Week 22: The rich, the poor and the climate emergency

Dear all, 

I hope everyone is well and ready for another edition of ‘ESG on a Sunday’.

Who are “we”?

This week’s newsletter will focus on the S and G of ESG with particular focus on the darkest shadow of humanity, i.e. the climate emergency.

In the media, the social and governance elements of the transition – the systemic change we need across this beautiful planet of ours – have not yet been addressed to the extent they deserve. Yes, there’s been many different statements from companies and governments, experts and scientists, very often starting with a “we”. We need. We will. We believe. We doubt. We…

It’s a nice way of sharing connectivity and a sense of responsibility with humanity. It has that ring of belonging, of a shared past, present and future. Yes, “we” need to feel it because it makes it easier. Same boat, same challenges, same destiny. “We” need a joint effort so “we” can save us all from ourselves…

But the question about who this “we” is, who exactly they are referring to in the many statements, is seldom addressed in the context of ESG. And it’s rarely understood in a systemic sense.

Understanding the systemic transition from an efficiency point-of-view as well as from a real-impact point-of-view is a prerequisite for this process to create any tangible improvement for the people affected by this. Yes, all of us, but not really all of us, or?  

The rich and the rest

The fight to protect the planet is shifting in ways that could soon exacerbate conflicts within countries, particularly between social classes. Or, to put it bluntly, between the rich and the rest.

The top 1% by income of the world’s population accounts for about 15% of emissions, according to UN data. That’s more than double the share of the bottom 50%. The richest 1 percent need to cut their carbon footprint by 2030 by “at least a factor of 30”!

Almost everything the wealthy do involves higher emissions, from living in bigger houses to running larger cars and flying more often, especially by private jet. Eating meat comes into it, as does owning a swimming pool. Not to mention a holiday home. Or homes.

Climate change is becoming less a battle of nations than a battle of rich vs poor. You can read more and view some interesting charts in this piece by Financial Times – here’s one of the charts:

Who will pay?

This leads us to the next question: who will pay for the transition?

Europe’s bold plan on emissions risks political blowback. The reforms proposed by Germany and others would set a carbon price for the majority of companies. But different member states and activists worry that the poor will suffer.

Since January, Germany, the EU’s largest economy, has introduced a de facto tax of €25 per tonne of carbon on petrol, diesel, heating oil and gas to ramp up the cost of dirty energy and incentivise greener ways of living. It means that millions of Germans will be paying more at the petrol pumps and in their heating bills.

Right now the people directly impacted by Europe’s carbon price are still a few thousand companies rather than millions of people. The fear is that without an accompanying system of mass state subsidies and financial compensation, carbon pricing will be a regressive tool that will punish millions of Europe’s poorest families who live in rented or social housing and are stuck with petrol-driven cars – ultimately serving to undermine public support for the EU’s ambitious climate goals. 

Carbon inequality in numbers

Now, let’s look at some numbers and stats to better understand the situation (source):

• The richest 10% of the world’s population (790 million people) are responsible for 52% of the cumulative carbon emissions – depleting the global carbon budget by nearly a third (31%) in 25 years alone. 
• The poorest 50% (3.9 billion people) were responsible for just 7% of cumulative emissions, and used just 4% of the available carbon budget. 
• The richest 1% (79 million people) alone were responsible for 15% of cumulative emissions, and 9% of the carbon budget – twice as much as the poorest half of the world’s population 
• The richest 5% (395 million people) were responsible for over a third (37%) of the total growth in emissions while the total growth in emissions of the richest 1% was three times that of the poorest 50% 
• The richest 10% of the world population live in every continent, and the geographic composition of the group has evolved over the last 20-30 years
• Around half the emissions of the richest 10% (24.5% of global emissions) are today associated with the consumption of citizens of North America and the EU, and around a fifth (9.2% of global emissions) with citizens of China and India
• Over a third of the emissions of the richest 1% (5.7% of global emissions) are today linked to citizens in the US, with the next biggest contributions coming from residents of the Middle East and China (2.7% and 2.1% of global emissions respectively)

Is ESG making a real difference?

The climate emergency is going to increase the existing divide between those who have resources and those who do not.

The “we” being addressed has little to do with the world’s poorest communities often living on the most fragile land, politically, socially, and economically marginalized, making them especially vulnerable to the impacts of the climate emergency.

How do “they” fit into “we”? How do our investments, our ESG beacons of light and hope contribute to addressing “their” challenges? Any tangible outcomes? Any revolutionary life and habitat improvements we can show?

