ESG is the Necessary Evil, and the Markets and Entrepreneurs are Taking Full Advantage
A few months ago, I published a piece arguing that ESG will become the new bottom line. This is not a politically motivated statement, and I don’t fully agree with the ESG approach. I do believe however, it is time to change, and it is time for executives, entrepreneurs, and investors to appreciate we are at an economic and societal transition point. This transition will force us to engage the consumer base more dynamically, while placing greater efforts to decarbonize our business operations. These issues are both good for business and good for society provided companies and investors are willing to take risk and change. Capitalism models should be leveraged to create profits while absorbing the societal problem-solving more systematically. Please note that I have adopted a rather broad definition of ESG in my analysis to ensure I capture the sustainability, clean tech, and climate risk investment trends.
The Carbon Cost
To decarbonize the global economy, and reach Net-Zero, we need to reduce the level at which the greenhouse gases going into the atmosphere are harmonized by their complete removal. Based on the COP26 Climate commitment of 2021, we should reach this level by 2050 if all countries deliver on their commitment. So, what will the cost of Net-Zero be? To reach Net-Zero we will need to invest at least US$ 10 trillion dollar per year between now and 2050. The price tag is clearly very high; however, the cost of unmanaged and unpredictable climate change (based on current business practices) would be much higher as climate events are projected to affect about 20 percent of global GDP by 2040. In the US alone according to the While House, natural hazards could cost the U.S. federal budget about $2 trillion per year, a 7.1% loss in annual revenue by the end of the century. According to Swiss-Re, the European Reinsurance heavy weight, by 2050 climate change could cause $23 trillion in global GDP losses corresponding to 11 to 14 percent off global economic output.
Despite the charged debate around ESG, climate risk and compliance, I believe that decarbonization and ESG represent the biggest business opportunity of our generation. I also believe the transformation has already started…