Emerging Economies Climate Report 2022

Introduction by Amal-Lee Amin, Managing Director, Climate, Gender and Advisory.

This article provides an in-depth summary of our Emerging Economies Climate Report 2022 – you can read the full version here.

The climate emergency is having a significant impact on communities all around the world, especially those living in Africa and Asia. A recent report from the UN’s Intergovernmental Panel on Climate Change (IPCC) said that 40 per cent of the world’s population is now ‘highly vulnerable’ and predicts that future climate risks are even more severe than previously thought.

It is clear we need urgent climate action. Incremental improvements in sustainability will not get us to net-zero and resilient economies. The focus must now be on embracing emerging climate-friendly technologies, and embedding reduced emissions and increased climate resilience into business models and behaviours across all sectors. More financial support has been pledged to help make this a reality. At COP26 in Glasgow, the Climate Finance Delivery Plan was published, which sets out how developed countries will achieve the target of mobilising $100 billion per year to enable developing nations to address the crisis and adapt to its impacts. The UK is playing its part too – it is providing £11.6 billion in climate finance up until the end of 2026.

In the markets where we invest in Africa and Asia, there are huge opportunities to use climate finance for green economic transformation. From clean energy and mobility solutions, to green buildings and new adaptation and resilience technologies, there is huge potential to address the climate crisis in a way that delivers prosperity and supports a just transition to a new, green economy.

Last year, we launched our Emerging Economies Climate Report to try to understand the extent to which the climate emergency is affecting companies, how they are responding and what more can be done to support them as we move to a greener future. We surveyed senior executives working across our portfolio of companies and funds in Africa and Asia. Questions in the survey were structured around the pillars of the Task Force on Climate-related Financial Disclosures (TCFD), which provides an international framework to help businesses disclose climate-related risks and opportunities. We found that nearly half of the participants had already experienced an extreme weather event that affected their business, 86 per cent thought that climate change would negatively impact their firms in the decade to come and 94 per cent thought the international community has a duty to support emerging economies respond to climate change.

A year is a long (and critical) time in the climate crisis. Since we published our 2021 report, the scale, urgency and complexity of the challenge have become clearer, as have the tools we need to rise to meet it. So, 12 months on, what has changed for the companies and funds in our portfolio?

The results of this year’s research are covered in this report. They show how climate change is becoming an increasingly significant concern for businesses and investors in Africa and Asia, the difficult decisions it is presenting firms and what they need to effectively tackle the crisis:

• 68 per cent of respondents said climate change is affecting their business today.
• Over half of respondents have experienced an extreme weather event (58 per cent) – up from 48 per cent from last year.
• 40 per cent of respondents have been impacted by flooding, while 25 per cent have been affected by drought.
• More than half (56 per cent) thought climate change will affect the viability of their business in the next five years, while 72 per cent were concerned that climate change will impact plans to grow their business or investment portfolio over the next ten years.
• 91 per cent agreed to some extent that organisations that take steps to reduce their carbon emissions and reduce vulnerability to physical climate change risks will be more successful in the long-term – up from 82 per cent last year.
• In comparison to last year, the number of respondents adapting their strategy or financial planning in response to climate change increased from 69 per cent to 73 per cent.
• Nearly half of respondents (48 per cent) are introducing new green or climate-friendly products.
• 92 per cent agreed that better and more targeted investment is needed to reduce emissions and vulnerability.
• Respondents were largely optimistic that COP27 will have a material impact on how countries address climate change.

What types of physical climate events are affecting businesses?

The most frequently reported physical climate event was flooding, where 40 per cent of respondents said they have been affected by it (see chart below). There was a relatively broad split of companies that have experienced flooding, ranging from electric utilities firms, to agricultural companies, banks and real estate businesses.

When we look at a regional breakdown of how all physical climate events reported have affected respondents in Africa and Asia (see chart below), a similar picture emerges with flooding being the most significant (39 per cent of all physical events in Africa and 45 per cent in Asia).

“Drought is the big threat to crops for us. Capital is required to adapt to climate change to avoid the longer-term financial impact.”
Judith Munyurwa, Zebu Investments, pan-Africa

The impact of climate change on business growth and viability

For our 2021 report, we asked respondents whether climate change would affect plans to grow their businesses over the next 10 years. 86 per cent agreed, to some extent, that it would.

This year, the scale of the question was expanded to capture just how much participants felt their business’ growth would be impacted (see chart below). Overall, 82 per cent ranked their concern above a 5, meaning they are at least somewhat concerned. 21 per cent gave a score between 8 and 10, showing they feel that climate change will substantially impact their businesses growth.

