanley report suggests that the biggest barrier to establishing a sustainability strategy is the high levels of investment required. This is the same reason developing countries find implementing net-zero strategies difficult. Similarly, MSME companies also face difficulties.

Renewable energy adoption is complex. Renewables are the best substitutes for fossil fuels, which currently have a well-developed infrastructure and network. There exists a vast network of powerlines that connect to power stations. Or, there is a petrol/diesel station network where one can refill fuel conveniently. In the case of renewables, this network has to be established. Establishing the network requires time and effort. It is also costly.

Technological changes: Another issue is that no one knows which technology will survive in the long run. Whether electric vehicles will survive or hydrogen cars will rule the roost. This makes capital investment difficult. Unlike in the past, technologies are changing dramatically and rapidly. An investment today may become a burden tomorrow. Capital investments may be laid to waste in no time. In such an environment, the risk-averse will avoid or delay investment.

These challenges are difficult and will not go away easily. The fossil fuel industry has developed since the 1800s, and the renewable energy industry is rather nascent. While we don’t have too much time, we will still need to wait for the industry to develop. At the same time, global leaders will need to find a way to ensure that the developing and developed nations agree on the way forward. Similarly, large and small businesses must negotiate how decarbonisation efforts can progress. A constant sustained effort is the key to success.

Biodiversity Is Not Just Planting Trees

The recent IPL tournament saw BCCI team up with Tata Group to plant 500 trees for every dot ball bowled during the 2024 playoffs and finals. While they do not talk of this as a biodiversity venture, there are many companies that talk of their work on biodiversity, but if you read their sustainability reports of companies, the only action they appear to be taking is planting trees. While planting trees is great for increasing the tree cover in our country, the impact on biodiversity is questionable. The recent IPL will lead to 161,500 saplings being planted and will positively impact India’s tree cover.

#ESG #sustainability #netzero #biodiversity #ecology — Photo by Olena Bohovyk on Unsplash

Human growth has come at the expense of fauna and flora. As humans needed more space, they cut down forests and chased away wild animals, destroying the ecological cycle. Many plant and animal species have become extinct in the process. Is the process of ecological destruction irreversible? Definitely not! With careful effort, we can reverse many of the side effects of human growth. Building back diversity involves increasing tree cover and bringing back fauna and flora that thrive in our jungles. Many species that are close to extinction need to be regenerated. Planting trees is a small part of the whole process – a beginning but not the end. While some argue that trees will automatically attract fauna and flora, the impact will be slow and ineffective.

In this context, the 2030 Agenda for Sustainable Development’s Sustainable Development Goal 15 is devoted to “protecting, restoring and promoting sustainable use of terrestrial ecosystems, sustainably managing forests, combating desertification, and halting and reversing land degradation and biodiversity loss.”

I live in Bangalore and see some interesting efforts to protect and improve the country’s biodiversity. Take the case of the biodiversity park developed by Toyota Kirloskar Motors. Called Ecozone, it is spread across 25 acres within TKM premises. There are 17 theme parks that are designed to create a sense of ecological consciousness among children and various stakeholders. Then you have the efforts of Wipro Foundation, whose Earthian programme promotes sustainability and biodiversity education in schools. They started the butterfly park in 2013 in Bangalore. While not a corporate IIMB’s campus has paid close attention to biodiversity. Its campus boasts of some 20,000 trees and more than 200 species of plants, including horticultural trees and flowering plants. Similarly, another institution that I work with, IIM Raipur has set up a biodiversity park.

I’m not saying planting trees is not required. It is required, but more needs to be done to protect and enhance our biodiversity.

ESG Investing and AI

Artificial Intelligence (AI), machine learning, and natural language processing have taken a firm foothold, and companies are exploring opportunities to leverage their power. AI and related tools will help investors navigate companies’ financial performance prospects and environmental, social and governance (ESG) factors.

Let’s look at some of the ways in which AI can support ESG investing:

Data standardization: AI can standardize and validate data from multiple sources, providing a more consistent and transparent view of ESG performance.

Data analytics: AI can collect and process large amounts of ESG data. This can help companies identify trends and track performance, resulting in improved investor decision-making.

ESG Ratings: AI can automate the analysis of diverse ESG datasets by creating standardised frameworks. This helps investors to compare and evaluate ESG performance consistently.

Portfolio construction: AI can help investors construct well-diversified portfolios. These portfolios not only align with sustainability goals but also seek to generate competitive financial returns.

