Why the WWF is right to warn about challenges facing firms as they move to net zero

0:12Karen Ellis: Welcome to the latest episode of Margin Notes with me, Simni Kuriakou, editor of FT Advisor. We have been looking at risk this year and one of the key risks facing businesses is how firms are navigating the transition to a net zero, nature positive economy. A report earlier this year from WWF and supported by KPMG showed that few businesses were actually equipped to manage the social impacts in order to ensure the benefits were shared fairly or to ensure the future growth and resilience of their business models. Now we know that climate and nature risks are already creating physical and operational pressures that businesses need to adapt to.

0:50Karen Ellis: And the transition itself is reshaping workforce dynamics, supply chains and market opportunities. So here to speak with FTA about the report, which was called The Path to Resilience, a People-Centric Transition to a Net Zero, Nature Positive Economy, is Karen Ellis. Karen is Chief Economist for the WWF. Welcome, Karen. Thank you for joining us. Thank you so much. Fantastic. Now, before we get right into it, can we just go back into the report? In a nutshell, could you just explain what the report set out to do? Absolutely. So the report was really looking at how businesses are managing this transition to a net zero, nature positive economy, how they see the opportunities and the challenges of that transition, and importantly, the extent to which they are understanding and managing the economic and social impacts of that transition and their own activities.

1:47And so, yeah, we did the survey of around 500 businesses across 19 countries, sorry, and asked them a range of questions to understand how they are managing this transition. And the overall findings were that businesses are actually very supportive of the transition. Around 90 % of them do believe they have a responsibility to limit environmental impact. And most of them also see the economic opportunities in that and the benefits to the economy as well. So about 75 % believe the transition will contribute positively to national prosperity as well. So they are really on board with the transition, but they also do see many challenges in implementation of that transition and risks for their business as well in being left behind or in sort of losing the support of their various stakeholders and customer base, et cetera, as they navigate that transition.

2:39So overall, you know, they're keen to progress it but want help and support in undertaking that transition.

2:46Karen Ellis: Absolutely. And I think one of the encouraging things to take from this is that, as you said, businesses are keen to progress. They want to help with that transition. They want to be part of that positive movement. But it's perhaps a case of the spirit is willing, but the flesh is weak. But I think, you know, they have understood about those empirical risks. If they don't take action or if they don't become part of this transition, there are going to be serious risks involved. And I just wondered if you can go back into the report, like how might businesses be impacted by failures? you know, for example, whether it's disrupted supply chains or other sort of risks, you know, what are the risks of just not getting on board as quickly as they want to?

3:33Absolutely. So as you said earlier as well, they face risks already from the climate change impacts and nature related risks already. Plus, they know they need to manage those risks and progress on this transition. And that transition itself has additional risks. So there's a lot of different challenges they're navigating at the same time. So, for example, in relation to supply chain disruptions, we know, for example, that climate change has had an impact on, you know, droughts and floods that have affected the production of certain goods, such as food crops, for example, which has created shortages and food price spikes and inflation.

4:09So that's a significant risk. But at the same time, some of the efforts they are undertaking to manage that risk and to build the resilience of their supply chain also pose challenges. So for example, if they are imposing environmental criteria on their suppliers, or reporting requirements, so they can understand how well their own suppliers are managing the transition, some suppliers are not able to produce those things and are not well, don't have the great capacity to actually be able to respond to those challenges. And so they face a challenge to their own supply base, they may be looking for alternative suppliers, but there's going to be a sort of growing competition for those sustainable suppliers who are best able to manage it.

4:49So that's one kind of example. I guess another is around the sort of workforce capability and skills that they have to actually undertake the new activities as part of the transition. There are significant skills gaps in some areas, which they are really struggling with. This came up a lot in the survey. At the same time, in some of those areas where they need to move away from, like fossil fuel based industries, there's also the layoffs of workers that may be very difficult for them to implement and result in a kind of public backlash as well. So there are a couple of examples of the kinds of challenges that they face.