While 82 per cent were concerned about climate change’s impact on their plans to grow their businesses, more than half (56 per cent) expressed concern that their firms would be viable at all (see chart below).

Financial planning

Physical and transition risks are also feeding into businesses’ financial planning (see chart below). For example, 36 per cent of respondents said that climate change had affected their access to capital. The survey responses also demonstrated that capital expenditure is key to allowing organisations to adapt and that leading firms are doing this already – with 35 per cent saying climate change had affected their capital expenditure decisions. These organisations are making capital expenditure decisions to improve resilience to physical climate change events, as well as helping to transition to a low-carbon economy.

As an example, two of the agricultural firms interviewed – Zebu Investments and Sahel Capital – had made capital expenditure investments to adapt to climate change. Zebu Investments has built two dams to allow them to irrigate crops to counter lower maize yields due to worsening drought in Cameroon, and Sahel Capital, a fund manager that operates across sub-Saharan Africa, has invested in a flood defence system to adapt to climate risk.

Assessing and managing climate risk

There was an increase in those organisations introducing initiatives to make them less vulnerable to the physical risks associated with climate change, with 47 per cent saying they are doing this, up from 39 per cent last year.

The survey also explored how companies are assessing and managing both physical and transition climate-related risks. In terms of physical risks, primarily companies are integrating climate change into their general risk management process and using this system to assess and manage climate risks. In terms of transition risks, energy security was a significant issue among respondents, and this explains the large percentage of respondents that are investing in renewables (48 per cent) and adopting energy-efficiency measures (41 per cent). We also found that a large proportion, 46 per cent, said that they are reducing the carbon footprint of their products and services.

Metrics and targets

We also asked respondents about some of the metrics and targets that they have put in place to respond to climate risks.

There has been a moderate increase in the number of respondents calculating their carbon footprint (38 per cent this year, up from 33 per cent last year), and a similar increase in respondents planning to do so (34 per cent up from 29 per cent). There has also been a small increase in the number of respondents who have set a greenhouse gas reduction target (13 per cent this year, up from 11 per cent last year).

Looking ahead

With COP27 taking place in Egypt this year, respondents were asked to rank on a scale of 1 (strongly disagree) to 5 (strongly agree) how optimistic they are about the material impact the conference will have. They were generally optimistic that it could have a positive impact on how the country they operate in responds to climate change, with 58 per cent agreeing or strongly agreeing.

However, they were less positive that the world could come together to effectively limit its effects – 46 per cent said they were at least somewhat optimistic, down from 49 per cent in 2021 (see chart below). Note that in this year’s survey, participants were asked to rank their responses to this question between 1 (very pessimistic) and 10 (very optimistic).

This research, and the comparisons with our findings from last year, demonstrate the significant impact the climate crisis is having on businesses, the ways companies are stepping up their responses and what they need to help them navigate the challenges it brings.

We can see respondents have reported more lived experiences of climate change, reflected in the increase in the underlying number of people who’ve been affected by extreme weather events, and the increase in concerns about transition risks.

As business leaders gain a clearer picture of the financial risk of the climate crisis, it is resulting in positive action. For example, we saw an increase in the number of companies adapting their financial strategy or planning because of climate change – nearly half of respondents reported that they are offering new climate-friendly products and a similar number are excluding investments that have a negative impact on the planet. We also found increases in the number of businesses taking steps to reduce their vulnerability to the physical effects of climate change, as well as calculating their carbon footprints and setting greenhouse gas emissions targets.

The findings of this research provide guidance on how the positive work already underway can be supported, and how we can accelerate action to meet net-zero by 2050. For investors like us, there are three key takeaways from this research that can inform our climate-focused approach:

• Respondents are looking for capital expenditures to build adaptive capacity and minimise physical climate impacts.
• There is a demand for financial assistance with a transition to low-carbon energy sources, as this also improves energy security.
• Businesses want education and training on the likely impacts of climate change and how they can be mitigated.

We will continue to monitor the views of the companies we invest in, so that our approach supports economic transformation, and a just transition to net-zero and resilient economies, in the best way possible.

This research was carried out by Anthesis Group on behalf of British International Investment. The questions were designed to compare with our Emerging Economies Climate Report 2021 to gauge sentiment changes from last year. In addition, more detail was asked of respondents relating to specific climate change attributed events in an attempt to capture the lived experience of climate change for business leaders in emerging economies.

We received a total of 85 responses to the survey. 62 of the firms that responded operate in Africa and 31 in Asia. Nine businesses are counted in both of these numbers, as they have operations in both regions.

You can read and download the full report here.