Black’rocked’ for ESG shortcomings … the EU TaxoNOmy … the DaNOne conundrum … The ‘Big Sustainability Illusion’ as a booklet …

The Lighthouse Keeper is back from a couple of days of celebrating Easter. But well, what’s Easter really with no family around, no Easter eggs to be found outside, and a swelling third wave of a global pandemic with slow vaccination strategies. At least there is some vaccination available, with more to come in this second quarter of the year! Hard to accuse anyone who do their utmost to organise, remedy, vaccinate or actually test people. My shout-out to all those brave people who have to manage the unknown. And to all of you who still hang in there, however hard this pandemic hits your personal and professional life. There’s much light at the end of the tunnel.

Time to also reflect on a whirlwind of things that happened since the release of Edition 2 of The Lighthouse Keeper. I have to say much of what you will read below was foreseeable, at least you would know if you have read the 4-part mini-series ‘The Big Sustainability Illusion’. There’s now a condensed version of this series available as an r3.0 Opinion Paper, please feel free to download a copy. Much of what I cover here is giving me hope that we are reaching tipping points, those moments where a certain practice is just not accepted any longer. Enjoy! React if you feel triggered! Or simply like and share this 3rd Edition of the Lighthouse Keeper, as sharing is the new liking and helps to spread this format even more.


Blackrock got hit by a lump of rock – called out for ‘deadly distraction’ ESG practices

Tariq Fancy, a name to easily remember. He was hired by Blackrock’s chief investment officer for sustainable investing, before he left in 2019. This meant incorporating ESG into the investment processes that govern the world’s largest pool of investment assets. And oops, as an experienced reader of The Lighthouse Keeper, here’s where your shivering should already begin. ESG is NOT sustainability, it’s a form of efficiency measurement on topics related to sustainability, comparing performance from one year to another, without measuring it against a ‘fair share’ of resources or capitals deriving from knowing the carrying capacities, or thresholds and allocations, as experts call them. As I described in ‘The Big Sustainability Illusion’ this wrong understanding is a fatal flaw in the complete information food chain of standard setters, standard users, benchmarkers, rating and ranking agencies, up to investors that often don’t understand what they actually buy to support investment decisions. 

In an article for The Globe And Mail (Canada) Tariq describes the lack of sustainability context as follows: “The vast majority of our work at BlackRock helped the bottom line, but showed no demonstrable positive impact on society. I realized that the only way providing more ESG information and launching ESG funds would create any real-world impact was through a slow, plodding and highly uncertain ‘free market self-corrects’ mechanism – a ludicrous response to the greatest market failure in history. Unfortunately, Western capitalism has become distorted in recent years. Incentives are skewed to the short term – far too short to care about the long-term public interest – and there is lax or no regulation in areas of critical importance. In that context, waiting for the market to figure itself out is absurd. It’s like leaving bars open during a pandemic and hoping people will be responsible. Setting the rules correctly is essential. Through taxes and regulation, governments can create incentives for businesses to pursue activities with positive side effects for society and discourage activities that harm us – such as emitting carbon and exploiting workers.”

That’s close, Tariq! Just one more step in seeing the need for thresholds & allocations, plus an independent international governance body, and you’re there. His final conclusions, however, hit the hammer on the nail: “But after I left the industry, marketing efforts around sustainable investing ramped up significantly in 2019 and 2020. Financial firms raised record new amounts for ESG assets. Given that there was next to no real social impact, I wondered: Could sustainable investing and the narratives that surround it be harming the world by creating a societal placebo that delayed overdue government reforms? The idea that this is a ‘deadly distraction’ [emphasis added] that is actively harming society troubled me. Giving wheatgrass to a cancer patient is medically harmless; but if that wheatgrass convinces the patient to delay chemotherapy, it’s a complete disaster. So I decided to test the idea that responsible investing is a deadly distraction.[…] Business leaders need to take a stand: If you believe in capitalism, then you know that market failures cannot be addressed with silly markets-self-correct theories. Claiming so in 2021, 13 years after the financial crisis and decades after we’ve been told that climate change is the great market failure in history, is an abdication of our responsibilities to the youngest and the poorest in society, who will bear most of the burden of continued inaction.”

This ‘lump of rock’ hit his ex-employer hard and was picked up in may more articles, including USA TodayCNBC (a video interview with Tariq), Citywire SelectorGreenqueen or The Guardian.

