Geopolitical RIsk – Merlin Linehan

How Climate Change will drive Geopolitical Risk: And how companies can prepare

Last year was when climate risks become a reality. Major rivers including the Rhine, Po and Yangtze fell to record lows. Heatwaves in China forced many factories to close over the summer. Pakistan suffered a devastating once in a century flooding and extreme heatwaves.

Climate change will make extreme weather such as the flooding or heatwaves more frequent and deadly. Floods can cause great human suffering, destroying homes and businesses and encourage the spread of water borne disease like cholera. In Pakistan’s case, flooding also dealt a deadly blow to an already fragile economy. The chaos and disruption of flooding means lower economic growth, higher debt payments and a massive bill for reconstruction.

The ripple effect of climate change goes well beyond the headlines of new extremes of weather; the impacts will spill over into politics, economics, and society, radically reshaping the world. Climate change acts a force multiplier, accelerating existing threats (extreme weather, flooding and drought have always been with us) to make them more common and deadly.

Conflict and Climate

Climate change induced drought and desertification in the Sahel region of Africa has driven the rise of extremist and militant groups in the region. Climate change and increasing demand has seen water sources dry up across an already water stressed region. This has pushed many farmers and pastoralists from the land.

As traditional livelihoods disappeared desperation pushed locals into the arms of extremist groups such as Boko Haram and Daesh. The rise of these groups have sparked a number of conflicts across the Sahel, pitching government forces against these extremist groups.

A hotter world is a more unstable and dangerous one. A world facing more hunger, drought and conflict will experience more geopolitical conflict as countries grapple over dwindling resources. The construction of the Grand Renaissance dam in Ethiopia has sparked anger in Egypt because it threatens the flow of water on which it is highly dependent. If as expected, the Nile shrinks further due to climate change and growing demand for its water. Egyptian agriculture will become increasingly unviable.

Climate risks should not be seen in isolation, rather as a series of shocks, which will overlap and overwhelm governments

As temperatures rise, the likelihood of mass crop failures across the globe increases. Already many of the world’s breadbaskets are under pressure from record-breaking heat and water shortages. The Indus and Ganges River basins in South Asia face the overlapping burdens of rising demand, extreme disruptive weather, and rising temperatures all factors that threaten the region’s status as a breadbasket.

A mass crop failure one or more key crop growing region such as the Ganges Basin, Euphrates or Nile basins would impact millions of people creating famine, and potentially engulfing the world in economic and political chaos. Widespread crop failure along with extreme heatwaves would likely see mass migration, that could see the movement of millions of starving and desperate people attempt to cross borders.

Syria

The movement of Syrian refugee into Europe caused a major political crisis as countries such as Turkey and Greece grappled with millions of desperate people flocking to their borders. Academics have linked the long running refugee crisis sparked by the Syrian war to climate change. A multi-year drought pushed many poor and hungry farmers into cities created an angry, politically volatile movement of people eager to protest at the government.

Policy makers and scientist are careful not to attribute an event solely to climate change. However, it will make events like the Syrian drought and subsequent war more common and frequent.

Systemic Risk

One or more major crop failures would trigger higher global food prices. In turn, this would put major pressure on economies across the world and unleash unpredictable political reactions. Governments may turn to isolationist policies such as export controls on food in an attempt to protect their own populace. Nations could lurch toward extreme politics or lash out at neighbours in an attempt to seize resources such as supplies of water.

The Covid pandemic was in many ways a foretaste of the future, the virus itself was a major killer, but the second and third impacts were also enormous, think of the unpredictable economic disruption and societal change – all factors that are still unfolding. The Chinese government shifted from strict lockdowns to relaxing Covid restrictions in a matter of weeks causing confusion and disruption in and outside China.

How can organisations prepare?

Companies need to prepare for a more unstable world. One leader in this regard has been the US military who recognises Climate Change as a “destabilizing and potentially catastrophic transboundary challenge”, and has prepared detailed scenarios so it is prepared for a wide range of threats to unfold.

Other organisations should follow this example and create credible climate related scenarios that could influence their own operations. This might include deep and disruptive economic shocks and loss of markets in badly afflicted regions, supply chain interruptions, and widespread political uncertainty.

Organisations should develop simulations and exercises that allow them to understand how these scenarios will this affect their operations, and how they should respond. Successful firms of the future will have a plan for dealing with climate change. Firms that plan successfully can also thrive in these adverse circumstances.

While the picture painted around climate change is often bleak, there are causes for optimism. The pressures of this new world could spark a powerful reaction as countries extend and develop innovative technologies to mitigate, or even reverse the damage of climate change (think of how quickly Covid vaccines emerged). The same pressures could even see the world pull together politically to develop successful policies and initiatives to combat this existential threat.

Geopolitics, Climate Change and Energy Transition

Why the next decade will be warmer, more chaotic and conflict ridden

What is causing this?

Global politics is changing. China has emerged as a rival to the US and a multilateral world is emerging. China, Russia and others feel constrained by the US and the West. Conflict has already emerged in Ukraine and many predict war over Taiwan before the decade is over.
Many countries are highly vulnerable to climate change and will be busy dealing with a cycle of floods, heatwaves and extreme weather and the consequences of these changes: such as economic chaos, migration, starvation, and decline.
As the world shifts to renewable energy and starts kicking its addiction to fossil fuels new international power structures will be forged. Competition over the critical resources will intensify and future wars could be fought over water, nickel, lithium and copper rather than oil or gas.
These three trends will push the planet into economic, environmental and social decline unless governments, people and companies can respond to these challenges.

Global Rivalry

Geopolitical rivalry has already scuppered talks between the two big beasts of emissions – China and USA. US support for Taiwan has angered Beijing so much that it has suspended talks on all climate matters. Special US Climate Envoy John Kerry tried and failed to separate climate talks from other strands of diplomacy. Of course, Beijing and Washington will continue to develop their own climate plans, but lack of dialogue on such a crucial issue raises serious concerns.

This year the US Congress passed historic, albeit imperfect and two decades late legislation. But the Inflation Reduction Act (IRA) should now provide the path to a low carbon future for the country. Beijing is stepping up its impressive rollout of renewable energy but remains wedded to coal and many other high carbon industries. But the fact that the two climate giants are not talking is an indictment of global leadership.

Taiwan

This split could just be a taste of future conflict, China could seek to invade Taiwan potentially sparking a wider Pacific war involving the USA, Japan and others. China (and Russia) feel encircled by the west who they see as hypocritical and self-serving. Even without a full-blown war, the tensions between China and the US will see further disputes, flashpoints and proxy conflicts that will destabilise the global politics over the coming decade.

The Keys to the Economy of 2030

A low or net zero carbon economy is now the stated aim of virtually every country on earth. It is undeniable that progress towards net-zero has been too slow but shifts are clear to see. The falling price of renewable energy, the new focus on environmental values has taken root in large companies.

This trend is undoubtedly uneven, prone to greenwashing and has already attracted a backlash from climate deniers, but the momentum is clear. Large companies have at least now pretend to be green and many are making serious efforts to decarbonise their operations.

But what does this mean to the global economy and how will this impact geopolitics?

On a macro level there is a shift from a fossil fuel economy based on supplies of oil, coal and gas. Fossil fuels are mined, drilled and shipped in huge quantities to power every corner of the globe. The constant flow of these fuels powers every part of modern life.

Decarbonisation means modern life will be primarily powered by electricity. Electricity from the sun, wind, earth and water (plus nuclear).

These technologies such as wine turbines and solar panels are capital intensive and rely on the supply of critical materials such as copper, nickel, lithium, graphite, rare earth metals, cobalt and others.

The mining, refining and supply chains of these materials will become geopolitical flashpoints in the same way the Straits of Hormuz or Malacca, the Russian Federation invasion of Ukraine are for oil and gas supplies.

The world is steadily shifting away from fossil fuel intensive to mineral intensive one, driven by trends like the take up of electric cars, policy shifts like the EU Green New Deal or Inflation Reduction Act in the US.

China took an early lead realising the importance of electric batteries and subsidised the sector for many years. Beijing also took a strategic role in controlling the supply chain of metals and minerals needed to build these engines of the transition economy.

Supply Chain Security

Now other states have caught on. The USA recently took action to secure its own supply chains of critical materials. Now India, the EU and others are following China and the USA’s lead. For many years the electric car battery was a futuristic dream. Now it has become a symbol of national and economic security.

However, modern supply chains are long, complex and messy. It will be difficult to fully control the supply of so many different materials and components. This means that in the scenario of a major conflict between China, Taiwan and the USA in the Pacific – supply chains would be severely disrupted and many industries reliant on the flow of trade from the region would be interrupted. Thus slowing the energy transition.

2022 the year Climate Change hit home

2022 was for many the year that climate change felt real. Across China record breaking drought saw rivers shrink and whole industrial areas shut down due to the excess heat. India experienced a sweltering heatwave devasted farmers and making living conditions unbearable for many. But perhaps worst hit was Pakistan.

Pakistan received five times the normal amount of rain in 2022. The Indus River which runs through the length of the country flooded the country. The flood hit over 30 million people and washed away 2 million homes and businesses, over 700 km of roads and left widespread devastation.

The floods started with the record temperatures in Pakistan. Jacobabad recorded 51 C earlier in 2022. Hot air holds more moisture, this results in higher rainfall. This along with melting glaciers in the Himalayas created the ideal conditions for a record-breaking monsoon.