Risk assessment: AI can assess a company’s exposure to ESG risks, such as climate change, labour practices, and corporate governance.

Investment theses: AI can help firms create their own investment theses. They can use standardized and detailed taxonomies and materiality maps to refine their weighting of a large number of quantitative ESG sub-metrics.

While AI can bring tangible efficiencies in ESG investing there are several risks that need to be kept in mind. The quality of underlying data is always a concern. Garbage in Garbage out (GIGO) is a well-known technology risk. AI models are susceptible to biases in training data. Many of the ESG factors are complex and correlated. It needs an expert hand to make sure that they do not lead to misleading results. The use of AI raises ethical concerns, including privacy, data security, and the responsible use of technology.

While AI can enhance decision-making, it is important to strike the right balance between human judgment and AI-driven insights.

𝐂𝐥𝐢𝐦𝐚𝐭𝐞 𝐟𝐢𝐧𝐚𝐧𝐜𝐞: 𝐁𝐞𝐲𝐨𝐧𝐝 𝐮𝐫𝐠𝐞𝐧𝐭

We are at the doorsteps of 2030, the year designated to reduce the global temperature increase to 1.5°C, and the picture is gloomy. Finance is a critical ingredient to saving our planet. And it seems to be in short supply. According to the IMF, the Asia-Pacific region faces a climate financing shortfall of at least $800 billion. The UN says that developing countries need at least ten times more money to adapt to the effects of climate change than they currently receive. The OECD estimates that developing countries will need around $2.4 trillion annually for climate investments between 2026 and 2030. A graphic (below) from a recent Financial Times article caught my attention. The climate finance flows in 2022 were a quarter of the annual climate finance needs till 2030. More money seems to have been spent on military and fossil fuel subsidies than on climate.

Is this likely to change? Unlikely. In 2024, 49% of the world’s voters will vote in elections across 64 countries. Most of the world is still struggling with economic woes, and many of the largest economies face budget deficits. Many industries are trying to come to terms with the economic reality. Thus, there is a shortage of both public and private funds.

Governments and private investors must urgently focus on climate finance and create innovative financing methods to attract capital. The Dubai Climate Summit has rightly drawn attention to blended finance (see https://www.linkedin.com/posts/umajmudar_blended-finance-activity-7073867065530470400-mKhd/), financing through a mix of public and private funds. Countries’ annual budgets must incorporate provisions for climate finance. Similarly, companies need to disclose their spending on climate/ESG.

The time for mere discussions on climate finance has passed. We are in a critical phase where action is the need of the hour. Let’s act now to secure a sustainable future for our planet!

Biomaterials: Past is the Future

Biomaterials have long been part of our lives. We lived in wooden houses, wore clothes made of natural fibres (cotton and wool), and lived a natural life. With advances in technology, we started living in concrete houses, powering our heating, cooling, and transportation with fossil fuels. Our everyday products were made from synthetic materials. Climate change and ecological sustainability concerns are now turning the clock back. We are reviving the traditional ways of living, which has led to the growth of biomaterials.

So, what are biomaterials? Biomaterials are of two types:

A material derived from, or produced by, biological organisms like plants, animals, bacteria, fungi and other life forms. These are also called biologically derived materials.
A material used for a biological purpose such as a biomedical application like treating an injury or growing biological cells. These may be synthetic.

According to McKinsey, over the next ten to 20 years, advances in the use of biology in the production of materials, chemicals, and energy could amount to $200 billion to $300 billion in global market growth.

Biomaterials development started when people started using biological materials like plants, wood, paper, leather, textiles and other such materials to replace unsustainable materials. Soon, biotechnology took over and helped create modern enzymes that led to the development of products ranging from detergents to animal feeds. Significant investments were made in biofuels and biomaterials. Recent advances in gene editing, artificial intelligence and other technologies are furthering the development of biomaterials.

Biomaterials have applications across a range of industries – apparel, electronics, automotives, FMCG, packaging etc.

Take the case of buildings. Buildings account for 40 per cent of global energy demand and a third of all greenhouse gas emissions. Several biomaterials can be used in buildings — self-healing concrete, chipboard made of food waste, and mycelium insulation.

Biomaterials can significantly improve the sustainability of supply chains and products. They have the potential to reduce carbon footprints and improve biodegradability or recyclability of materials. They have the potential to help in reaching net zero targets.