5:25Karen Ellis: And that's that social impact that has to be considered as well, because when you do layoffs, it affects entire communities of people who've either moved to the area or who lived in the area for that specific job. And then you've suddenly got hundreds or even in some cases thousands of people no longer working there. So, I mean, that's just one of the social impacts that it could have on communities and people. But what other social impacts has the report highlighted, you know, that if you just don't get this transition right, what other social impacts could it have on communities and people? so the other kind of social impact and risk i guess is when you're building a new plant or a new um yeah a new generation uh installation for example it might affect local communities in a way that you know negatively affects them or that they have concerns about or that they're just not benefiting from in their own right and so that can lead to opposition uh delays in implementation legal challenges even, reputational harm as well, of course.

6:33So that has been a very big risk and cost to some businesses in some sectors, of course. There's ways they can manage these things by engaging local communities, of course, but that hasn't always been done in the best way possible and has resulted in a lot of these challenges sometimes.

6:49Karen Ellis: Yeah, and I remember reading government reports and reading the debates around infrastructure investment just in the UK and how they've got sort of pipelines of projects. But at the end of those pipelines is the knowledge that you have to then get something else through and whether you're building a road, there's planning permissions and legal challenges and all sorts of issues just in the UK. And then if you're sort of extrapolating this worldwide when you've got companies with supply chains elsewhere or businesses that operate in other countries, you've got to deal with a whole plethora of of illegal challenges and documentation and policy loopholes that perhaps you have to go through and I can imagine that's a very difficult and very costly thing for businesses to navigate.

7:39Absolutely and and has political risk attached as well where governments also might you know begin to worry about some of the developments that businesses want to take forward and may withdraw support for certain investments, for example. So yeah, these risks are very, very significant.

7:53Karen Ellis: Does it change very much country to country? Are there certain areas that are sort of managing the transition well in terms of helping to support businesses move? Or is it sort of geographically, is it just, you know, polarised between fully developed nations and developing nations? So there is some differentiation, yes, between high income and lower income economies. So actually, many lower income economies are very supportive of the transition, actually. I think they see the opportunity in it, but they do also see significant challenges. And a particular one for them is often access to finance for the upfront investment.

8:33Access to finance is much higher in Europe and North America, for example, than in Africa. So you see significant differences in the response rate on that. So there are challenges, but also opportunities for many low-income countries actually to gain from new investments and leapfrog some of the sort of problems we've had in richer nations and the need to sort of transition away from old-style technologies. You may not need to do that if you can leapfrog straight to the sort of new modern ways of doing business and generating energy.

9:07Karen Ellis: Of course and you know it's a global issue it affects everybody because you know we as you said in one of your answers earlier on we've seen how drought and wildfires have affected the number of tomatoes on supermarket shelves in the north of England and it's just one thing can have such an impact on everything and I think we have to be very aware that we are in a global economy and businesses do not operate on a not you know they're not technically on an island if I can use that awful awful metaphor there Could you talk, though, about that integration? Because, you know, a part of the report looked at social impacts and the integration into business transition or environmental strategies.

9:52Karen Ellis: So could you talk, expand a bit more on that aspect of integration? yeah so ideally for a successful transition you would be integrating those economic and social dimensions into your transition planning and also into policies so both government and business have a big role to play in facilitating this more kind of holistic approach to transition so for example governments should be thinking about how to support groups that might struggle such as SMEs or, you know, as we mentioned in developing countries where access to finance is already limited through, for example, extra incentives, financial incentives such as subsidies or tax rebates or through supporting finance mechanisms like blended finance or guarantees, for example.

10:48they can also really help with some of the skills challenges by coordinating education and training facilities and also social security to support workers who may lose out from the transition in the short term so there's lots of things governments can do to integrate social and economic impacts into their into their own planning for businesses there's also a lot they can do I mean many businesses are now developing their transition plans as required by a growing number of governments. And those transition plans should be integrated, connecting climate, nature and people to avoid those unintended consequences and risks associated with the transition if you ignore the impact on people.