The floods have created thousands of internal refugees and the lingering water makes the perfect breeding ground for water borne diseases like dengue fever and malaria. Experts are also predicting that the floods will take years and decades to recover from. Farmers will struggle to plant crops, roads and bridges will have to be rebuilt and Pakistan’s overstretched finances will be pushed further into the red.

Climate Fragility

Pakistan was already a fragile country rocked by political instability and poor relations with its giant neighbour.

Despite these problems Pakistan had been enjoying moderate economic growth. But now the floods look set to reverse this trend as the country rebuilds. Pakistan may also end up becoming more dependent on China, which has invested heavily in the country as part of its flagship Belt and Road geo-economic policy. China has heavily backed infrastructure development, seeing Pakistan as an investment target and a potential alternative trade conduit from the Middle East.

Storm Clouds over Sharm el-Sheikh

The COP 27 Conference in Egypt this November is a chance for countries to discuss climate change, decarbonisation and how to pay for it. Western countries promised but failed to deliver on a promise of US$ 100 billion a year to mitigate and develop resilience around climate change.

Pakistan’s climate change minister Sherry Rehman asked why the country is paying the price for carbon emissions it had very little part in. This question is certain to come up in COP27 in Egypt this year. Developing countries that are paying the price for crippling climate change will be asking richer countries that created the emissions to stump up for the costs.

The problem is that public opinion in many richer countries will be unfavourable to funding climate mitigation overseas. In addition there will be the usual squabbling on which countries are most culpable – are high per capita emitters now and/or historic emitters but now decarbonising like the UK the most to blame? Many will point the finger at emerging economies like Pakistan with growing populations as future sources of carbon.

Pakistan also faces another risk as it has moved away from the west, the conflicts over Afghanistan and an eventual diplomatic breakdown with the US during the tail end of the war of terror saw aid inflows fall. Instead, Pakistan looked North and forged a partnership with China.

China – Pakistan Nexus

The China Pakistan Economic Corridor (CPEC) is a series of Chinese funded infrastructure projects across country valued at US 62 billion. However, economic pressures at home have hit China and its not clear if how they will support Pakistan through another debt crisis. Instead, Pakistan will most likely have to turn to a familiar source, the IMF – which will no doubt request economic reforms in exchange for further funding.

These over lapping crises have the potential to produce a outcome worse than the sum of their parts. This so called Polycrisis where disparate shocks interact and threaten to overwhelm our collective ability to respond to crises. Humans appear to be constantly firefighting and crisis managing, but not solving underlying problems.

Will this decade see humans resolve great power conflict, climate and many other technological and socetial issues? Recent history is not particularly comforting, but hiumans have proved themselves and adaptable and innovative in the past when faced with seemingly intractable problems.

The Geopolitics of Nickel: Energy Transition, Electric Vehicles and Environmental Destruction

“Nickel is the biggest challenge for high-volume, long-range batteries!” Elon Musk

Cobalt, lithium and copper have often dominated headlines about electric vehicles and energy transition. But there is another metal, traditionally used to produce stainless steel, which has emerged as a critical element in the energy transition story. Nickel is a key material in the production of electric car batteries (EV) which are experiencing rapid growth as the world moves away from fossil fuels.

These shifts mean that nickel is in hot demand and EV manufacturers are chasing precious supplies of the metal. The recognition that batteries are central to energy transition supply chains and ultimately national economies has set in motion a geopolitical race to secure supplies.

Tsingshan, a Chinese firm which is the world’s biggest producer of nickel was badly stung by this shock, losing large sums of money. Tsingshan are now reportedly looking to sell its Indonesian nickel assets to another Chinese giant Baowu. But how did it get them in the first place….

Nickel production is currently dominated by just a few countries; namely the Philippines, Russia, New Caledonia, Australia and Indonesia. This places enormous power in the hands of just a few suppliers. For instance, the fear that Russian supplies of nickel could disappear from the market following the country’s attack on Ukraine in February 2022 caused prices to rise an unprecedented 250 percent on the London Metal Exchange (LME).

It was a nickel shortage in China following the great financial crisis in 2008 that originally prompted Chinese steel giant Tsingshan to secure long term supplies. A decade ago, nickel was primarily in demand because it is a vital part of the stainless steel making process.

It soon also became apparent that nickel was also needed for building electric car batteries, which so much of the transition economy depends upon. At first sight securing nickel supplies should be easy. Indonesia is one of China’s major trading partners and holds the world’s biggest reserves of the metal.

However, the Indonesian government had realised that selling raw nickel might bring strong short-term revenues, but eventually this would leave them exposed to global commodity downswings. Instead, the Indonesian government had an ambitious plan to move up the production cycle and to process nickel to make the purified product which is needed for EVs. A more profitable process than just exporting the raw ore.

Tsingshan got on board with this vision and started investing heavily in the Indonesian district of Morowali, building the infrastructure to mine, refine and then finally ship nickel to China. There are plans for the electric battery production and an integrated supply chain for EV batteries to be established in Indonesia. An MOU was signed with CATL the Chinese battery producer in 2020 but nothing solid has yet materialised.

Enter the Dragon

Other Chinese firms soon followed in Tsingshan’s footsteps into Indonesia to secure nickel and other critical metals. Tesla was reportedly in talks with Indonesia mining interests but pulled out due to environmental concerns.

Tesla’s move highlighted the fact that environmental protections can be lax in Indonesia and that the processing of nickel can be highly carbon intensive. The nickel mines in the Indonesian Obi Islands have seriously polluted the waters around the islands turning them red.

This devasted the lives of fisherman and created a lot of anger towards nickel mining firms. Indonesian nickel is smelted using coal, which is a big problem for EV producers who want a carbon free supply chain.

The Geopolitical Race Heats Up

In August 2022 the Biden Administration launched a program to secure critical supply chains. This has accelerated a geopolitical race to secure supplies of critical materials for electric vehicle production and other key ingredients for global energy transition. Countries and corporations want to secure supplies from friendly countries so conflict or trade wars do not interrupt supplies.

Demand for nickel is expected to rise 10 fold by 2030, with supplies relatively limited and difficult to access due to local environmental and social concerns as well as the cost of developing new mines means further geopolitical competition to ensure that supplies of nickel are secure. This will mean China, the US and others which have realised the importance of reliable EV supply chains and ensuring good relations with the states which hold deposits of nickel and other critical metals is a priority.

The US fears that supply chain issues and reserves in the hands of rivals could see supplies of critical material dry up strangling the the young EV sector.

After pleading with miners to secure new supplies of nickel Tesla signed a contract with Talon Metals in 2020 to provide US mined nickel. Talon have claimed they can mine Nickel in a carbon neutral manner. This claim is a big plus for environmentally conscious battery makers like Tesla who are under pressure to ensure their vehicles are zero or low carbon.

Whether Talon can deliver on its promise of carbon neutral nickel remains to be seen. But at the very least Tesla’s deal also shows that the demand for sustainably produced nickel is there.

Environmental Damage

Another cost hangs over nickel the enormous environmental damage that it can cause. The Fenix nickel mine in Guatemala has been the scene of a long running and violent dispute over pollution in Lake Izabal. When local fishermen complained of a rusty coloured patch of water in the lake they took their concerns to the authorities. But the government and the miners attempted to put a lid on complaints about the mine, resulting in a long running dispute.

Activists managed to get the mines licence revoked, but the mine owners in league with the government struck back using threats, bribes, arrests and eventually martial law to supress the protests and reinstate the mine.

Hackivists took internal emails from the miners (Solway group a Swiss company) and exposed publicy that the firm knew the pollution was from the mine and not an algae bloom as they claimed.

As demand for nickel rockets, the pressure to develop new mines will rise. Each new mine is likely to put pressure on local communities that face the environmental destruction and pollution that nickel mining brings.

“I think ESG risk cannot be separated from business risk. The dichotomy only leads us to the old pattern that caused the current climate crisis,” says Muhammad Rushdi, a researcher with Indonesian NGO Action for Ecology and People’s Emancipation (AEER).

New Caledonia

The Goro mine in New Caledonia is another that has attracted criticism thanks to five chemical spills and a chequered history of production. Ownership passed from Brazilian Vale to locally owned Prony Resources along with Trafigura which has promised to develop a social licence and local investment, taking into account the wishes of the Kanak people that were previously ignored.

Tesla have also become a stakeholder (or technical advisor) in Goro bringing greaterscrutiny and the hope that it will encourage best environmental practices.

Nickel production creates a lot of waste, if it isn’t dumped in the sea it needs to be drystacked or tail dammed, both options need a lot of land. The other alternative is deep sea disposal, currently only 20 mines use this method as it is notorious for destroying marine environments.

What next for Nickel?

Clearly nickel mining needs to be carefully regulated to ensure environmental issues are minimised and future environmental incidents do not become a pattern. The risk is not only to local people and communities but also to the electric battery sector – if it becomes associated with poor environmental practices it will undermine both its green credentials and the wider clean energy transition.

As well as an environmental flashpoint New Caledonia could also see geopolitical tensions over its mining assets. China is the world’s biggest EV manufacturer not coincidentally is also the biggest purchaser of nickel from the island. The Pacific island is a French province which has been rocked by demands for independence and any future shifts away from France will be watched carefully by Beijing as an opportunity to extend its influence in the region.

