Bye Bye 2022

2022 came and left with its lot of surprises…good and bad. Let’s take a look at what happened.

2002 THROUGH THE SUSTAINABILITY LENS…

Looking at the sustainability forefront, many important things happened in 2022.

THE EU GREEN DEAL IN ACTION

In Europe, 2022 marked several iconic measures that are aligned with the European Union’s Green Deal objectives. The Green Deal is a legally binding agreement to reach climate neutrality by 2050.

• New EU taxonomy to identify the economic activities that can be classified as environmentally sustainable.
• New mandatory sustainability reporting with disclosure requirements in relation to climate change objectives (mitigation and adaptation) starting January 2022
• a new Circular Economy proposal for EU-wide rules relating to Packaging and Packaging Waste regulation [1]
• a law to fight global deforestation and forest degradation driven by EU consumption and production.

COP 27

The UN climate summit COP 27 in Sharm-El-Sheik closed with:

• an historic agreement to create a Loss and Damage fund for vulnerable countries. The fund should become fully operational by COP28 in 2023 in Dubai.
• the unveiling of a $3bn plan to create an early warning system against hazardous weather over the whole planet.
• a renewed promise to follow through on a — so far failed — commitment to provide $100 bn annually to developing countries, which will put the emphasis on Climate Finance in 2023 and 2024. This will put pressure on Multilateral Development Banks to gear up their alignment to the Paris Agreement.
• a failure to agree on the phasing down/out coal

COP 15

The UN biodiversity conference in Montreal, COP 15 concluded with the objective to protect 30% of earth’s lands, oceans, coastal areas and inland waters, to reduce by $500bn annual harmful government subsidies and cut food waste in half, all by 2030.

• Nations agreed on a new global biodiversity framework that will require large and transnational companies to better monitor and disclose their biodiversity-related risk.
• This implies that regulations and policies may evolve in the coming years to encourage mandatory disclosures in annual reports. This means that companies will eventually have to include natural disclosures in their annual reports, following the recommendations of the Taskforce for Nature Related Financial Disclosures (TNFD) [2].
• It also means that business leaders will eventually have to consider natural capital risks in their decision-making.
• the question of “debt-for-nature swaps” (forgiveness of natural debt in exchange for investment in conservation) was touched upon. Praised by some, yet criticized by others due to the high refinancing costs. [3]
• the question of reinforcing biodiversity funding through development banks was mentioned, as well as the need to close the biodiversity finance gap of $100bn per year.

Unfortunately, Climate Change is still the elephant in the room, and the nations have failed again to achieve their targets of emissions reduction. Several natural disasters marked 2022: among others, the Indian heatwave, the California wildfires, the historic flooding in Pakistan, Nigeria and Australia.

2022 A (MORE) GLOBAL OVERVIEW

• 2022 marked a certain return to normalcy after 2 years of full blown pandemic. It felt like a return to business as usual, except that it was not.
• Business struggled with the new hybrid workplace dynamics: should they impose a full return to office or not?
• People started revisiting their relationship with their work, especially in the US, because you know, YOLO (You Only Live Once). After the big resignation, quiet quitting became a “thing”, puzzling employers desperate to bring back a docile workforce.
• the global supply chain was still gripped and ailing, which combined with a soaring demand of goods, drove price inflation
• the war in Ukraine created a full blown energy and food crisis that also contributed to inflation.
• Unfortunately, the immediacy of the crisis prompted European nations to switch back their coal plants rather than doubling down on longer terms renewable energy strategies.
• The war also brought to the public light the geopolitically strategic question of energy, food and lithium independence, while the world still struggles to find sustainable and affordable alternatives. A new world order is in the making and new alliances are minted.
• Russia typically provides 40% of the Europe’s natural gas. Ukraine supposedly holds 1.09 trillion cubic meters of reserves of natural gas, the second biggest level of reserves in Europe after Norway, most of it untapped with a very low 2% annual reserve usage rate.
• Ukraine also accounts for 10% of the world wheat market, and 50% of sunflower oil trade. and 500,000 tons of lithium reserves. which may seem little compared to Chile’s 8 million tons of lithium reserves.
• December marked a remarkable breakthrough in nuclear fusion, when a US fusion experiment created more energy than it consumed. Although this technology is far from viable, it’s a sliver of hope on the possibility of achieving one day a future of abundant clean energy.
• To tackle inflation in the US, the Fed hiked interest rates up to 4.4% in December 2022. Back in March 2020, the Fed interest rate was naught (0%). In turn, US mortgage rates flirted with 8% during the fall of 2022, up 6 points compared to the prior year, which continue to put pressure on housing costs for both the homeownership and — indirectly — the rental market.
• On a $200k loan at 30-years, the mortgage rate increase from 3% to 8% means a monthly mortgage increase of $624! For a $250k home price financed at 80%, this higher rate means an increase of monthly mortgage from $843 (at 3%) up to $,1468 (at 8%).
• Theoretically, housing prices should readjust after the rate increase, but homeowners are not ready yet to stomach the price cut: the home seller who hoped to sell its home at $250k would have to generously cut its price to by 40% down to $143k to maintain the mortgage cost of the buyer at $843 (assuming that the purchase is financed at 80% at a 8% rate). Needless to say that such a price cut adjustment will not happen any time soon.

For me, 2022 was the reminder that sustainability can play an important geostrategic role by rebalancing the global/local (in)dependence dynamics. It foreshadows the forthcoming circular disruption which will transform businesses with circular business models, and supply chains into supply lattices that will mix near shoring, global supply and local production in new ways. Inflation is a curse and an opportunity. Why? Because it may shift the perception of unaffordability that has crippled sustainability efforts so far. Indeed, sustainability was often perceived as too costly before, but now it may become a necessary investment to achieve geostrategic independence or to achieve longer term affordability.

REFERENCES

[1] EU Packaging and Packaging Waste regulation https://ec.europa.eu/commission/presscorner/detail/en/ip_22_7155

[2] Taskforce for Nature Related Financial Disclosures (TNFD) https://framework.tnfd.global

[3] Bloomberg article on Belize’s debt-for-nature swap https://www.bloomberg.com/news/articles/2023-01-12/bankers-bet-millions-on-sovereign-debt-deals-tied-to-green-goals