It just took a couple of days for the defence front to counter-argue. Hugh Wheelan, Responsible Investor Co-Founder and Joint Managing Director, in an article called “Blackrock’s former sustainable investing CIO Tariq Fancy is wrong that ESG is spin and marketing hype”, writes: “But, as I argued in another recent piece, now is the time to hold fund managers to account, and to back the EU Action Plan, which is pushing ‘empiricism’ (at least on the green side so far, with more to come on the social and governance sides) and seeking to put some measurement and rigour against loose ESG claims.” 

So, here we go again, the defence of ESG through politically-biased thresholds (with no reference to allocations) needs to confirm that ESG is a step in the right direction, and connecting it with the EU Taxonomy (see more about this pandora’s box below), as empiricism is the best we got? How much more wrong can an argument be, we can’t negotiate empiricism with Gaia.

Hugh is simply 20 years too late to argue like that. There is no Overton window remaining for treating a crisis like a crisis, to use Greta Thunberg’s words that she repeated in a recent very strong video interview with The Guardian.

His relativisation continues: “We too readily forget the past victories of voting and engagement that have led to changes in corporate behaviour and strategy. We downplay the success of sustainability funds that have pushed the envelope of finance. We discount the shift in political/economic thinking that has led to something as significant as the EU Action Plan; driven, it should be remembered, by responsible investors.” Oh, this hurts, a triple ‘ouch’:  have business behaviours and strategies changed to deliver sustainability? No, they haven’t, they produced ESG Progress, unrelated to claims if any performance is sustainable. Have ‘sustainability funds’ pushed the envelope of finance. No, they have pushed more PR and marketing to confuse sustainability by pure ESG, our ecological footprints still grow and societal stress id mounting. Will the EU Action Plan then deliver on sustainability? Again no, as I argued in the above paragraph. 

At the end Hugh picks up an important point though, and contradicts himself somewhat, while he reduces the contradiction by calling it a ‘paradox’: 

“The reality is that responsible investment has been ahead of the political and societal curve; even if it’s hard-fought success is based on a paradox. It is a square peg in a round hole. It recognises that real, sustainable ‘economic’ change has to come from ‘within’ the finance world as much as ‘without’, but that finance will not – and in many ways cannot – change, without the will of politicians and savers (and I include asset owners in this) to make it so. Why? Because politics today is framed by economics, and for better or worse (worse, of course in our view), much of that economic paradigm is now dictated by market forces: companies in relation to the interests of their shareholders within a primary focus on growth and returns. To change the economic structure, you must address where the power lies, and much of it can be found in short-termist capitalism.” Going back to Fancy, he says in his conclusion to his article: “We’re running out of time and need to accept the truth: To fix our system and curb a growing disaster, we need governments to fix the rules. On that, he’s absolutely right. Politics is the lever, activism the fulcrum.”

So, what does that leave us with? So far, we’ve just heard relativistic ‘lipstick on a pig’ excuses from the ESG field and reducing their argumentation to ‘a step in the right direction’, or ‘buyers of ESG ratings or ranking need to explore themselves what these ESG benchmarks can deliver. If they trust them for helping to make “sustainable investments”, it’s all their own fault.’

Tariq is plain right with the wrong claims made by the ESG bubble, but it all needs a breakout from just ESG to breakthrough towards establishing thermodynamic realities and ethical norms as the requirement to measure ESG performance against. That’s mainly a governments and governance task, and needs necessary funding for an independent entity. r3.0 is working in this area to establish a Global Thresholds & Allocations Council (GTAC), and is now working to collaborate with supportive players to first create a Global Thresholds & Allocation Network (GTAN). 

We will see. In the meanwhile Axios reports in an article that Blackrock hired Paul Bodnar, a climate finance and diplomacy veteran who held senior roles in the Obama administration, as its new global head of sustainable investing. He follows Brian Deese, another Obama White House alum now in the Biden White House as director of the National Economic Council. The doubts remain. The article mentions: “The umbrella group BlackRock’s Big Problem, responding this week to BlackRock and Vanguard joining the Net Zero Asset Managers Initiative, said they need to ‘accelerate near-term action.’ Until there is a corresponding escalation of action and ambition, these pledges are more valuable as marketing materials for ESG funds than they are to people on the front lines of climate change, the group said.”