The race for nickel looks set to heat up over the next decade as EV batteries become a central part of the global economy. Control over nickel supplies and their carbon/environmental impact will be of critical importance to battery/car manufacturers and the countries which have an interest in controlling this vital supply chain.

Developing environmentally sustainable mines as promised by Talon will be an increasing priority for EV producers that are particularly sensitive to any criticism that their products are not green.

Geopolitics of the Clean Energy Transition

How metals and minerals will replace oil & gas as the world’s most valuable resources.

Why is the price of lithium soaring this year?

⛏️Why are the US Government backing a potentially highly polluting refining process in Texas and the Pentagon investigating so called biomining to secure supplies of rare earth metals?

📈Why is the demand for copper projected to rise rapidly in the next few decades?

The world economy is facing its biggest ever transformation as countries attempt to rapidly decarbonise in a bid to prevent runaway climate change. There will be a global energy transition from fossil fuels to renewable energy. This means solar and wind, but also hydrogen, geothermal and possibly nuclear all displacing oil, gas and coal.

Energy transition will bring in its wake huge shifts in geopolitical power. For many this transition will be painful. Many nations such as Saudi Arabia, Algeria and Norway will see the central pillar of their economy disappear along with it much of their power, influence and wealth. The countries that rapidly adopt new technology and adapt to this new world will emerge the winners.

Energy transition

⚡🛢️⛽Coal, oil, and natural gas remain the cornerstone of global energy. But change is happening, the global energy transition is well under way.

Recent decarbonisation pledges from nearly every country in the world.

The falling cost and efficiency of wind and solar power, plus the emergence of other alternatives such hydrogen means that a clean energy future is possible.
Banks are turning away from fossil fuels as the long terms risks and costs become clear.

Energy transition means closing dirty coal fired power stations, refineries, and oil wells in favour of offshore wind farms, replacing petrol cars with electric and peppering roofs with solar panels.

Of course this change will be slower than many would like. The transition will be a bumpy ride, but it does now feel inevitable.

Rather than relying on physical inputs of coal, gas, and oil renewable energy is technology based. Solar panels with silicone cells, ever more efficient wind turbines and electric batteries.

Tech Competition

🔋China leads the race in terms of electric batteries. In 2021, 148 of the world’s 200 lithium-ion battery megafactories in the pipeline are located in China. Whereas Europe and North America have only 21 and 11 megafactories in the pipeline.

Electric batteries and the components for wind and solar require metals and minerals, from lithium, copper, cobalt, nickel, manganese and a host of rare earth metals. As the world scales up its use of clean energy demand for these materials will rise rapidly. Demand for lithium is expected to rise 40 fold by 2040 as the global energy transition accelerates.

The world will move from an energy intensive world to a mineral intensive one.

This fundamental change has massive consequences for mining, energy and geopolitics. The world can go from harvesting and processing 13 billion tonnes of fossil fuels a year to mining 43 million tonnes of critical minerals.

Currently the production of these critical materials is focused in just a few countries. Cobalt mining is 60 – 70 percent concentrated in China and the Democratic Republic of Congo (DRC). China dominates the dirty, polluting rare earth metal refining sector (90 percent of the market).

Rare Earth Materials

🪙Realising China’s dominance in the rare earth metals sector represents a major strategic weakness, forcing the US to react. US Presidential Executive Orders and the recent US$ 1 trillion infrastructure bill have identified and attempted to rectify these supply chain weaknesses. The government recently pledged US$ 30 million towards a rare earth refining facility in Texas. Other measures are sure to follow.

Tensions over mineral rights have surfaced in Greenland and Brazil where US and Chinese interests have clashed over the supply of minerals.

Any country that dominates the supply of critical materials can if it chooses cut or restrict the supply of materials. This would cripple the green tech industries of any opponents or rivals.

Global Competition

🌏Overseas the US and western allies are looking to secure supplies of critical metals and minerals. Countries from Kazakhstan, Mongolia, to Tanzania, Zimbabwe and Malawi all have potential for mining rare earth minerals. The competition between the US and China means that any potential location will be carefully vetted as a future geopolitical flashpoint.

South America and Lithium

🌎South America is also a rich source of lithium. The metal is in demand thanks to its use in electric car batteries. Mining companies have flocked to the so-called lithium triangle of Chile, Bolivia, and Argentina to secure mineral rights in the region. Large and relatively easy to reach deposits made the region a hotspot for both western and Chinese firms.

However, South American nations are not passive hosts. Resource nationalism will always raise its head to thanks to the decades of accusations of exploitation aimed at US firms. As lithium rises in value governments will more tempted to take more control over such an important asset.

Despite being a relative newcomer China is the biggest trade partner for many countries in South America. Chinese firms will compete hard against US or Western interests for mineral resources, particularly those which feed critical industries back home.

King Copper

⚡Copper is also essential for the global energy transition. In order to meet decarbonisation targets the world needs to electrify rapidly. Plugging growing energy demand into a renewable powered grid can decarbonise power sectors rapidly. An easy win for green targets. Electrification also means heavy use of copper for wiring.

No surprise then that copper demand is expected to rise by over the next decades. Wood Mackenzie estimates this will take US$130 billion to provide another 6.5 million tonnes per year. Major copper producers are already predicted to see falling market share.

The race is on to locate new sources to match future demand. The problem is that mining is a very slow drawn out process. The planning and development of any mining project can take years or decades until anything is actually produced.

Metal Heads

Geographical concentration of production could put lithium and other metals in the hands of just a few producers. This will give the miners and refiners significant monopoly power, potentially allowing them to control the supply and price of critical materials. In turn this will push up the cost of global energy transition.

Another big problem of concentration is that any disruption through conflict, trade disputes and increasingly extreme weather events could disrupt the flow of metals to factories. Any disruption has a knock on effect delaying global energy transition.

Dirty Dangerous and Difficult

🌲Global energy transition is supposed to be environmentally friendly. Cutting out fossil fuels from the global energy mix will be decarbonise the sector, but what about other environmental factors? Unfortunately, mining is a notoriously polluting sector.

Monitoring and measuring the sustainability of supply chains and mines will come under ever greater scrutiny. The pollution and human cost of refining rare earth metals is one reason countries have not flocked to host these facilities. Inner Mongolia in China is host to huge toxic lakes full of black sludge, the by-products of rare earth metal refining.

Manufacturers of green tech do not want their credentials undermined by dirty polluting mines that abuse labour. This should put pressure on miners to clean up their act, but this could also push up the cost of extraction. However. these constraints will also spur innovation.

Recycling the electrical revolution

Recycling electric batteries, wind turbines and electrical goods has become an industry in itself as entrepreneurs try to salvage the most valuable parts of clean energy technology. An industry that is pushing sustainability does not want a dirty underbelly of waste.

At the same time demand for transition metals and minerals will push mining companies to look for new sources in different regions. This will lead to a hunt for metals and minerals that feed the energy transition that will be complicated by geopolitical competition.

Geopolitics of global energy transition

🌏The geopolitics of a mineral intense world will also look very different.

Firstly, marginal oil producers where production is expensive are likely to go out of business first when oil demand finally wanes. Places like Venezuela where the cost of production is high and the quality of oil low will be first to go and along with it any oil based geopolitical leverage.

Supply chain disruptions will not be severe as seesawing oil demand. A tight lithium supply will only impact building new electric batteries not existing vehicles. Oil requires near constant supplies to avoid disruption.

Shifting countries away from being petro-states will help them in the long run. Oil often poisons the politics of a country and creates a parasitic mono-economy.

Saudi Arabia and Gulf states will retain their power the longest. The cost of production in this region is much lower, so oil production can be sustained for longer.

What comes next?

What will replace the era of fossil fuel geopolitics. Countries that control the mining and refining of critical minerals such as lithium, cobalt and copper will gain newfound power in the energy transition. Rocketing demand and concentration of supply will create lots of talk about the “Saudi Arabia’s of lithium”.

The shift to a mineral intensive world will hand greater power to the countries and companies that can control the supply and processing of critical minerals and metals. The rest of the world will be keen to ensure that there are reliable supplies of critical materials to ensure a smooth transition.

Key Takeaways:

Demand for the raw materials that will build a climate economy: Copper, cobalt, lithium, graphite and rare earth metals will enjoy unprecedented demand over the coming decades. More solar panels, electric batteries and electrification means more mining for critical materials and less fossil fuels.
Mining is a dirty business. There will be major opportunities to help mining companies improve their environmental and social performance.
There is a risk that a lack of or the high cost of raw materials such as copper will stop the world from hitting decarbonisation targets. Copper projects can take years to become productive.
Demand for metals such as lithium combined with falling demand for oil and gas will shift global geopolitics. Lithium producers will enjoy greater bargaining power as China and western countries compete over supplies. Key oil producers such as the Gulf States will see their power grow in the medium term as marginal oil producers are forced out of business as demand falls.

When Technology and Politics Collide: How to Manage Geotechnology Risk

Geotechnology issues are a growing global risk for multinationals. I examine what does geotechnology risk entail and how can it be managed effectively.

In 2020 the UK ordered the removal of all Huawei infrastructure across the country by 2027 . Initially the UK had welcomed Huawei’s investment, but warnings from parliament, the intelligence services and from the US steered the government in a new direction. The Huawei ban effectively brought to an end to the “golden era” of relations between the two nations.

