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Nyet zero: what Putin’s war could mean for the green transition

Clim8 Investment Team

01 March 2022 Sustainable Investing

The current situation in Ukraine is truly heartbreaking. As people first and foremost, we are all deeply affected by the suffering playing out on our screens. And as climate investment specialists, we want to examine how these events could reshape our journey to net zero – as well as the macroeconomic and geopolitical forces that drive it.

Putin’s invasion doesn’t just threaten the foundation of global peace and security. It also jeopardises the urgent, coordinated global policy action needed to meet humanity’s most important long-term objective – the war on climate change.

We live in a world where geopolitics, climate and the markets are inextricably linked, especially in a century where conflict is increasingly driven by climate change and resource scarcity. But with the world’s attention now firmly fixed on the sight of Russian tanks rolling through Ukrainian countryside, along with rampant inflation in the early months of 2022, the momentum generated by last year’s COP26 seems an increasingly distant memory.

Putin’s mixed messages on climate

In light of recent events, it’s almost surreal to remember that only a few months ago Russia sent one of the largest delegations of any nation to COP26. Although Putin himself didn’t attend due to the pandemic, his spokesperson said that climate change was “one of our foreign policy’s most important priorities”. Given the potential impact of lower European fossil fuel demand on Russia’s economy – estimated at 0.5% of its GDP growth rate – the international community started to get hopeful about Russia’s long-term climate stance.

The country’s active participation in the green transition is indeed vital. But Putin’s geopolitical ambitions seem to pay scant attention to his past promises on climate – perhaps unsurprisingly. After all, he was slow to join the Kyoto protocol, and only ratified the Paris Agreement in 2019. And seeing as Russia’s natural resources are such a major trump card for Putin, who knows what the war’s long-term collateral damage to the climate could be?

Can the world wean itself from Russia’s natural resources?

In 2019, Vladimir Potanin, president of Russian mining giant Norilsk Nickel, pointed out how integral the company is to the global economy and transition, stating that: “We produce many products which are really needed by companies all over the world – palladium, nickel, etc. If there is any kind of war, any kind of sanctions, it will not benefit anyone.” 

His confident statement unfortunately rings true. We are all heavily dependent not just on Russian oil and gas, but also many of the raw materials needed to create a net zero world. And although we’re gradually moving away from fossil fuel dependence on Russia, we can’t underestimate its major role in supplying the vast material needs of a world in transition either, especially in Europe. 

The conundrum for green commodities

Without question, Russia is a commodities powerhouse. As well as being a major oil and gas producer, the country is the world’s largest palladium producer, and one of the largest players in platinum, aluminium, nickel and cobalt.

These last two are essential materials for the batteries that are powering the new generation of electrified cars and homes, as well as other key net zero technologies. Russia’s share of global cobalt production alone is currently set to nearly double from 5% to 8%. In this fast-evolving geopolitical climate, the need to find alternative sources for these transition materials is growing more urgent.

Rising commodity prices signal bad news for green investments

The military conflict, ensuing Western sanctions and post-pandemic inflation are set to significantly push up the cost of fuel and raw materials. This means that many companies may well pause their R&D and strategic investments as they seek to absorb some of these higher costs.

We’re already seeing this happening in the US Philly Fed CAPEX Index, which represents companies’ capital expenditure in the key US manufacturing hub of Philadelphia. Given that many of these strategic initiatives in the US and elsewhere are aimed at the green transition, there’s a significant risk of the trend becoming more widespread.

Governments are swapping their green agendas for guns – and gas

This trend is likely to be mirrored in government spending. Already we’ve seen the UK, Germany and other nations around Europe announce increased military funding to counter the Russian threat. While this may be good news for some manufacturers, it does mean that governments scrambling to reconcile their pandemic-induced deficit spending will be even more financially stretched. 

This ultimately means less wriggle room to spend on green energy initiatives and tax breaks for renewable energy manufacturers, and could therefore stall the rapid scale-up of clean energy that we’ve seen over the last decade. 

Several major economies have already put their green energy plans on hold to protect energy supplies, undermining global climate pacts. Germany has just announced it will build two more liquefied natural gas (LNG) import terminals and activate its strategic coal reserves and gas storage. In the US, a push to unleash more domestic oil and gas to deal with higher energy prices is gaining traction.

Despite the well-established scientific consensus that this decade is critical for decarbonising our future, countries could well start to de-emphasise climate change policies in favour of preserving their energy security and national interests.

Can genius overcome the madness?

The picture doesn’t need to be uniformly bleak, however. As an unintended consequence of the conflict and rising commodity prices, the brightest scientists, researchers, and engineers could push the boundaries of innovation by developing the yet-unknown technologies that can decarbonise our complex and interconnected economies.

There is precedent for this. Bill McKibben, the American environmentalist and commentator, has pointed out that the supply chain crisis during World War Two led to rapid patent sharing for synthetic rubber between five major US companies. In just one month, 51 plants were built to produce the monomers and polymers needed to make it.

Whether it’s developing batteries requiring fewer rare earth materials or establishing better supply chain coordination for key transition metals, it’s not unthinkable that this crisis could lead to the solutions that peacetime has so far failed to produce.

What’s good for the planet is also good for peace

Before the invasion, the climate for sustainable investing was already tough. Higher inflation generally makes long-term growth companies like those in the climate tech and green energy space less attractive to investors. Now Putin’s actions have added a whole new dimension of geopolitical woes to the macroeconomic ones – and the markets are reacting accordingly.

In truth, nobody knows how the situation will unfold – militarily, economically or otherwise. The longer term impact of Western sanctions on global economies as well as Russia itself may be especially profound. But what hasn’t changed is our urgent need to scale up the green transition – not just for the sake of the planet, but to promote peace and security around the world too. For those of us who care about a safe, sustainable future, there’s a lot at stake.