Last week, I had a very interesting meeting with the world’s largest cocoa producer. A company that sources raw material from parts of Africa where child-labour and deforestation are endemic. The CFO on the call looked very surprised when I asked how often they get visits from ESG investors in Africa (and they have many on the list of shareholders). The answer was short. Never. Before COVID? No.

The fundamental question that the entire ESG industry needs to face every morning in the mirror is this: Are we making any real difference with these investments?

If the carbon footprint of fund X is better than the respective benchmark then that means what? For whom? In relation to what?

If 10% of a fund invests in tech leaders and we cut our portfolio emissions by X% every year then what does it mean? It sounds good, but what is the tangible outcome? For whom?

If “we” invest in companies that someone has rated ‘very good’ with regards to human rights, and with other social issues policies in place, then what does it mean? Any results? Improvements? Tangible outcomes for those affected? 

That’s what this is all about. Those are the questions we should be asking to ensure ESG is not just another tool to increase the divide, but will actually help bridge it and help secure a just transition.

The child labour in your batteries

Let me give you an example. 70% of the world’s cobalt reserves, a chemical element needed for the transition to a sustainable future, are based in DR Congo. Cobalt is a by-product of copper and nickel mining, it is used to make rechargeable batteries, and nowadays it’s used by all companies to shift our unsustainable energy dependency towards a more renewable energy supply.

It is everywhere. In our phones, cars, equipment we use, appliances, all over the place.

It is a well-known fact that DRC is sort of a shaky place due to internal conflicts, corruption and endemic difficulties to get some kind of stable governance in place.

Now, investors around the world under the banner of ESG invest in ‘sustainable’ companies that produce new, less fossil energy driven products. These investments are labeled ‘sustainable’.

The companies participate in all sorts of initiatives, all sorts of We Are Against Child Labour letters. The companies have policies in place, they have processes in place, they can show how they manage “risk” in their supply chain. All good. Investors are covered, companies do their part and “we” change the world together. Or? 

Not really. Because the truth is that on the ground in DRC the amount of child labour, forced labour and other nasty forms of hazardous labour have been increasing the last 15 years. The same goes for health hazards as well as different kinds of environmental destruction.

The situation is such that only very few of the international extraction companies that operate on the ground in DRC are trying to do what they can (or are forced to do so), and their businesses are rightly deemed ‘non-sustainable’.

In other words, Tesla who puts 20 kg of cobalt from DRC in a car is deemed ‘sustainable’ even though the sub-vendors are clearly not.

What are the consequences for the more than 300,000 children who are mining cobalt? Can ESG investors answer that question? 

Displacement and poverty is very real

More than 570 coastal cities could be affected by sea level rise by 2050.

In that same period, as many as 1 billion people could be displaced by environmental hazards – primarily sea level rise and natural disasters.

Displacement can push a person into poverty by stripping them of their home, profession, and networks. Many people who are displaced are unable to carry their former wealth into their new contexts and struggle to find work and regain their stability. An estimated 100 million people living in developing countries could be pushed into poverty by climate change by 2030.

Not only are people within these contexts ill equipped to adequately prepare for these extreme events, but they’re also ill equipped to recover from them afterwards.

So are they “we” as well?

The only viable route towards eradication of poverty, by a meaningful definition and within a remotely reasonable timeframe, is to improve the relationship between global economic growth and poverty – and to do so much faster and more effectively than has been achieved over the last 20 years.

This means shifting our attention from global economic growth itself, and towards improving the distribution of the benefits of global production and consumption.

Here’s a very interesting piece on this – I recommend you read it.

Microsoft’s Bermudian tax affair – and the G7 deal

Finally, here’s an interesting story on G-side of ESG: An Irish subsidiary of Microsoft made a profit of $315bn (￡222bn) last year but paid no corporation tax as it is “resident” for tax purposes in Bermuda.

The profit generated by Microsoft Round Island One is equal to nearly three-quarters of Ireland’s gross domestic product – even though the company has no employees.

The subsidiary, which collects licence fees for the use of copyrighted Microsoft software around the world, recorded an annual profit of $314.7bn in the year to the end of June 2020, according to accounts filed at the Irish Companies Registration Office.

The company’s profits jumped from just under $10bn in the previous year and compare with Ireland’s 2020 GDP of €357bn ($433bn).

In the tax statement, the company says: “As the company is tax resident in Bermuda, no tax is chargeable on income.” Bermuda does not levy corporation tax.

Is this “we” too? 

Hopefully, this will all change with the ‘historic’ G7 deal reached yesterday, even though some campaign groups condemned what they saw as a lack of ambition.

However, 15% is certainly better than “no tax”.

That’s all for now. Have a great week!

Best regards, Sasja