Huawei’s global power has grown steadily across the last decade as it leads the way in providing cutting edge 5G infrastructure. The company with origins in the Chinese People’s Liberation Army has been pivotal in developing new technologies such as 5G which allows unprecedented connectivity. Allowing people to watch videos and use the internet on the go. 5G is also crucial to developing the Internet of Things (IoT).

5G and the IoT allows millions of physical devices to be connected to the internet opening up new possibilities such as driverless cars and smart jackets. The IoT also enables so called smart cities with thousands of sensors providing up to date information on everything from traffic, to air quality to security. Connectivity allows constant feedback loops that allow officials to monitor and improve on key performance indicators. Critics would argue they also allow officials to snoop and spy on citizens.

Technology has been pivotal in geopolitical battles through history. Now new technologies are driving new political divisions which create global risks for organisations.

Tech Rules the World

Technology companies now make up roughly a quarter of the world’s stock markets. While European firms do have strengths in areas like the development of 5G (Eriksson) and Software (SAP). It is increasingly China and the US that dominate the global tech scene. Large domestic markets, access to finance and entrepreneurial culture have all helped the US and China cultivate strong technology sectors. Now firms are looking to dominate new areas such as fintech, climatetech and the internet of things to build and dominate new markets.

This rivalry has been demonstrated by the global political row over Huawei. Building 5G infrastructure appeared to be dull behind the scenes job. But in fact, building 5G allows Huawei enormous power over the development of this critical technology and standards that regulate it. Huawei is a private company. However, like all Chinese firms – the Beijing government can exercise a great deal of control over their actions and would expect full cooperation if required.

Tech is a Political Choice

China and the US are both competing to set global technology standards. When countries choose Huawei over a western firm for 5G or vice versa they risk angering the other side.

The Australian government moved to ban Huawei from its 5G networks along with the US and other countries. This rejection of Chinese technology along with other factors caused a major diplomatic rift with China. China banned Australia imports of wine and beef, while Chinese investment in Australia has fallen 61 percent in 2020.

China is Australia’s biggest economic partner so declining trade and investment relations is a major blow to the nation’s economy. However, Australia has effectively followed the lead of the US its major diplomatic, military and intelligence partner in rejecting Huawei on national security grounds.

Choose Wisely

Companies or countries that select Huawei even for part of a 5G network will faces political pressure and exclusion from the US networks. Interoperability between different networks can also be a potential issue, while different 5G providers can work together it is more efficient to use one carrier which in turn makes choosing a single vendor more likely in the longer term.

Battles over infrastructure have a long history. Britain pressured Egypt and France into taking control over the newly built Suez Canal in the nineteenth century and fought unsuccessfully to retain that control in the 1950s. Today China often receives a political dividend from its sprawling Belt and Road infrastructure investments in every corner of the globe.

Competing Network Initiatives

The US has actively promoted their Clean Network Initiative an attempt exclude China from global telecommunication networks. China has responded with their own Global Data Security Initiative described as the Chinese attempt to write rules on data governance. Dominance in this sphere gives the winner a major advantage in terms of intelligence gathering, commercial edge and political firepower.

China’s Digital Allies

In contrast Saudi Arabia and other Gulf States have embraced Huawei which is rapidly rolling out 5G across the region. China views this rollout as part of the Digital Silk Road itself a strand of the Chinese Belt and Road Initiative, the cornerstone of China’s foreign policy.

Saudi Arabia’s decision use Huawei is likely to see it align itself more closely with China on tech policy. The countries are perhaps natural partners in this sphere as they both share a top-down approach to governance and rejection of western human rights norms. This approach could eventually lead to rifts with the US, Saudi Arabia’s traditional security partner.

While some US allies have effectively banned Chinese firms from 5G infrastructure taking the side of the US. Others such as Turkey have used both Chinese and western firms for 5G infrastructure in an attempt to placate both sides.

However, trying to remain independent will become more difficult to maintain over time as 5G becomes more widespread and both the US and China may push countries to take digital sides.

Hard Data Choices

Tiktok was the first global social media brand born in China. Designed for creating short form videos the App spread rapidly becoming the most downloaded App in the world in 2020. Tiktok and its parent Bytedance were gathering data from their user base across the world (of course no different from other firms).

Concerns were raised when it was clear that large amounts of data could be indirectly accessed by the Chinese government (although a CIA report concluded that they had not done so). This coincided with growing digital nationalism particularly between the US and China.

The Trump Administration soon moved to ban TikTok or force its sale to a US company. Trump’s Executive Order was blocked by the US courts but eventually a deal was hammered out to ensure US consumer’s data was not held in Chinese jurisdiction.

There was speculation that US also feared TikTok because it was dominating a newly important industry, namely Social Media. This is an industry the US had a stranglehold over since its birth, Facebook, Twitter and Instagram were all started in the US . Many saw Chinese firm arriving to disrupt the sector which collects huge amounts of data and now has incredible political power. This pushed the US to act and try to stop TikTok’s runaway growth.

Growing Digital Nationalism

TikTok is not the only case. India has banned 177 Chinese Apps on the grounds they present a “threat to the sovereignty and integrity of India”. India and many others do not want to see a rival like China to gain dominance in key platforms such as social media.

Data localisation laws are also likely to become more popular. Governments and citizens concerned about data leakage and sovereignty will demand that data collected within the country should remain there.

Making decisions around buying technology hardware or software might at first seem like a choice between brands, price and which has the most advanced or appropriate technology. In fact, it is clear that technology choices are increasingly having a geopolitical impact. Organisations need to actively manage this risk.

How Can Organisations Manage this Risk?

Geotechnology risk is technology driven geopolitical or global risks or change which impact the operations of an organisation.

Consider your geopolitical choices when backing a Chinese or European company for any kind of technology service, infrastructure or hardware. It might seem like a technical choice but in fact it is a political one with long term implications.

Digital Nationalism is here to stay so preparation is essential. Organisations need to thoroughly understand geotechnology threats. Understanding who in your organisation is responsible for overall political risk is crucial. They need to be supported with information to make effective decisions.

Multinationals should be aware of data onshoring governments like the US. IF they view their citizen’s data as being exposed or misused or their essential interests under threat by others will move to protect them. This could include sanctions or taking legal action against foreign companies.

These are the questions Executives need to be asking themselves

Can we work with stakeholders, business partners, regulators suppliers, governments national and local to manage Geotech risk in a similar way to managing geopolitical risk. All these stakeholders could have a different reaction to this risk. But there could be severe commercial and reputational consequences if firm is partnered with another from China, the US or other country which is then suddenly barred from working with national governments.

Firms should question whether they have the ability in house or hired in to understand and track Geotech risk. Understanding an often fast changing landscape is difficult as many understand the tech or the geopolitics, but rarely the interplay of the two.

What can be done to effectively manage Geotechnology risk? Companies should be proactively managing these risks. Can they influence stakeholders to prevent or smooth over politically charged issues. Speaking with government or regulators to see and influence events before they become a risk will help organisations navigate political risks.

Deciding on technology partners should be considered with a political lens as well technical and pricing considerations. How will that firm’s national origins be viewed now or if there is political friction in their countries of operation. The national origins of any technology partner should be considered whether it is Chinese, Japanese, German or Vietnamese. Firms from all countries carry a potential risk.

Be prepared for complexity. Governments may require tech firms to be divided or set up separate arms. This could mean one arm serving Chinese markets and another Western markets with clear national divisions in data hosting and usage. This could also mean companies working more through alliances rather than formal mergers to avoid regulations.

Horizon Scanning

Scanning for future technology based risks is an important activity for any prudent firm. The emergence of driverless cars, ever more advanced artificial intelligence and renewable energy are all future flashpoints of competition and disruption. Both the US, China, Russia and many others will view critical technologies as worth shielding and protecting from foreign competition and interference if the political climate becomes worse.

Protectionism

For example the US is trying to protect its solar panel industry from Chinese dominance. China successfully subsidised its renewable technology sector for years to achieve higher market share. But other nations do not necessarily want to be dependent on Chinese imports for solar and wind tech.

Understanding how competitors have dealt with geotechnology risk is crucial. Learning from the mistakes and lessons of others will allow organisations to hone their own strategy.

Politically motivated cyber attacks are another threat. Governments or their proxies may be driven to attack organisations because of links or even perceived links to governments. Large companies or organisations like banks or infrastructure companies like the US’s Colonial Pipeline or the UK’s National Health Service could be targets because of their strategic importance.

Turning Geotechnological Risks to your Advantage

Understanding and monitoring technology based risks and how it can combine with geopolitical risk effectively. By effectively identifying rising digital nationalism and how some companies or sectors will be impacted by this change. Once identified these sectors/companies can be avoided if possible. A well informed company may identify growing digital nationalism in advance and plan accordingly. This might mean ensuring they have geographically flexible data storage options.

Geopolitical Arbitrage

Far sighted organisations may identify opportunities in the growing digital divide and turn them to their advantage. This could mean carefully surveying the political pressures that push out other firms from working in a country. After all any organisation or company excluded because of political pressures leaves a gap in the market. This is arguably a very cynical play, but a well prepared firm can potentially take advantage of another’s misfortune.

