MUNEER ISMAIL: SMEs and corporates working together will be key to achieving climate goals

COP26 served as a wake-up call to many of the need for urgent and tangible collective action to deal with climate change. Indeed, SA announced its own landmark deal of $8.5bn worth of finance from developed economies to reduce the country’s reliance on coal as part of its just energy transition, described by President Cyril Ramaphosa as a “watershed moment”.

The main takeaway for corporates coming out of the event was a reinforced commitment that they need to reduce their carbon emissions to achieve net zero before 2050. It also highlighted the financial sector’s pivotal role in financing the global economy on a sustainable path towards this goal. In particular, there is a need to help developing markets such as Africa respond to the threat of climate change and develop a viable agenda towards a just transition that can create opportunities to positively define its economic future.

More than 3-billion people live in developing economies that still depend on coal for more than two-thirds of their power consumption. An abrupt shift would endanger basic development needs, disrupt industry and have a huge social impact from job losses in coal regions. Therefore, the future path must continue to develop and invest in the energy infrastructure required for electrification, renewables and low-emission fuels, while also phasing out thermal coal on a timeline that does not jeopardise net zero.

How Africa’s economies work with partners, policymakers and multilaterals across the public and private sector will affect the journey towards decarbonisation. Critical to this will be identifying and funding alternative growth areas to ensure affected energy sectors create new and sustainable opportunities for a low-carbon economic future that enables Africa to undergo its just energy transition.

As the focus turns to COP27 this coming November in Egypt, corporates will be looking at how they can tackle their net-zero journey, and one of the most important ways to achieve this will be by creating more sustainable supply chains.

According to a recent report by HSBC and Boston Consulting Group, supply chains account for 80% of global emissions and act as the departure point for any strategy aimed at getting to net zero. The report, “Delivering Net Zero Supply Chains”, points out that “the environmental impact of a complex supply chain can be several layers deep”.

While many organisations have begun to address their direct emissions, there is still much to do in terms of reducing their indirect emissions, including the emissions arising from suppliers. Therefore, the challenge for any company lies in implementing decarbonisation efforts and sustainability standards consistently across the entire value chain.

More than $100-trillion of investment is needed to deliver a net-zero economy by 2050. About $25-trillion to $50-trillion of this will need to be directed towards SMEs, which represent more than 90% of a typical supply chain. This is a considerable challenge in terms of market access and risk appetite. SMEs typically have less access to funding to facilitate a transition to more sustainable practices and lack the wherewithal to prepare adequate strategies to deal with climate change.

The corporate sector, in turn, cannot simply demand sustainability compliance: it must co-invest, use supply-chain finance and share knowledge and resources. Companies have a responsibility to support these efforts, so they will need to develop relevant capabilities and accelerate the training required to play their part.

In addition, achieving net zero by 2050 will require enormous investment in research & development from corporates. An overhaul of business models and processes is required from a company-specific perspective. Of primary importance will be creating structures to gather real-time operational data across the supply chain to provide consistent ESG metrics that are comparable and include end-consumers who increasingly demand transparency when making a purchase.

While levers to achieve emission-free supply chains vary from sector to sector, several principles apply across the board. Top of that list is collaboration. For corporates to create sustainable supply chains far beyond their company parameters which encompass all stakeholders, they must create a “leadership crucible” of joint action involving financial institutions and banks, as well as policymakers and governments, industry bodies and NGOs.

From a governmental and regulatory perspective, policies will need to be implemented that mandate transparency, disclosure and enable cross-jurisdictional alignment across the entire value chain. The collaboration between industry, science, government and finance, bringing products to market and accelerating sustainable innovation will require procedures that are recognised across national borders.

The financial sector will play a significant role, not only in providing financing but bringing skills, knowledge, networks and data. For financial companies, the sphere of influence extends far more broadly than inside the company. Impact will be created by the investments they make into other companies and projects, along with the sustainability criteria and policies governing these.

HSBC, for example, recently outlined key steps the bank will take to turn its net-zero ambition for its portfolio of clients into business transformation across the bank, in line with the Paris Agreement goal to achieve net zero by 2050 or sooner. It announced a detailed policy to phase out the financing of coal-fired power and thermal coal mining by 2030 in EU and Organisation for Economic Co-operation and Development markets, and worldwide by 2040. The bank has also set net zero-aligned targets to reduce financed emissions from oil and gas, power and utilities sectors.

Finance institutions can help to address the needs of corporates through partnerships with clients to set up sustainable supply chain finance programmes that lower the cost of borrowing. Targeted, ring-fenced and affordable capital is a key enabler, but financial institutions cannot do this alone.

Banks will need to develop access to team mechanisms, co-invest with corporates, and form public-private partnerships to help deliver financing where it is needed most. This requires appropriate data structures that provide transparency and traceability of financing including where it is being directed, how it is being used and by whom. HSBC has recently announced it is investing $100m as an anchor partner in Breakthrough Energy Catalyst, a ground-breaking programme that leverages private-public capital to accelerate the development of clean technologies that will help achieve net-zero emissions by 2050.

From a sustainability perspective, no economy operating within the global supply chain can afford to be the weakest link, or be perceived as such. The global community of stakeholders must be able to work with consistent data and metrics to make sustainable business decisions, driven by standards that ensure information is comparable across industries, financial markets and jurisdictions.

To this end, Africa’s ambition to increasingly integrate its economies into the global supply chain means that it cannot be out of step with its international counterparts regarding net-zero aspirations and policies. The same standard of sustainable practices and policies must be adopted and integrated to attract foreign direct investment and to cement its future trading potential.

Collaboration will be vital to making substantive progress before COP27 to create a just transition throughout the entire supply chain towards net zero. Finance has a vital role to play to accelerate innovation to help scale up climate change solutions and unlock opportunities for clean technology, infrastructure and skills development. The pace of change is now more important than ever and, given the urgency of the situation, it is imperative that nuts-and-bolts action beyond generalised commitments is taken now to achieve sustainable supply chains.

• Ismail is CEO of HSBC SA.