We have been regaled by stories, analyses and expert opinions on the rapid growth in the value of Tesla’s stock. Literally adding billions of dollars to Elon Musk’s wealth and propelling him into the top ranks of the world’s wealthiest people. It can be argued that the key reason of the phenomenal growth in Tesla’s stock prices, is the positive investment sentiment around businesses driving a green agenda, such as electric vehicles. Especially now that developed nations have embarked on decarbonizing their economies, providing incentives to increase the use of electric vehicles, in addition to other strategies to become carbon neutral within the next 30 years.
The Tesla story epitomizes some of the elements of the green economy and how it is revolutionising finance and investment. The United Nations Environmental Programme defines a green economy as one, that improves human wellbeing, and builds social equity while reducing environmental risks and scarcities.
This definition has further been distilled into three pillars; economic prosperity, environmental sustainability and social inclusion. The UN High Level Political Forum for Sustainable Development (HPFL), launched the following five principles for inclusive green economies. The wellbeing principle, in that all people must be enabled to create and enjoy. The justice principle, promoting equity within and between generations. The planetary boundaries principle, where we must safeguard, restore and invest in nature. The efficiency and sufficiency principle, where you must support sustainable consumption as well as sustainable production. The good governance principle, promoting integrated, accountable and resilient institutions.
The green economic agenda is picking up momentum the world over, with consumers, investors, financiers, and policy makers, moving to ensure that they align with the above principles.
The financial sector too has not been spared from the green revolution. All financial institutions now espouse the triple bottom line policy. Where it is not enough to thrive economically, but the institution must have a positive social impact, promote environmentally friendly policies and foster a positive governance culture. All lenders including Export Credit Agencies, multilateral lenders and commercial banks first assess the borrowers on their compliance with the above green finance principles. The writing is on the wall, it is going to get harder and harder for borrowers who do not conform with the green agenda to the get financing.
Uganda too, has experienced the impact of the green agenda firsthand. In December 2015 the World Bank halted its funding to the Uganda Transport Development Sector Project due to contractual breaches related to worker’s issues, social and environmental concerns, poor project performance and allegations of various abuses against the communities. The World Bank stated that they must ensure that the poor and vulnerable are protected. In addition, the World Bank restated its commitment to be a global leader in environmental and social standards in the development sphere. However, this was a temporary setback, because the roads authority quickly put in place stringent measures to maintain social and environmental safeguards.
Green principles are becoming the norm in all huge infrastructure projects. There was a lot of fanfare, when NEMA issued the certificate of approval for the Environmental and Social Impact Assessment study undertaken to identify and assess the potential environmental, social and health impacts of the East African Crude Oil Pipeline and subsequent measures to mitigate any negative impacts as well as enhance the projects benefits.
Once again, this approach is fully aligned with the principles espoused in green economics and finance.
However, the move to a green economy faces some transitional dilemmas, and sub-complexities. First is how to create a sustainable green finance taxonomy while mitigating transitional risks. With agreed shades starting from red, to brown, light brown and then green and dark green.
These would support a gradual and orderly transition. But most especially, anchor the fact that different nations are at different stages of development. For example, there are concerns that the EU green rules could starve emerging markets of much needed capital. It is a known fact that a considerable number of poor nations suffer from extreme energy poverty, with significant reliance on biomass for over 90 per cent of their energy requirements, with access to electricity at below 30 per cent of the population.
Their rapidly growing populations are wiping out forest cover at alarming rates mainly for fuel, settlement and farmland, inadvertently fueling global warming.
These poor nations are looking to diversify their economies away from primary production, to develop the extractive industries, grow manufacturing and create jobs for burgeoning youth populations. As well as fight disease and hunger. So how do we ensure that the green finance taxonomy caters for everyone? How do we ensure that we do not drive much needed investment capital away from the poorer nations?
Even more complex, is the argument that wealthier nations, need to change their lifestyles and consumption behaviours, in order to support green economic objectives. Mike Berners-Lee & Duncan Clark, in their book “The Burning Question – We can’t burn half the world’s oil, coal and gas, so how do we quit?”. Explain that the Sub-Saharan African lifestyle takes less than a tonne of carbondioxide a year to provide. That compares to around six tonnes globally, 15 tonnes in much of Europe and more than 20 in North America and Australia.
Another big dilemma is the impact of some elements of the green economy’s production chain and waste processing. The minerals and rare earth elements like lithium, nickel, cobalt, neodymium and graphite required to produce green energy are mined in ecologically sensitive areas and generate highly toxic waste during their extraction. This brings into question, both the impacts of the environmental and material costs of the green economy.
However, despite all the challenges, governments, investors, financial Institutions and businesses have started implementing sustainable green economic practices.
Those that have not yet started must act now and not wait until it is too late. Some of the important questions that businesses should ask themselves include:
What is our green policy? What systems have we put in place to assess, measure, evaluate and disclose compliance with the said green policies? The consequences of failing to effectively answer these questions will lead to severe climate disruption and social upheaval.
James Reginald Karama is the Head of the Financial Institutions Group at Stanbic Bank