How Risk, Regulation and Technology are Forging a New Climate Economy

The convergence of key technologies, the existential global risks that climate change present as well as fast emerging government policies are creating a new climate economy. What does this mean? The climate economy means companies creating goods and services which drive decarbonatization. Climate will become the new lens through which all activities are viewed and sustainability will disrupt virtually every sector and industry from manufacturing to transport to energy.

The most obvious example of the climate economy are the wind turbines which increasingly dot the seas, oceans and hills across the globe. But the climate economy is far wider than just renewables, it means any goods and services that reduces greenhouse gas emissions or addresses the impact of climate change. This could mean companies that produce more efficient engines for trucks to firms focused on protecting global forests

The climate Economy is broadly connected to the rise of Environmental, Social and Governance (ESG) investing. The ESG movement attempts to tackle with the broader non-financial risks and opportunities of investing. Currently most economic activity in the modern world is entirely dependent on energy which is primarily supplied by carbon emitting fossil fuels. However, times have changed and now renewable energy can compete with fossil fuels on price, consumers increasingly favour climate friendly companies and government policies across increasingly seek to reduce emissions.

The New Drivers of the World Economy

The next few decades will see climate (decarbonisation) and more broadly sustainability (ESG) become the new driving force of the global economy. All business will eventually have to embrace decarbonisation and sustainability. Three main trends will drive this: technology, renewable energy is cheaper than ever and continues to become more efficient, but also other new technologies such as artificial intelligence (for more efficient decision making), growing meat in a lab and industrial batteries will all drive decarbonisation.

A wave of new legislation and regulation designed to encourage decarbonisation such as the Task Force for Climate Related Financial Disclosures (TCFD), the EU Sustainability Taxonomy as well as national level legislation to fulfil climate targets will shift vast amounts of capital away from carbon intensive activities. Much of this capital will need a new home, which is where new wave of innovative companies in the climate and clean tech fields will emerge as well as existing firms with the ability to pivot to the new reality.

Perhaps above all the climate economy will be sparked by the unfolding reality of climate change, each unpredicted wildfire. Each temperature record broken, each mm of sea-level rise will force change onto society and inspire new companies in the Climatetech space and force governmental and geopolitical shifts.

A Grand Opportunity

As the global economy shifts toward decarbonisation the opportunities for Climatetech firms will emerge rapidly. Some parts of the world with more favourable regulatory regimes and a technological edge will become leaders in Climatech. China despite its record emissions is a leader in the Climatetech field. Many US firms so often leaders in innovation have taken up the challenge to decarbonise.

Perhaps the key firms in building the climate economy are those which are still emerging. Start-ups could in time become key drivers decarbonisation through innovation and imaginative use of technological solutions. The new wave of climate investment is looking beyond renewables to transform agriculture, food, mobility and much else beside. For example firms such as Beyond Meat, Impossible Foods and New Wave Seafood are offering plant based meat and seafood substitutes which reduce demand for carbon emitting and deforestation causing meat ocean ravaging seafood.

Technology Rules

Solar energy has dropped 89 percent in cost over the last decade and wind power has declined by 70 percent in the same period of time. This demonstrates the power of applied technology which is a key element to the success of many Climatetech firms. The climate economy is very much tied to the so called Fourth Industrial Revolution. Like previous revolutions before it promises major improvements in efficiency and huge upheavals in society.

The Fourth Industrial revolution promises a dramatic leap forward in the application of robotics, artificial intelligence, quantum computing and energy storage, as well as the mass connection of society and businesses through the internet of things and 5G.

These new developments bring huge global risks such as the increasing exposure of infrastructure to cyberattacks. But also major benefits, more efficient storage and distribution (through smart grids) of energy makes renewables more hugely more attractive, overcoming their traditional limitations such as windless days and night time. Artificial Intelligence advances can help humans monitor climate change risks such as deforestation as well as providing more detailed and accurate predictions and simulations of climate change.

Other new technologies will also prove vital in the decarbonisation process. These include industrial batteries for storing energy, energy efficiency measures (such as more efficient home appliances), cutting edge energy such as hydrogen as well as the electrification of cars, planes, trains, ships all of which will ease the move towards decarbonisation.

Services that employ technology such as those which measure climate risk, carbon trading platforms, measurement of ESG risks and measures will all have a part to play helping service the climate economy.

The New Regulatory Framework

The EU has led the way in providing a regulatory framework for decarbonisation, countries that follow can grow and nurture the climatetech firms of the future.

Nations like Russia are likely to favour a rearguard action and continue backing oil, gas and coal for as long as possible in the hopes that the shift to renewables will be slower than hoped. Others like Saudi Arabia can hedge their bets – able to host vast solar arrays in empty deserts and even become an innovative exporter of blue hydrogen while remaining a major oil producer.

The Task Force for Climate Related Financial Disclosures is designed to push Banks into diverting financial resources into climate safe investments. By identifying the assets at most risk from climate risks in terms of either physical or transition risks banks can avoid projects exposed to climate change. The G7 recently moved towards making TCFD reporting mandatory.

This mass movement of capital will impact over time oil and coal producers who will be unable to access capital as it becomes clear that investing in these industries is not only environmentally damaging but also financially unsustainable. The launch of the TCFD has given rise to a new similar piece of regulation which attempts to measure the financial impact of biodiversity loss.

The EU has recently published its long-awaited sustainability taxonomy which will clearly define which economic activities contribute to decarbonisation. This will make it clear to investors which companies are backing climate friendly projects and which favour carbon intensive activities.

Carbon pricing or emissions trading is another instrument of change. Putting a price on carbon encourages polluters to reduce emissions. The EU is planning to extend its scheme beyond large firms to buildings and transport. This does risk a backlash if users are landed with big bills to reflect the cost of change.

Geopolitical Winds of Change

China’s Belt and Road Initiative (BRI) was built partly so China could secure oil, gas and raw materials such as iron ore. All key for feeding Chinese economic development. The rise of the climate economy could mean geopolitical battles for materials such as cobalt, copper and lithium all vital to develop electronics, batteries and cleantech (A wind turbine uses 4.7 tonnes of copper). This will be mirrored by the fall in use for fossil fuels and materials associated with that industry.

The Next Wave of Government Action

The United States has new impetus with a major decarbonisation plan for the US aiming at a 50 percent reduction on 2005 levels of carbon and international financing for decarbonisation of developing countries is underway. This legislation alone may spur other countries onto more ambitious plans. Perhaps the most critical achievement of the plan will be the demonstration effect.

The US and other climate action leaders need to show and prove that societies and economies can continue to thrive in spite and because of decarbonisation. The success of these plans will help dispel doubts and excuses for countries still planning a fossil fuel future who can take up new targets with confidence of a positive outcome.

China Laggard and Leader

China is home to 40 percent of solar capacity and roughly one third of global wind power. Its bus fleets are nearly all electric and it is a world leader in terms of electric vehicles being sold. Solar prices have dropped 80 percent wind turbines while lithium batteries have dropped one sevenths of the cost compared to a decade ago. On these terms China is global climate leader.

This claim comes with a major caveat: China is doing little in the short term to decarbonise. The country remains hopelessly hooked on coal and oil imports to power an economy rapidly rebounding from the shock of Covid. China has promised to cap carbon emissions by 2025 but for this to happen there needs to rapid uptake of renewables, energy efficiency measures and a major unprecedented scaling down of coal use.

Countries that fail to embrace the climate economy will face a number of risks: failing to keep up with international regulation like the TCFD and EU Taxonomy leaves them open to transition risks. Continued focus on fossil fuels for countries like Indonesia, Russia, China and Iran make the shift to renewables harder and more painful when it does inevitably happen.

The Shift has Started

There is a long road ahead before the climate economy is a reality. The companies and countries that forge ahead with change now are likely to be the winners. Companies that fail to embrace new green regulation, ignore public sentiment and growing climate risk and geopolitical change will see themselves fall behind and increasingly out of sync with fast changing times. For start-ups and new ventures focused on decarbonisation the next decade will be a golden era for growth as the climate economy picks up momentum.

Geopolitical Aftershock: Climate Change and Commodities

Food security and the dangers of a hungry population are a major global risk and geopolitical flashpoint. Corn, rice, soy, coffee, copper, iron, nickel, crude oil, natural gas and propane are just a few of commodities traded in huge Supertanker sizes quantities across the world.

Commodity trading is worth billions a year and is a cornerstone of the global economy, the glue that connects farmers, miners to merchants, industrialists and refiners to consumers.

However, a sobering new report by the Commodity Futures Trading Commission highlighted the fact that financial markets are not recognising the risk that climate change poses to commodity trading. These risks could plunge commodity markets into chaos even if they are recognised.

Millions of people already suffer from food poverty and insecurity in India, Africa and Latin America, but even in the wealthy United States around 10 percent of households suffered food insecurity last year as the country experienced a sharp pandemic sparked recession.

Climate change over the next couple of decades will dry rivers, disrupt traditional weather and weather patterns such as monsoons. A warmer world means more wild fires, drought and sea level rise which will destroy coastal farmland and river deltas.

All this spells bad news for agriculture, climate change will decimate crop yields across the world while population is still predicted to be growing.

The FAO expects the global population to rise by 2 billion and food demand to grow by 60 percent by 2050. But by 2050 without drastic action catastrophic climate change will be ravaging agriculture.

