Climate Change and Geopolitics: The Role of Risk and Internal Audit Professionals
Most people may think of climate change action as primarily involving scientists and governments — but there is a clear geopolitical angle to it that keeps businesses and other organisations up at night. Businesses are more visible and more actively scrutinised than ever before. This has come as the result of social and economic shifts in the wider society, and changes in attitudes, thanks to rolling news and social media. Public concern over climate change and the disruption caused by it will increase over the coming decade.
As Navigating Geopolitical Risk: Building Resilience Demands Collaboration in a Challenging World by the Chartered Institute of Internal Auditors (CIIA), Association of Insurance and Risk Managers in Industry and Commerce (Airmic), and AuditBoard demonstrates, greater collaboration is needed between risk and internal audit professionals to tackle the heightened uncertainty and volatility of the new geopolitical era. Read on for the case study on climate change and geopolitics from the report, and download the full report for a deeper dive.
Climate Change and Geopolitics: Background
There are numerous areas where climate change and geopolitics intersect — recent notable challenges include:
Resistance from citizens. There was much progress made at the COP26 UN climate summit in Glasgow in 2021, notably with the pledges on methane reduction and deforestation — but these pledges have been a difficult sell to citizens, as countries emerge from pandemic public debt. There seems to be a disjuncture between governments and their citizens.
For instance, in a June 2021 referendum in Switzerland before the COP26 summit, voters narrowly rejected a new law that would have helped the country meet its goal of cutting carbon emissions under the Paris Agreement on Climate Change. The draft law included measures such as increasing a surcharge on car fuel and imposing a levy on flight tickets.
Ukraine and the energy crisis. The war in Ukraine and the resultant impact on energy and commodity prices, and inflation, have heightened the challenges in coming to a global consensus at the subsequent COP27 summit held in Egypt. Governments have asked for coal-fired power plants to be kept open.
Developing countries and the issue of equitability. More climate finance needs to be unlocked to help developing countries cut their emissions without negatively impacting their economic development and to transition away from fossil fuel dependence. Developing countries have argued that it is not equitable for developed countries to demand that they cut their emissions, as developed countries had polluted the planet during their economic development in earlier eras. Yet governments of developed countries struggle to convince their electorates that they need to unlock such climate finance for the benefit of developing countries.
A zero-sum game between energy prices and green investments? There are fears that the rise in wholesale energy prices is having the effect of reducing the amount of money available for green investment.
COP27 UN Climate Change Summit: The Expectations of Risk and Internal Audit Professionals, and Their Organisations
In the lead-up to the COP27 UN Climate Change Summit, which took place in Sharm El-Sheikh, Egypt in November 2022, risk and internal audit professionals shared with us the expectations they and their organisations had in terms of the summit’s outcomes, as well as their take on global climate action more generally:
Businesses recognise the importance of achieving the target of preventing average temperatures from rising by more than 1.5 degrees Celsius above pre-industrial levels. But they sensed that the willingness, politically, for governments to cooperate had been dissipating since the COP26 summit in Glasgow, due to increased geopolitical tensions. They feared it would be harder to get that consensus or nearer that consensus at COP27, and therefore harder for governments and businesses alike to achieve their targets.
Businesses also recognise that if the developing countries do not have enough funds for climate-related solutions, it would become a global problem, which would sit on the balance sheets of companies through the value chain, and through the investment platforms.
“If you’ve got positions as a company, or if you’ve got risk, the related things like achieving 1.5 degrees, that doesn’t go away just because there’s a conflict and there’s terrible economic and societal consequences. It is indeed not easy, but the reality is that if we don’t sort out 1.5 degrees, what’s going on right now with the climate will seem like a picnic in 50 years’ time. So, the challenge is how to act when we have some tough short-term issues, while we still have our 1.5 degrees commitment. We are still working with customers and with investing companies to work on their transition plans and help them manage the risk associated with the transition.” – Head of Sustainability Risk, Insurance Company
It is important to take an industry sector approach when mooting energy efficiency solutions. Consider for instance the construction sector, which has been responsible for about 40% of the energy demand in Europe. If the construction sector were to embark on a journey to utilise energy efficiency mechanisms and new ways of sourcing the energy it needs, it would release some of the energy supply for the other parts of the economy and for the world.
Businesses appreciate the need for climate-related regulation, but they want advance notice of such regulation. Ideally, they would like governments to give early warning of two to four years of when such regulation would be imposed. Some businesses have been caught out in the past, where the introduction of new climate-related regulation resulted in the disappearance of some of their end-use markets. Having a handle on regulation in advance would make a big difference to them, especially smaller businesses for which it would help level the playing field.
COP27 was billed as the ‘Implementation COP‘ — the moment to implement the pledges made at the COP26 in Glasgow — but observers were disappointed on that front. The emissions cuts pledged did not add up sufficiently to limit the temperature rise to 1.5 degrees Celsius above pre-industrial levels. Nevertheless, there were some bright spots, such as the fund established to help countries facing severe damage from climate change.
What Businesses Want Governments and Regulators to Do
“We shouldn’t forget that technically, like every climate-related risk, the current challenges with inflation and the rise in commodity prices also present opportunity to the world to turn to renewable forms of energy, instead of going back to the old ways of providing energy through coal power plants.” – Sustainability and Climate Advisor
A roundtable participant from a utility company wanted governments to be more proactive rather than reactive. Businesses understand that it would cost more to deal with the effects of climate change when they strike, and it therefore makes sense for governments to be more proactive and reduce emissions in the first place.
Governments need to include energy conservation within their climate change approach, as it is one of the lowest-hanging fruit. It also represents the lowest marginal cost improvement that can be taken, with no investment required for it. Energy subsidies are all still going towards fossil fuels. In the words of one roundtable participant, “Governments paying people to pay for more expensive fossil fuel energy doesn’t make sense.”
“If the government invests in insulating properties, and promoting new wind and solar farms, which can be built in one or two years, that would be far quicker than launching a new gas field or to start fracking – that will actually increase our energy security much more quickly than some of the higher carbon intensity forms of generation. And we would reduce people’s utility bills much more quickly. So, I think as long as the message is delivered in the right way, progress in climate action is still possible at this time.” – Internal Audit Director, Multinational Electric Utility Company
A roundtable participant from the financial services sector found it key for regulators to unlock some of the capital their sector is required to hold for regulatory purposes, and to allow them to invest more in research and development into solutions to the climate crisis. Regulators in the financial services space are indeed closely engaged in dialogue and consultations with industry — which is crucial — but the increased ability for the sector to invest in climate solutions would help ensure they do their part in climate action.
Where businesses look to regulators to lead: The cost implications of having solar panels installed, for instance, are not widely accepted by customers. Without regulation to force the construction industry to build to different standards and to enable them to pass on those costs, it becomes very difficult for businesses to deliver the green proposition.
For a deeper dive into the topic, download the full report, Navigating Geopolitical Risk: Building Resilience Demands Collaboration in a Challenging World, for ideas, approaches, and practical tips to help you support your organisation in navigating geopolitical uncertainty.