As an interim step I also recommend to read As-You-Sow CEO Andrew Behar’s article in Responsible investor where he nicely annotates Black CEO Larry Fink’s letter from 2021. That’s, well, a step in the right direction, but would need unprecedented action from Blackrock. As Andrew comments: “Larry, you are in a very unique position. You are one of a handful of people on the planet who has the power to make real change, in the real world, to solve our most dire problems. I urge you to use this power for the good of all – not just talk about it.”

The EU TaxoNOmy … a pandora’s box for green claims that ridicule the concept

For the readers of ‘The Big Sustainability Illusion’ mini-series the issue around the politically-biased and relativistic definitions of thresholds of the EU Taxonomy on Sustainable Finance to define a technology as ‘sustainable’ is not new. As discussed there and in all depth predicted in r3.0’s Sustainable Finance Blueprint, the pre-final of the Taxonomy opened a pandora’s box for ridiculous claims where nuclear power and gas should be included as sustainable solutions. How far can it get? At least not much further, as even many of those involved in the design of the EU Sustainable Finance Taxonomy now threaten the EU with stepping out of the process. How did that come?

An Action Network around MEPs Sven Giegold, MEP and Bas Eickhout, plus several hundred other individuals connected to Sustainable Finance signed a letter in which they ask the EU: “Under no circumstances should conventional gas-fired power plants or related infrastructure be counted as a greenhouse gas mitigation measure or an adaptation measure. It would therefore be wrong to raise the threshold values of 100 g CO2/kWh and 262 g CO2/kWh against the recommendations made by the expert group. Weakening the thresholds in one area also risks setting a precedent for all other critical areas of the taxonomy. Thus, investments in nuclear energy and in unsustainable forms of forestry should not be considered ‘sustainable” either.’” They conclude: “Sustainable Finance stands for transparency and transformation, it is not about prohibiting certain investments. Sustainable Finance alone will not prevent any country from investing in understandably highly controversial projects such as the construction of new gas-fired or nuclear power plants and their infrastructure, or in destructive forest management. But if such investments are labelled as sustainable, the credibility and growth capacity of Europe as a forerunner in sustainable finance is gone. Important initiatives such as the EU Green Bonds Standard and the EU consumer label for sustainable finance will then no longer be in demand in keymarkets and will thus not be able to establish themselves.”

A group of scientists led by UCD College of Business faculty Theodor CojoianuAndreas HoepnerFabiola Schneider, and Joeri Rogelj from Imperial College London raised a similar concern in a letter to the relevant EU Commissioners, signed again by hundreds of experts. They called it a ‘Gas Attack in Taxonomy’.

Reuters article then also shed light on an additional set of ‘tactics’ that could severely weaken the whole Taxonomy aim. Those recommendations, published about two weeks ago, said the taxonomy already acknowledges so-called ‘transition finance’. The article summarises: “There’s actually lots of transition financing tools already in there. The point is that what was green before is still green, said Nathan Fabian, head of the advisory group, which includes experts from finance, industry and campaign groups. For example, the taxonomy offers a green label to ‘transitional’ activities that cannot yet be made fully sustainable, but which have emissions below industry average and do not lock in polluting assets. The advisers said a further option could be to count as ‘green’ the investments companies make to move a polluting activity towards complying with the taxonomy criteria over a 5 to 10 year period. Those investment plans would need to meet criteria developed by the advisers in future. Ultimately, the advisers said, green activities must support the goal agreed by EU leaders in December to cut net EU greenhouse gas emissions by at least 55% from 1990 levels by 2030.”

As a result, and as mentioned in another Reuters article, ‘Nine EU advisers threaten walkout over sustainable finance row’ if Brussels pushes ahead with plans that they say would discredit its efforts to fight climate change. “Should politics and lobbying prevail over science, it is our responsibility to inform you that we would be forced to reconsider our contribution to the Platform,” said the letter. “Its signatories included finance experts from the campaign groups WWF, Transport & Environment and Romanian group Agent Green, and academics. The platform also includes representatives from industry and the finance sector. The letter said the Commission’s proposed rules for gas, bioenergy and forestry would ‘openly discredit’ EU goals to cut planet-warming emissions. ‘The concept of what is scientifically sustainable, that’s really not for politicians to decide’, said Andreas Hoepner, a professor at University College Dublin who signed the letter. ‘We have a once-in-a-decade opportunity to do something right,’ said Monique Goyens, director general of the non-profit European Consumer Organisation, another signatory.”