For example India, Vietnam and Thailand are the world’s premier rice exporters, a major drought in two or three of these places would see a major global rise in the price of rice.

As these effects take hold over the next decade and the realisation that agricultural produce is less secure, there will be a concerted effort to monitor and protect food sources so exports do not mean local people starve.

Food Nationalism

Food nationalism will take hold across the world as populations demand government’s prioritise local food chains. During the pandemic a number of countries put exports controls in place to ensure their own people got fed first. Export clampdown will in turn create further prices swings.

There are many ways which humans will combat these problems, many innovative solutions exist including:

Vertical farms growing crops inside away from the vagaries of weather, such Danish venture Nordic Harvest.
Growing more climate resilient crops which are better able to withstand heat and drought.
Farming and agricultural production could also be boosted through improved technology or by utilising more farmland

However these measures are unlikely to stop the full force of climate change, some crops such as rice and wheat cannot be grown at scale indoors and there is limit to resilience measures and how far crops can be adapted.

Insecticides and pesticides are already decimating insect populations across the world and much of the world’s land is already severely degraded. Given so much land has already been put under the plough there is a limit to how much more can used.

The trade in metals and minerals are not immune to climate risks. It might appear that mining would be unaffected by climate change, but droughts, extreme weather and extreme heat could all make certain mining operations much more difficult. Mines that rely on regular water supplies could see those dry to a trickle.

Global Supply Chains

Global supply chains which bring these metals from deep inside the earth to be processed and sent onto to manufacturing plants in an intricate series of steps will be under more threat than ever before. Extreme weather events, flooding, greater incidence of disease and growing geopolitical tensions are just a few of the factors which those governing supply chains will be concerned about.

In geopolitical terms fluctuating commodity markets will create major price fluctuations and supply problems will push suppliers to look for more stable sources of commodities.

Crops and agricultural produce will be sourced from new more climatically suitable areas. So the South of England could become a major wine growing region while the Spain and Italy suffer as their crops suffer in excess heat. Innovative companies like Nordic Harvest could be big winners as the world turns to innovate climate friendly solutions.

Coffee Shortages

Countries most exposed to climate change – South Asia and Africa will suffer most acutely will also see the commodities such as coffee, chocolate, rice are likely to be hit hard. Coffee the drink which powers people’s mornings in every corner of the world is a US$ 70 billion a year industry. Now warmer temperatures are encouraging the fungal diseases which are destroying crops.

Changes in rainfall patterns are also costing coffee growers, too much rain can make the fungal infections worse, too little and the crop will not grow. Adaptation is hard because of the unpredictability of rainfall and heat, if you invest in a drought resistant crop but then experience excessive rainfall and widespread fungal growth any resilience measures will be unhelpful. Right now customers are not feeling any change, but in time they could see prices rises and many varieties wiped out.

Instability and the effect of climate on commodities has not been priced in by global markets which means any correction could be painful and expensive. Investors are increasingly turning to risks assessment like the Task Force for Climate Related Climate Disclosures which attempt to measures a company’s climate risk exposure.

Commodity trader and suppliers will have to pay close attention to climate risks as they disrupt global markets over the next decades.

The Green Futures Index: How to Rate the World’s Climate Progress

If the world is to hit ambitious climate goals over the next ten years and avoid the worst effects of climate change, we need huge shifts in our economy. This means mass uptake of renewable energy, rapid decarbonization policies and the development of sustainable economies.

There are signs this is happening, the pandemic has seen the oil industry hit hard in 2020, losing 40% of their revenues due to a huge drop in demand. In turn this helped greenhouse emissions fall 7% (relative to 2019). But the fossil fuel industry still made US$ 1.5 trillion in revenues over the same period, five times total investment in renewables which indicates the scale and difficulty of transitioning to a sustainable, climate friendly economy.

At the same time there is an appetite for change across governments, the corporate sector and the public. But how should this progress be measured, the new MIT Sustainable Green Futures Index attempts to do just that. The Index rates 76 leading countries on their progress and ability towards building a low carbon future. The index measures countries across five pillars; carbon emissions, energy transition, green society, clean innovation, and climate policy.

It is probably no surprise that European countries dominate the top of the index with 15 of the first 20 places. Iceland is the leader, followed by Denmark – both countries renowned renewable energy and climate policy leaders.

Norway is third in the table thanks to measures such as leading the adoption of electric cars and rapid transition to a low emission economy. However, Norway remains a major oil exporter and contributor to other countries carbon emissions, which may be reflected in its poor score in the green society pillar.

The energy transition pillar was dominated by African countries; Ethiopia, Angola, Uganda and Cameroon are all leading a move to clean energy.

Much of the continent has seen rapid adoption of solar and wind energy. Ethiopia has been in the news thanks to its construction of its monster dam near Sudan and conflict in the Tigray region but its Green Climate Resilient Economic Strategy has been in place since 2011 and has led the way in promoting a clean future.

Morocco is also prominent in the Index as an African country which has pioneered clean innovation. Morocco made an early decisive shift toward renewables, lacking the oil or gas reserves of its neighbours (such as Algeria) it grasped the future with both hands.

Now the country is on track to have a 52% renewable energy share by 2030. The Moroccan Agency for Energy Efficiency has become a centre for expertise – it hopes it can promote and share expertise on renewable energy across Africa.

The green society pillar is driven by preserving the environment, recycling levels as well as meat and diary consumption. Singapore tops the pillar thanks to its advanced recycling program and low use of meat and dairy.

New Zealand despite being a high performer overall is last in this category thanks to its high meat consumption and lack of green buildings plus a poor recycling rate.

New Zealand does top the Climate Policy Pillar, which is the most important element contributing 40 percent of the total score. This pillar measures countries climate ambition as determined by the national determined contributions (NDCs), as well as the effectiveness of the policy frameworks that will deliver these targets.

Policy is also defined as the development of carbon pricing measures, sustainable agricultural policies and the so called “pandemic pivot” – in other words what do stimulus packages offer towards decarbonisation such green infrastructure and transition. Denmark and France excelled in this pillar. Denmark’s recovery program placed EUR 5 billion to make homes more energy efficient.

While each pillar can contain some interesting results, it is the overall index score which counts. There is no real surprise that the countries at the bottom of the chart are the so called climate abstainers.

These are typically fuel exporters like Saudi Arabia and Russia who have consistently blocked climate initiatives. We can probably expect these nations to delay meaningful change until it is too late.

Arguably the most critical countries are those which will drive global decarbonisation due the size of their economies and emissions. Right in the middle of the table (40th Place) is the US, it should and must improve this position under the new Biden Administration.

China sits just below the US at number 46. While the country is a leader in renewable technology it also remains heavily dependent on coal. But China should now feel the pressure from the US to up its climate game.

India is perhaps surprisingly just outside the green leaders at 21 in the table overall given its high carbon emissions, but it partly makes up for this thanks to its rapid uptake of renewable energy, primarily vegetarian diet and ambitious climate policy.

The Green Futures Index will help judge the relative performance of nations in the drive to decarbonise and develop sustainable economies. In time the Index could become a well known benchmark like the World Bank’s Doing Business Survey.

Decarbonisation and sustainability will become a growing factor in judging whether to invest or even broker alliances with other nations (climate diplomacy). As the world faces climate breakdown understanding who the laggards and the heroes are will be ever more critical.

Global Risks, Local Risks: The Toxic Legacy of Rare Earth Metals

Below I look at how the mining and extraction of rare earth metals creates environmental, social and geopolitical risks.

Deep in the remote western province of Inner Mongolia a vast dark lake is fed by a black toxic sludge trickling from metal pipes. Metal towers rising from countless refineries and coal power stations puncture the grey sky. From the towers sulphur, diesel, and solvent fumes rise and mix in the air to create a noxious toxic soup, all inhaled by Baotou’s two and half million residents. Nearly all of Baotou’s population have settled there in the last twenty years, lured by a modern day gold rush.

Baotou and its surrounding mines is the fountainhead of a global supply chain which provides the crucial components of the modern world’s essential technology.

Rare earth metals are in fact found in relative abundance in the earth. The “rare” comes from the difficultly in chemically extracting them from other metals which they are clumped together with. This often involves dissolving them in the likes of sulphuric and nitric acid. The byproduct of this is large amounts of toxic waste that have made cities like Baotou and others a public health hazard.

Rare earth metals occupy the lower reaches of the periodic table and includes the likes of lanthanum, cerium, scandium, terbium. Apart from the periodic table earth metals are connected by their importance in modern manufacturing.

Rare earth metals have properties such as magnetism, heat resistance and phosphorescence which make them indispensable for certain applications. Rare earth metals are crucial for smart phones, wind turbines, electric batteries, laptops and many modern defence applications.

Rare Earth Metal Geopolitics

Because China controls around 80% of the global supply of rare earth metals there is a strong geopolitical undercurrent involved in mining them. China hosts the majority of the world’s extraction facilities which appear to give it effective control of the global market.

However, the 80 percent figure is rather misleading as it refers to the supply of rare earth metals, not the deposits in the ground. Other countries such as Australia, Myanmar, Russia, Greenland and many others have large reserves of rare metals.

China could if it chose order the halt of rare earth metal exports which would cause the buyer’s major supply problems. China strongly encouraged the development of rare earth metal mining and processing, its relative lack of environmental controls and cheap labour force put much of the rest of the world out of business.

