What walking the ‘China tightrope’ means for global businesses and climate

When it comes to engaging China on climate action, it is easy for businesses to get distracted by ongoing geopolitical tensions.

There seems to be no end in sight for the long-running trade war between China and the United States. Competition to secure strategic raw materials and a tussle for global influence between the two major powers have not only soured trade and diplomatic ties, but brought about heightened risks in many areas for global businesses.

This tension has inadvertently trickled down to affect decisions on climate.

Already seen as a risk factor that business leaders cannot ignore, climate today has also evolved into a potential new growth opportunity. Financing for climate and technologies needed to protect it, or what are known as ‘frontier technologies’, is expected to reach US$9.5 trillion by 2030. Both the public and private sectors cannot afford to find themselves in a situation where they have to choose sides in a geopolitical race, or “toe the line” just to avoid getting caught in a battle, if they want to crack the climate problem.

On climate, the world is racing against time. All parties increasingly need to realise that they need to stand on the same side or risk paying a much higher price price for climate inaction. Billions of people worldwide are already experiencing local warming of higher than 1.5°C. July this year was the hottest month on record, and it prompted United Nations’ secretary general Antonio Guterres to warn that the era of global warming has ended and that “the era of global boiling has arrived”.

The UN Framework Convention on Climate Change (UNFCCC) also recently released its synthesis report for the first “global stocktake”, concluding that the world is not on track to limit global warming to 1.5°C above preindustrial levels – a goal outlined in the 2015 Paris Agreement. As a baseline, the report states that companies need to show how they are part of the solution, not the problem. They will need to define robust targets and develop credible plans for the transition that set out how they can meet their commitments and play a successful part in an economy-wide transformation that the stocktake shows is essential, inevitable, and presents a massive commercial opportunity.

It is against this backdrop that global businesses should take care to not subscribe to the ‘China Plus One’ (or ‘C+1’) diversification strategy – where there is a conscious pivot in investments to areas outside of China – which is becoming increasingly attractive following supply chain disruptions and geopolitical tensions between Washington and Beijing. Reimagining a similar strategy when it comes to climate partnerships will only slow down progress.

For example, when it comes to accelerating the energy transition, as the world’s leading renewable energy supplier, China could inevitably be the key puzzle piece if critical solutions are to be scaled. Achieving a breakthrough in decarbonisation will need systems and standards that are coordinated, and if there is any country in the global value chain that should not be excluded, that would be China.

The country is also currently responsible for around 40 per cent of global industrial carbon emissions. Iron, steel and aluminium powers its industrial sector, but also are the main sources of emissions. The slower these sectors decarbonise, the more costly it will be for almost every global business activity that depends on these raw materials. It is also unthinkable how companies can detach themselves from China’ supply chain. For most companies reporting on Scope 3 or indirect supply chain emissions, developing sound disclosure strategies in complex supply chain markets such as China will only become more important.

With over US$540 billion invested in renewables in 2022 - three times that of the European Union - China has long been the earliest adopter and biggest supplier of clean energy solutions. China’s journey, however, has not been without failures and challenges, and the world can learn from its past mistakes.

For example, it has not been easy for China’s industrial sector to escape “pilot purgatory” mode, where a business idea or solution is stuck at the pilot phase and is unable to scale. Almost 70 per cent of Industry 4.0 solutions are found to be stuck in pilot mode for an extended period without reaping economies of scale. Closing this gap can stimulate the wider adoption of the technologies that have the potential to game change climate action.

To help manufacturers overcome this barrier, the World Economic Forum’s Centre for Advanced Manufacturing set up the Global Lighthouse Network in 2018, to identify manufacturers from a broad range of industries who are demonstrating frontrunner leadership in industrialising and adopting advanced technology adoption. The impact of this initiative on sustainability KPIs (key performance indicators) such as greenhouse gas emissions and energy efficiency can reach as high as 100 per cent. Today, over a third of the world’s 132 ‘lighthouse factories’ or about 35 per cent of these ‘lighthouses’ are based in China. They present some of the most advanced use cases, specifically in the field of automation and artificial intelligence.

China, which in recent years has seen an exodus of its foreign expatriates, also needs to urgently fill some of the new green jobs which are emerging. The country’s iron-fisted handling of the coronavirus pandemic saw the exit of talent, and post-recovery, it now needs to continue looking beyond its own shores for the right people to do these jobs. It can also invest in universities, training and educational facilities overseas to play a stronger role in helping to nurture the world’s talent and allow for a robust cross-border exchange of knowledge and expertise on climate and renewables.

Investing in talent also goes both ways. As new solutions take off from China, new opportunities emerge. This is evident in how fast China’s electric vehicles are making inroads in the Europe and Southeast Asia markets, which can also potentially create new jobs and means for shared learning. As Chinese companies expand abroad, their tried-and-tested models for battery technologies, market adoption and infrastructure support will be meaningful lessons for countries building their own electric transport blueprint.

Global businesses need to urgently recognise that untangling supply chains that have been built up over decades is not only complex and costly, but can be counter-productive for their other interests. For climate, the interconnectivity of current supply chains can arguably be beneficial, especially if it pushes for businesses to disclose and account for their Scope 3 emissions – which is potentially seen the real game-changer for collective decarbonisation. Time is not on our side and it will be costly if businesses act only for self-preservation and in consideration of political interests.

Speaking at WEF’s “Summer Davos” summit in Tianjin this June, Ngozi Okonjo-Iweala, director-general of the World Trade Organisation cautioned that decoupling and fragmentation are what the world “simply cannot afford to have”. That the economic meeting was held in China was a major milestone for the country, displaying a positive signal to the global business community that it is serious about engagement and dialogue after three years of Covid-19 closure.

More than ever, it will need to let the world know that it is keen to play a larger part in advancing the climate agenda, defending open markets against protectionist sentiments, and helping to foster an ecosystem in which global businesses do not need to feel the pressure to take sides.

As most diplomats like to say, nations have no permanent friends or allies, they only have permanent interests. An interest to fix the climate crisis needs to be a shared one for the long-term.