This article first appeared in The Edge Malaysia Weekly on August 10, 2020 - August 16, 2020

ONE of the more inspiring steps taken under the 2015 Paris climate pact is the commitment by countries to decarbonise their economies fully in the second half of this century.

Carbon neutrality or net-zero emissions, as this measure is called, involves the phasing out of fossil fuel emissions.

“For 125 countries to have net-zero targets will possibly be the most significant economic transition in history,” says Climate Governance Malaysia (CGM) founder Datin Seri Sunita Mei-Lin Rajakumar.

Conversations about decarbonising are more advanced in some countries and among climate-aware fund allocators, says Sunita, who is the independent non-executive chairman of the Caring Pharmacy Group. Carbon emissions in these settings are being analysed in each industry sector and individual company, she adds.

“Investment decisions that disregard the sustainability and health of our planet will not generate lasting returns. Capital markets are forward-looking and it is expected that decisions on capital allocations are likely to change before climate changes,” she says.

Disclosure expectations include scenario analysis, stress tests for climate risks and espousing the principles of climate governance.

However, decisions to decarbonise are also very complex.

Replacing combustion engines with electric vehicles (EV), for example, may appear to be a climate-friendly step.

But a UK study shows that if the entire UK vehicle fleet is replaced with EVs, it would need about twice the annual global production of cobalt, three-quarters of the world’s production of lithium carbonate, nearly the entire world’s production of neodymium and more than half the world’s production of copper in 2018, writes energy economist Tilak Doshi in Forbes.

Another poser, says Sunita, is whether a country that is powered by fossil fuels should be transitioning to EVs.

Further, a country that aims for net zero carbon targets must be careful that it is not accused of outsourcing its carbon emissions to other countries with lower production costs and higher carbon emissions.

Issues surrounding deforestation are equally complicated. Besides contributing to about 25% of greenhouse gases that lead to climate change, it is tied up in a host of contentious issues such as human rights, especially indigenous peoples’ rights, water quality, and loss of biodiversity. Its impacts on these differ by commodity, depending on whether it is arising from activities such as cattle rearing, pulp and paper production, soy farming or palm oil cultivation.

Traceability is another key question that weighs heavily on trade in commodities that have an impact on forest cover.

Associate Professor Dr Gopalsamy Reuben Clements of the Jeffrey Sachs Center on Sustainable Development at Sunway University agrees that deforestation is a complex issue in Malaysia.

“Land is a state matter. But in order to obtain sufficient revenue to effectively manage their states, state governments have historically had to derive income from extractive activities such as logging, plantation and aquaculture development, which are, of course, detrimental to forest conservation,” he says in an email comment to The Edge.

“State revenue streams are dwarfed by those of the federal government and many large corporations. Without economic incentives from the federal government and environment, social and governance (ESG) investments from the private sector to help state governments protect forests, it will be impossible to avoid deforestation in Malaysia, and therefore, deforestation rates in the country are likely to increase,” says Reuben, who is also the co-founder of Rimba, a Malaysian conservation research group.

If the custodians of our forests are stuck in a Catch-22 situation between raising revenue and conserving nature, corporate boards are in no better position.

“It is difficult to support transforming a company to adapt to a new set of environmental and regulatory drivers, as this change is perceived as a new risk where boards are understandably nervous. Further, investors don’t want companies to change, and would rather pull their money out and reinvest in other businesses than to take a risk that a big company can change,” says Sunita.

Overcoming these barriers to climate action will therefore require a transgenerational mindset change.

Some directors are typically from a generation where climate change was not a central business issue or was a fringe conversation, says Sunita.

“They have succeeded without this being an issue and don’t approach it with the same rigour as audit, remunerations, capital investment priorities, and so on. However, we have a younger generation of middle managers who understand the issues and urgency, who see this as being entirely natural,” she says.

Another major constraint is the time horizon for company performance. “Everyone is rewarded on short-term remuneration which, at the most, is five to six years out. Only in some circumstances is the CEO required to hold on to his shares until retirement,” Sunita notes.

Nonetheless, the clock is ticking for companies to act on the climate catastrophe. “Economies and businesses that are not part of this conversation will not be able to cope with the rapid transitions that are coming. This will result in stranded assets where value will be lost almost overnight as governments around the world respond to crisis situations or litigation, which calls for individuals and companies to be responsible for the damage caused, where the chain of causality has been previously established for many years,” says Sunita.

To push the envelope in the corporate world, CGM has been bringing the message home to non-executive directors that climate action falls squarely among their fiduciary duties.

Since its inception last year, the initiative’s climate-dedicated director network has organised some 24 events with the support of the Institute of Corporate Directors of Malaysia, Securities Commission and Bursa Malaysia.

A CGM webinar will be held next month as part of Climate Week NYC — a key summit on the international climate action calendar — to showcase some best practices of Malaysian non-governmental organisations and businesses.

All said, the job of waking corporate boards to the systemic financial risk posed by climate change is a race against the clock.

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