Mining rare earth metals raises a wide range of Environmental, Social and Governance (ESG) issues and digging for rare earth metals are no different.

ESG Risk

Environmentally: the process of extraction is extremely costly unless it is done with no regard for the environment. Mining in China has left huge scars in the landscape and a legacy of dangerous ammonia and nitrate compounds along with many other dangerous chemicals in the ground.

Mining rare earth metals can also leave dangerous metals like lead and cadmium, other mines have been dug near uranium deposits. All this exposes miners and those living nearby to major health impacts, skin cancer and respiratory issues.

Socially: mining can have a profound impact local communities. Mining and the refining process can destroy landscapes and even uproot communities thanks to the setting up of the mine and the waste products created by refineries. Once land is identified as holding valuable metals or minerals it becomes much more valuable and without protections there is a risk that miners will steal or contaminate the land and drive indigenous people away.

Governance: the promise of mineral riches can distort local politics and create the temptation for illegal or unregulated mining. Illegal mining is unregulated so the chances it will cause pollution and environmental destruction are much higher.

For example the remote Kachin province in Myanmar has been the scene of a long running battle between the Government and local groups opposed to central rule.

Can China’s Rare Earth Dominance be challenged?

While China has the lion’s share of processing capacity, other nations are looking to increase their capacity. Hull in the UK has been discussed as a potential new site of a new plant and the EU is looking to set up a raw materials alliance to ensure the sustainable supply and processing of rare earth metals.

If China moves to stop the export of rare earth metals other countries could rely on their stockpiles until new plants and supply chains could be created. The US and China have tiptoed around the issue of rare metals, leaving them aside in the trade war which has simmered over the Trump years.

Texan firm Blue Line announced in 2019 they would be working with an Australian firm to set up a new independent manufacturing centre. The Pentagon is funding MP Materials to reopen the Mountain Pass site in the US where it will mine for rare earth metals.

Western nations are clearly concerned about the heavy reliance on China as a provider. Rare earth metals represent an easily broken supply chain and while there are short term fixes, avoiding reliance on a geopolitical rival makes sense.

Australian firm Greenland minerals acquired control of the controversial Kvanefeld Project from Chinese investors. Kvanfeld looks set to be a major rare earth metal project in Southern Greenland.

The mine has faced major local opposition, but the government have given the green light to a public consultation period ending in March 2021. Supporters of the project claim it will bring jobs to a depressed area but detractors point to the prospect of environmental despoliation.

Russia also plans to ramp up its rare earth sector. It is estimated the country holds around 10 percent of global reserves but has a list of 11 potential projects which could make Russia self-sufficient and eventually an exporter of rare earth metals.

Recycling Solution

The long-term solution to the dangers of mining and extracting rare earth will come through recycling them from old equipment. Unfortunately, rare earth metals are often found in consumer goods such as phones and computers which are thrown away with alarming regularity but rarely recycled often because people are unaware or unable to do so.

There is probably more hope in recycling rare earth metals from industrial uses such as wind turbines. Increasing the cost of extracting the metals in the first place through tougher environmental protections will also raise incentives to recycle.

Climate Risk: A New Frontier for the Corporate Sector

For millennia climatic factors have threatened humans. Farmers have been at the mercy of droughts, storms and floods. Harsh climates such as rainforests, deserts and tundra have shaped human development forcing people to move or adapt.

The modern world appeared to offer some deliverance from harsh climatic conditions. People can build huge cities in the desert or snow thanks to central heating, air conditioning and modern technology. Infrastructure can now be built to withstand extreme weather and technology such as early warning systems can effectively assist in managing disasters.

But now the steady but certain onset of climate change has changed these old assumptions. The world’s rapidly changing climate throws up a host of new risks and uncertainties. Climate change can be understood as a giant lens, which magnifies existing risks making them more frequent and more deadly.

Hurricanes have always posed a threat to humans, climate change will make them stronger and more regular. The deadly effects of droughts have been around for millennia, but climate change and overuse of water supplies is already shrinking places like Lake Chad, the Aral Sea and many other lakes and rivers.

Rising sea levels will drown mega cities like Jakarta, Mumbai and Shanghai. Despite billions being spent on sea defences, the sea will eventually simply overwhelm urban areas, forcing people inland. The destruction of so much infrastructure will dwarf previous economic losses.

Climate risk is the impact of the environment on humans. For many years we have been concerned with our impact on the environment and infrastructure, pollution and all the other activities of humans will damage the environment. The world’s fast changing climate over the next few decades will make profound changes to our existence.

Climate Risks

Higher sea levels as ice sheets melt and oceans warm.
Stronger and more frequent cyclones, typhoons, and extreme weather.
Drought and famine, higher temperatures & lack of rain will result in mass crops failure.
More deadly wildfires, with higher temperatures and drier weather this provides the conditions for fire.
Flooding, this seems to be in contradiction with drought, but more unpredictable and sudden heavy rainfall is likely, creating the conditions for devastating floods.

Organisations must now face up to climate change and act to preserve the planet as well as their themselves.

Below I explain climate risk and how it will impact businesses and organisations. I look at how the Task for Climate related Financial Disclosures (TFCD) framework can help banks and other organisations identify how they will be hit by climates risk.

Topping the Global Risk Charts

Authoritative think tanks such as the World Economic Forum placed climate related risks in the top four places of the top ten risks in their landmark 2021 global risk report.

Extreme weather, failure on climate action, natural disaster and biodiversity loss were selected by respondents as the key long-term risks facing the world.

For both businesses and individual’s climate change is often viewed a slow burn threat that always appears to be in the future and that will happen to someone else. Some detractors claim that organisations will be able to adapt to the new conditions.

Companies that fail to act on climate change will face a major backlash from investors, the public and consumers.

Firm’s emissions and supply chains will be identified in close detail for risk. Labels that detail the carbon footprint of products like food labels measure sugar and fat could become a feature of new products.

Companies still require consistent, reliable data on climate risk to finance climate resilient projects and to price climate risks correctly. There are also opportunities for firms that act to identify climate risks. These firms can gain advantages over rivals and pre-empt many threats and even offer products and services for a decarbonising world which faces huge unprecedented threats.

How Climate Risks will materialise

Shrinking ice sheets in the Arctic, Antarctica and the “third pole” the Himalayas where glaciers are melting. Shrinking glaciers in the Himalayas endanger the two billion people that rely on the glacier fed rivers. The melt of the glaciers will reduce the flow of the rivers cutting available water for agriculture and for dams.

The result will be a crash in agricultural productivity and in heavily agricultural economies like India and Bangladesh, as well as much of sub-Saharan Africa this will lead to widespread social unrest, migration and political anger.

The shrinking of ice sheets in the poles will feed sea level rises. Many of the world’s mega cities have exploded in size but will with little thought or preparation towards changes in sea levels.

Shanghai, Karachi, Dhaka, Miami are just a few of many cities threatened by rising seas. Jakarta the already sinking into the sea and the Indonesian government are looking at moving the nation’s capital to a new purpose-built city.

The Risk Multiplier

None of these risks are new, humans have dealt with them for millennia, but climate is best viewed as risk multiplier. It will increase the number and size of these climatic risks.

How far and fast climate risk will impact us is partly down to how fast humans can stop carbon emissions and therefore runaway climate change. Right now, there are signs that mitigation efforts or decarbonisation are taking hold.

Renewable energy continues to fall in cost and investment in the sector continues to grow. But the oil and gas sector’s hold over the energy sector is strong and modern economies remain wedded to oil, at least for now.

The increase in global temperature appears to be minor, ranging between 1.5 C to 4 C. However, it is important to consider this is an average and many critical areas (such as the Antarctica) warming much faster than the average. Even small temperature changes can lead to a catastrophic impact.

The effects of climate risk can be non-linear, so a 1 C temperature increase may reduce crop yields by 5%, but a further 1 C increase in temperature may see a dramatic fall in yields.

However, there are other emitters of greenhouse gases such as agriculture (particularly cows), deforestation and transport. It will take major political change and technological advancement to decarbonise these sectors.

Even if carbon emissions stop or peak now, we will all face unprecedented climate change and all the devastation that goes with that. The longer carbon emissions continue, the worse the risks we will face.

How Should Companies Act?

For companies it means two things: First they need to do more to reduce their own emissions which is the central plank of the 2015 Paris Agreement. Reducing emissions will mitigate climate change slowing the rate at which climate changes.

Secondly: Organisations need to consider their own exposure to climate change. The impacts described above will affect entire societies but will also hit companies and organisations in a variety of different ways.

Climate risk is fast growing discipline. The Intergovernmental Panel on Climate Change (IPCC) outlined many of the climate risks faced by world in various reports.

The Task Force on Climate Related Financial Risks (TCFD) was created in 2017 to create a framework for banks to assess the climate risks they face. Above all the TCFD was set up to make banks realise that climate is a financial risk. Companies and banks could lose billions if they fail to take climate risks seriously.

For manufacturers considering their investments, existing factories will be emitting carbon in 10, 20, or 30 years’ time, Decisions need to made now to cut emissions or companies will be left with outdated infrastructure designed for a fossil fuel world.

Planning new investments and projects should be viewed in the context of changing climate. When water shortages, desertification and sea levels rise become the norm, companies need to adapt to this reality. Within a decade all major companies will report on climate risks.

