Counting the Cost of War: Prospects for Global Companies in a New Era of Conflict
By Richard Howitt, Skytop Contributor / November 16th, 2022
Richard’s background celebrates three decades as a strategic thinker who integrates innovation into organizational practice. A 22-year member of the European Parliament Rapporteur on Corporate Social Responsibility, he led the EU’s Non-Financial Reporting Directive. This initiative, recognized as the world’s foremost legislation on Corporate Transparency, brought him to new challenges.
This includes his work as CEO of the International Integrated Reporting Council, the Task Force on Climate-Related Financial Disclosure, Advisor to the UN Global Compact, Member of the European Commission SDG Platform, and the UN Guiding Principles for Business and Human Rights Reporting Framework Eminent Persons’ Group.
Richard is recognized as a Sage Top 100 Global Business Influencer, Thomson Reuters ‘Top 30’ Influencer in Risk, Compliance and Regtech. He is a Member of the B20 International Business Leaders’ Group and its Climate and Resource Efficiency Task Force. He currently serves as Strategic Advisor on Corporate Responsibility and Sustainability, and Senior Associate at the law firm Frank Bold LLC.
The Damage is Stark
This is the year which was supposed to be the first which is ‘back to normal’ after the COVID-19 pandemic.
Instead, we are living – and some are dying – through a year which has seen the first war in Europe since the end of the Second World War and the first nuclear stand-off since the Cuban missile crisis.
This is so much more than its economic cost, but the damage to business is stark.
Inflation is returning to levels not seen since the early Eighties, currently expected to peak at 9.5% worldwide.
Interest rates are forecast to double compared to 2021. After a prolonged period of historically low rates, there is now the fastest rise for thirty years.
The price of oil touched USD130 per barrel earlier this year. OPEC, not just Russia, is exerting its market power, another direct echo of the 1970s.
Perhaps those of us who studied in the 1970s and 1980s, given these parallels, have a special responsibility to help the current generation learn from the mistakes from those times.
Vulnerabilities
Meanwhile in 2022, the supply chain vulnerabilities exposed during the Covid pandemic have only been compounded by the Ukraine crisis.
Shortages of key components and materials are almost bringing industries to a halt.
Don’t try to buy a new car manufactured in 2022. Supply delays for the semiconductors it needs means you won’t receive it until 2023.
Investors looking for normally safe havens, including U.S. Treasury bonds, the Japanese yen, even the previous confidence in cryptocurrencies, find that each of these is now suddenly looking volatile.
The World Bank says damage to trade will lower global GDP by a full 1 per cent.
The biggest adverse economic impacts have already been in middle income and emerging markets, precisely the countries which are needed to drive global growth.
Six countries in Eastern and South-East Europe have seen their risk of default on sovereign debt significantly increase.
If conflict extends from Central Europe to the South China Seas, as there are now well-founded fears, it could threaten the supply of all advanced semiconductors to the global electronics industry, disrupt one of the busiest trade routes in the world, damage world trade by a magnitude twenty times larger than the war in Ukraine and cut world income by twice as much as in the Great Depression of the 1930s.
Already six out of 22 of the biggest central banks are missing inflation targets, presaging further rises in interest rates to come. The International Monetary Fund predicts an absence of growth or recession across the United States, Europe and China.
Clearly, this presents a very different prospect for companies seeking to survive and to grow.
It isn’t that there is a direct link between the conflict and corporate earnings across the West. But the energy price rise, surging inflation, rising interest rates – caused by the conflict – are all hitting businesses very hard.
Although military scenarios suggest the conflict in Ukraine could become extensively prolonged, this is not just about a temporary economic cost, which we can be confident will reverse when – we all hope – the conflict is resolved.
Longer-Term Impact
Instead, the impact seems to suggest a significant breakdown in globally-accepted rules for trade and investment, which threatens permanent damage to future growth and prosperity.
Sanctions against Russia were right.
But the longer-term impact of sanctions and of the removal of Russia from automated bank payment systems literally overnight, has led to Russia and its allies to develop alternative systems to evade the same risk recurring in the future.
Witness the gas deals struck by Russia with China and Myanmar.
Payments systems are being created which are fully insulated from any possible future Western intervention.
There is also evidence that Russia or its economic actors might even be starting to use tools from within our existing market regulatory frameworks to fight back against the West. This involves using investor-state litigation to claim breaches of bilateral investment treaties, which may actually undermine existing systems of investor protection altogether.
Implications for ESG
Meanwhile, advocates of long-term goals for environmental, social and governance (ESG) transition by companies and for our economy, may find the coalition towards progress is also at risk of breaking up.
Energy security is threatening a short-term resurgence in fossil fuels, rather than in the necessary transition towards renewable energy.
The stocks of the supposed industries of the future – technology companies – have dipped in value, whilst those of the supposed industries of the past – oil and gas – surge.
As nations move towards protectionist measures to maximize the security of local supply chains, we may now see weakening of global supply chains, when all the ambitions for global labor standards and ‘Scope 3’ (value chain) carbon emissions require them to be strengthened.
ESG advocates have long warned about dependence on rare minerals, whose exhaustion or political intervention from authoritarian supplier nations represent acute risks for key products and markets.
Already following the Ukraine invasion, Russia has not simply switched the gas taps on and off. It has deliberately used the fact that it has by far the largest share of world production of the chemical palladium to push up the price of a product which is essential for every catalytic converter in every car on the planet, and vital in our collective efforts to reduce emissions.
New Requirement for Business Agility
This ‘system change’ is likely to have profound implications for how business engages with national governments and regulators.
If we are seeing a return to Cold War politics, of fragmentation of trade and other multilateral rules governing markets, then business is going to have to adapt to this new variable geometry.
The relationship between the center and the periphery in global business will have to change, with constant two-way communication informing business decisions at both ends.
It is also not too ambitious to argue that business can be more proactive itself in conflict resolution and prevention, as covered in my previous article on business sanctions against Russia.
False Beliefs
The challenges of COVID-19 and Ukraine and ESG may be very different in character, but mutually reinforce the very same vulnerabilities which characterize this current era of transition for us all.
This is an era of weak supply chains, chronic short-termism, of squandering precious resources, rising inequalities, of a reluctance to jettison out-dated assumptions and a failure to identify new risks until too late.
It is a false belief that economics can carry on as usual, even if politics does not.
We are confronted with a breakdown of multilateralism, just as we are seeking to mobilize it, to face the biggest challenges that the world has ever seen.
So in the week when the COP 27 UN Climate Conference and the G20 meeting of world leaders take place in parallel, it is sadly necessary to view these inter-governmental efforts through a different, or at least partially different lens.
It does not affect the scale of transformational change which confronts us.
But it presents the extra challenge of business being squeezed hard, just at the moment when companies are being asked to do more.
For those of us who think of ourselves as ESG advocates within business, it is a time both to redouble efforts but also accentuate warnings against any slow down in the global transitions required to meet long-term environmental and social challenges, which will not wait.
As the saying goes: “When bad times and hard times are suddenly here, notice those that remain and the ones that disappear.”
This is an edited extract from Richard Howitt’s keynote speech at the ESG Europe Summit held recently in Stockholm, Sweden.