11:26So helping them to sort of think about suppliers, how are they going to be affected? What might be the challenges they face? And then how can they support their suppliers to manage the transition? Maybe help by financing them to build the capacity needed to meet the reporting requirements, for example. They can also map the sorts of skills they're going to need going forward and invest in that, either training their own workers or partnering with a training company, for example, to enable those skills gaps to be closed as time progresses. And also working with local communities and customers and other stakeholders so that their perspectives can shape decisions and shape the planning from an early stage.

12:07So you understand who's going to be affected and what matters to them and how you can minimize any risks or negative impacts as a result of the transition and get them to be involved and sharing in the benefits of the transition.

12:19Karen Ellis: And that's a really, really good answer. And it shows that a successful transition doesn't just depend on governments getting involved or investors getting involved. It's absolutely everyone, professional connections, absolutely everyone, all these stakeholders, as you said. Can we go back to the question of finance? Because obviously, investors, retail investors, institutional investors are interested in putting money into those businesses which seem to be getting it right in terms of their own business stability and sustainability, but also in that transition. what role might investors then play you know is there money actually going to help yes I mean there is but not enough definitely not enough yet but so the whole sort of new asset class of transition finance is really crucial so financial institutions can ask companies to produce transition plans that enable the financial institution to assess how well that company is managing the challenges of climate change, managing the transition, whether it's going to be, you know, sustainable and resilient to all these changes in the longer term, and hence decide whether or not that firm is a good credit risk, of course.

13:37So it's directly relevant to their actual credit worthiness. And so by asking them these questions, and then if the answers aren't coming up to the standard they hope for, then engaging with those companies to support them on that journey to improve their standards so that they can meet the bar required to give confidence to the investor that they will be able to, you know, be successful and deliver a positive rate of return. So I think that's an absolutely critical role to play and a growing number of financial institutions are definitely doing that. But also, I think there's a significant gap in finance going particularly to lower income countries who do face a real risk premium on all of their access to finance actually across the board but also in relation to climate transition finance and you know they feel like because the effects of climate change are going to impact perhaps worse on them as well in some ways that will further penalize them so they face a really significant challenge in accessing finance and the risk is they get left behind in the transition so obviously it'd be great to find more ways that the private financial sector and governments can support companies to transition in lower income countries where a lot of the mitigation opportunities are actually the strongest and can potentially deliver a very significant rate of return.

14:55Karen Ellis: Yeah so I think that's a really important thing that you've said you know at the end of the day we are transitioning to this sort of net zero nature positive economy but we have to remember that people are at the heart of it and that's obviously the the title of your report you know a people-centric transition. Do you think that we in the UK really understand all the impacts on human beings in the UK and elsewhere around the world when we're making business decisions? Do you think that's been communicated well enough to us? So I don't think enough is understood about that. There isn't enough awareness about how this transition will play out generally.

15:36I think there is growing recognition of the risks associated with it, but in most cases, it's still kind of a new topic that companies are still getting to grips with and governments indeed. I think this is a good moment to be thinking about this in more depth because many companies are only now really producing their first transition plans. And this is the perfect moment to integrate that thinking about how this will affect people, different stakeholders and local communities and how that will play out globally. I think a lot of these things have to be done actually by governments working together to resolve these issues.

16:13So it can't all be solved by business and governments need to think more holistically about how this will affect, you know, trade relations and access to finance, financial flows globally. So there's going to be a lot of macroeconomic impacts as well that need to be understood. So this is definitely an area where more focus and attention is needed across the board.

16:33Karen Ellis: Fantastic. Well, thank you very much, Karen, for taking the time to speak with us. Thank you very much. And thank you all for listening. Until next time, take care.

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