Climate risk will intensify and compound existing threats and twisting them into tangible threats. Climate risk can broadly split into two areas: Physical climate risk and transition risk.

What are the Hurdles?

Climate risk is making waves in the corporate sector leading firms scour their portfolios for climate related risk. It has taken a time for organisations to understand, accept and implement the principles.

For many businesses’ climate risks are too far in the future, are too uncertain, others many feel they can mitigate against the risks. For most businesses planning 2,3 or 4 years ahead is the norm.

Beyond that time frame risks become too abstract and difficult to predict. Companies are often dealing with a raft of urgent issues so the problem of climate change can seem distant and unimportant.

Applying the TCFD

How can my firm discover its climate risks ?

Financial organisations can apply the TCFD principles, in practice this is difficult, given it is such a new set of principles in a new area of risk. But over time its application will become easier as firms become more experienced and skilled at applying the principles.

How does the TFCD work?

The TCFD was driven by Mike Bloomberg, founder of the financial information firm and ex-Mayor of New York. The framework is a set of recommendations and principles which will allow organisations to understand and measure the concentrations of carbon related assets in portfolios and the financial sectors exposure to climate risks.

Many banks and financial institutions have signed up to the principles. However, it is not yet clear how it will work in practice. Whether there will be a unified approach and standardisation or will organisation diverge and use their own approaches.

The TCFD process includes a disclosure of climate related risks. They should be adoptable by all financial organisations, which will provide useful forward-looking information, will focus on the risks and opportunities related to a low carbon economy and that recommendations should have a financial impact.

There are four pillars:

Governance

Disclosures around climate related risks including the role of management and the board.

Strategy

This should disclose the actual and potential impact of climate related risk and opportunity. Describe the impact on climate risk on the organisation’s strategy, financial planning and overall resilience.

Risk Management

This should identify the organisation’s processes for identifying and assessing climate related risks. It should also describe how these are integrated into overall risk management.

Metrics and Targets

This should disclose the metrics used by the organisation to measure climate risk. Disclose scope 1,2 and 3 greenhouse emissions and describe the targets used to manage climate risks as performance against these targets.

Scenario Planning

The TCFD also recommends scenario analysis, this provides the “what if” analysis which can help a firm tease out what might happen in a significantly warmer world, or one where there is rapid transition. Scenarios are not predictions, but rather a plausible narrative of what might realistically occur.

Physical Climate Risk

Climate change is predicted to result in more extreme weather, rain, typhoons, as well as longer term conditions such drought, flooding and sea level rise. None of these things are new, but what will change is the intensity of impact.

The devastation caused by these changes will result in political instability, economic damage and migration as people move in search of better conditions. This can be internally or across borders. Although poorer less resilient countries will be hit harder, more developed cities such as Shanghai, New York and Hong Kong will be under threat from sea level rise.

Water stress could spark conflict in places such as North Africa and Iraq. As droughts and water shortages become more common, problems with food supply and production will result.

Drought, water shortages and crop failures are as old as time, but the speed at which they happen will be shocking. Mass migration started by long term collapse of countries especially in the Middle East, Africa and South Asia will send millions of people in search of food.

Physical climate risks can be divided into two types, acute and chronic:

Acute physical climate risks:

Extreme heat/heatwave
Flood
Drought

Chronic Risks

Higher long term temperatures
Lower rainfall
Drier climate

Some examples of physical climate risks impact on businesses:

Supply chain interruption and damage from extreme weather
Higher insurance costs due to high risk of assets being damaged
The recommendations should lead companies to be able to identify what assets in their portfolio are threatened by climate risks. For example:
A power plant which relies on rivers and streams for cooling may find that if the river dries up and the average temperature rises the cooling system does not work and the factory is untenable.
Rising sea levels will mean many ports are unusable as the ocean engulfs the infrastructure due to rising sea levels, any new infrastructure should take this into account.
For an agribusiness reliant on food products, more frequent droughts will reduce crop yields making the business less profitable.
Along with physical climate risk there so called second order impacts meaning that one impact will result in further often unpredictable events and impacts:

Some examples of second order impacts:

Droughts and famines will result in millions of migrants as marginal land in hot countries becomes arid wasteland.
Many coastal towns, cities and communities become untenable due to sea level rise and flooding (Florida & Jakarta for example).
Poorer more vulnerable communities/countries will be hit hardest as they have fewer resources, and less ability to adapt to a changing climate.
Ecosystem collapse which will result in fish or food supply failure.
Communities in hurricane zones are devastated with ever more frequency making their existence untenable.
Crop failures due to a failure of rains, excess heat or even pests (able to breed faster due to increased temperatures) could result in shifts in the food chain, food price increases for some and starvation for others.
Epidemics – rising temperatures will make it easier for disease to spread, making the spread of viruses and diseases more likely.

Transition Risk

Transition risk is the threat that policy shifts around climate change will result in losses for companies and banks. As economies decarbonise to mitigate against climate change, what is the risk to your firm. Germany closing its coal plants is a transition risk for the owners of the coal plant.

In oil dependent countries like Saudi Arabia the risk is probably lower as the government will stick with fossil fuels for longer. But energy is not the only sector at risk, changes in technology are also a factor.

The move from petrol cars to electric will see many car companies change production models. However, not all will be successful and doubtless go bankrupt. This shift is already visible, Tesla which makes exclusively electric vehicles is the world’s most valuable car manufacturer by market capitalisation.

Other disruptions could be the move towards vegan diets which is already threatening meat processors and farmers. Other shifts driven by social change could be tricky to predict but could include a widespread boycott against flying or at least people cutting back on flying (the covid pandemic could accelerate this by making remote meetings the norm).

Somee examples of transition risk are:

Early write of equipment due to policy changes
Increased compliance costs due changes in law and policy
Falling demand for carbon intensive products
Increasing costs due to rising input prices in water, fuel and other raw materials

Disorderly Transition

Transition can be orderly or disorderly. An orderly transition is a well-planned decarbonisation of the economy with the broad backing of society, government, and the private sector. Germany is a good example, the government has steadily shifted its power production towards renewable energy.

Disorderly transitions will be seen where countries that have stuck with fossil fuel dependent economies.The country is then faced with a need to decarbonise very quickly to meet obligations under the Paris Agreement, national legislation, or peer pressure from other countries.

This could well translate into geopolitical risk as sectors of the economy such as coal mining are threatened and unable to adapt, they collapse resulting in energy shortages.

Geopolitical Risk and disorderly transition

Countries that fail to meet decarbonisation objectives will be put under pressure by those countries that have achieved their goals. As climate risks intensify, the political pressure on the worse greenhouse gas emitters will grow. Naturally a blame game will emerge where developing countries will accuse developed ones of carbon debts and hypocrisy.

This could escalate as the carbon sinners; countries that continue with deforestation or expanding fossil fuels use and those who have decarbonised. As climate risks engulf the globe the pressure on sinners will become acute.

Already politicians and others launch political attacks on Bolsonaro and Trump due to their lack of environmental credentials. While Trump could afford to largely ignore them, Brazil faces its trade deal with the EU being derailed thanks to disregard of the environment.

Climate Risk Analysis

Climate risk means each organisation will analyse their assets for physical and transition risks. This can be a time consuming process using climate models or policy analysis to identify risks, but also taking into account time scales and the criticality of asset locations. Assets with a short tenor do not pose so much of a risk, whereas those with a 20-year life span are far more likely to be impacted.

Locations such as distribution hubs or HQs are likely more critical to companies’ operations than a small branch office. Therefore these key locations should be analysed for climate risk ahead of less critical locations.

Eventually organisations should analyse their assets for exposure of both physical and transition risk and quantify that in their financial statements. For many this will involve a painful and frank analysis of their company. For those will heavy exposure to climate risks – this could involve major losses or at least a reduction in the value of the firm.

The key objective of the TCFD is to ensure that banks avoid investing in assets with climate risk.

The TCFD outlines some key principles for effective disclosures.

Principles for Effective Disclosures

1 Disclosures should represent relevant information.

2 Disclosures should be specific and complete.

3 Disclosures should be clear, balanced, and understandable.

4 Disclosures should be consistent over time.

5 Disclosures should be comparable among companies within a sector, industry, or portfolio.

6 Disclosures should be reliable, verifiable, and objective.

7 Disclosures should be provided on a timely basis.

Climate Opportunities

Climate risk is a significant risk for companies and the analysis should consider and mitigate against these risks. For the most resilient and nimble firms there will be opportunities.

Adaptation measures

Some countries and regions may see benefits, such as wine growers in the South of England to Russian farmers who may enjoy longer warmer growing seasons. While overall the risks of climate change will outweigh the benefits, there will be advantages for some.

Resource efficiency

By reducing the amount of material or energy used in production and distribution processes companies can save a great deal of money, as well as curb emissions. Innovative ideas such as using electric vehicles, retrofitting buildings, embedding circular economy ideas, introducing LED lighting can all assist the transition to a low carbon future.

Products and Services

By offering low carbon products and services companies can enhance their competitive position against rivals. Any product that reduces emissions whether this is because of local production, low energy consumption or reduced materials has the potential to be attractive to consumers who increasingly favour goods that do not damage the environment.

Conflict and Climate

Climate risks should not be seen in isolation, rather as a series of shocks, which will overlap and overwhelm governments

Syria

Systemic Risk

How can organisations prepare?

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