How Russia-Ukraine war thrust the world into potential climate tradeoff

MSCI head of ESG & Climate Solutions Research lays out how energy price pressures are testing countries' net-zero convictions

How Russia-Ukraine war thrust the world into potential climate tradeoff

While the shift to a net-zero carbon economy is generally seen as a trend that will drive investments in the coming decades, achieving that goal could end up costing more than it has to as the current climate of geopolitical tension and rising prices test countries’ convictions.

“Before the Russia-Ukraine war started, we had the Glasgow COP26 Summit. And it seemed that the world was agreeing on reducing emissions, making commitments, and phasing down coal,” says Guido Giese, Head of the ESG & Climate Solutions Research team at MSCI. “But this has changed.”

Standing pat on sanctions it has imposed on Russian exports, including Russian oil, the European Union has openly said it is looking to move part of its energy mix to coal. Outside Europe, Giese says Russia is offering its fossil fuels at a discount to other countries, which might be tempted to accept as they grapple with the global problem of inflation. India, meanwhile, has announced plans to fire up more coal plants as energy security and self-sufficiency becomes a priority.

The current tradeoff countries are facing – namely, whether to send money to Russia or to use coal-fired plants – is an “ugly situation,” according to Giese. But by choosing what could be the lesser of two evils, he says countries could be facing another, long-term tradeoff with world-shaping consequences.

“As a country, you may choose to use coal-based energy. Do you then simply accept higher temperatures and shift the problem to future generations, our children and grandchildren? Or do you say ‘no, we have to make up for it and follow through on our net-zero commitments, even if we’re starting later’?”

A recent report published by MSCI’s ESG Research team sought to quantify the potential impact of Russia’s war on the world’s carbon emissions and efforts to reach net-zero emissions by 2050. Based on the analysis, a shift by Europe to replace all its Russian gas imports with coal would, in the extreme worst case, raise emissions by as much as 0.8 gigatons of CO2 equivalent in the first year.

The least costly course of action overall, according to the report, would be to adhere as close as possible to European climate policy from before the war. To accomplish this, the report said Europe would need to mobilize all available options, including accelerating the financing of renewables.

“One of the things that we already hear politicians talking about in Europe is taxing energy companies’ windfall gains,” Giese says. “At the moment, they’re profiting significantly because of how high fossil fuel prices are. We estimate that that will create $200 to $300 billion in extra profits for the energy sector.”

Alternatively, he says the energy sector may decide to invest in renewables themselves rather than getting taxed by the government to fund those projects. But to get to that point, he says shareholders of those energy companies should persuade enterprise leaders that investment in new green technologies is much more desirable than paying out outsized bonuses or having their companies’ profits taxed by the government. Green bonds, which have grown in popularity in recent years, could also play a role.

“Energy and utility companies need to plan more projects tied to green bonds,” Giese says. “But at the same time, we need investors who are willing to put the money in … [and] steer the decisions as energy companies and utility companies double down on renewables. Shareholders have to help set emission reduction goals, as well as encourage companies to build up another business model for their own long-term survival.”

At this point, it might be a cliché to say that the climate clock is ticking, though that doesn’t make it any less true. Based on a scenario analysis that MSCI did, which draws from scenarios laid out by the Paris-based Network for Greening the Financial System, it found that delaying action to hit the global net-zero goal comes with an outsized increase in costs.

“Every year we postpone action leads to an exponentially more expensive cost of capital to hit climate goals,” Giese says. “In other words, acting sooner is so much cheaper … putting off the problem is a very costly thing to do.”