All this was predictable. All this was avoidable. But, as the majority of involved experts thought, the ‘Full Monty’ was impossible. And that’s exactly what’s wrong. This is probably a final litmus test if we humans are able to accept that we can’t negotiate with Gaia, and if we finally got it. The fact we got it wrong for decades doesn’t make it right now. As the IPCC said, we need to take unprecedented steps in all parts of society. The EU can now show that they understood what’s at stake. And again, it needs thermodynamic realism and ethical norms to deliver.

The DaNOne conundrum

And here’s the other big news that circled in the last couple of weeks: Activist investors attacked Danone for what they cast as its chronic underperformance compared with larger rival Nestlé, and publicly called for Faber’s departure. The FT writes: “The departure of Faber, who joined the group in 1997 and took over as chief executive in 2014, marks the downfall of one of the most visible advocates in global business for a more responsible capitalism in which companies do not only serve shareholders but also protect the environment, their employees and suppliers. Danone has espoused a more human, ‘multi-stakeholder’model of business going back to the 1960s under the leadership of Antoine Riboud, and Faber continued in that tradition. When Danone shareholders approved a change in the company’s legal status last year to enshrine its social mission, Faber declared they had ‘toppled the statue of Milton Friedman’. Danone became the first big listed French company to become a so-called enterprise à mission, or purpose-driven company. Faber also championed the growing environmental, social and governance movement among investors in other ways, such as when the group began reporting ‘climate adjusted’ earnings per share last year and invested heavily in reducing plastic use. Although the activists campaigning at Danone were careful not to directly attack its sustainability focus, they did argue that the balance between shareholders’ interests and others had been lost under Faber. The public campaign carried out since January by activist Bluebell Capital and Artisan Partners, a US fund, put Faber and the board under intense pressure to respond to the criticism. More shareholders had indicated in private that they too supported them.” 

Further attempts to split the board, in which Faber would remain chairman, and a new CEO would take over were also rejected by Bluebell Capital Partners and Artisan Partners due to violation of corporate governance standards. Faber had to leave.

This is another masterpiece of pure ESG failure. Both Danone investors claim to be ESG proponents, one of them even a PRI signatory. While PRI asks for long-term investments, the current situation that led to the demise of Faber is a classical short-to-mid-term financial return issue in which shareholder value prevails above all and its evenly a declaration of bankruptcy for the useless stakeholder primacy pleas and pledges, a revelation that those are just weak and prolonging shareholder primacy. It’s like what ‘Creating Shared Value’ was to Porter’s ‘Competitive Advantage’ mantra.

ESG is too weak due to two reasons: the lack of prolonging measurement by adding thresholds and allocations to finally assess if any performance is sustainable. But secondly, sustainability will never work if we don’t succeed in a mindset shift from ‘having rights’ to ‘having obligations’ first.

At r3.0 we call this ‘rightsholdership.’ Without this mindset shift ESG will be a weak counter position that produces just tradeoffs in one direction – the short-term monetary return.

At r3.0 we advocate for context-based multicapitalism to showcase the real contribution from degeneration towards regeneration, the final step of achieving sustainability. One instrument, actually the best we know of so far, comes from the Center for Sustainable Organisations, the ‘Multicapital Scorecard’. CSO founder Mark McElroy described Danone’s way to sustainability in two posts on Linkedin recently, shedding a light on how good Danone performed on sustainability. In his first post he wrote: “Danone‘s performance in 2020 was extraordinarily good (89% on a scale of -100% to +100%) when viewed through the lens of an abbreviated MultiCapital Scorecard (MCS).”

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In a second post Mark compared Danone’s performance to some others in the same industry, and here’s Nestlé and Unilever. “While most MCS reports involve the use of more than just 3 indicators selected as a result of organization-specific materiality determinations, the abbreviated form we’ve used here is sufficient for demonstration purposes and is reasonably applicable to all organizations. For a closer look at the MCS and how the same abbreviated form was applied to 5 other very well-known companies, see this recent article of ours.”

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The Danone case clearly showed that we indeed need a ‘Planetary Accounting Emergency’, going back to Greta Thunberg’s video interview, repeating ‘treating the crisis as a crisis.’

By The Lighthouse Keeper – the ‘Big Sustainability Illusion’ as r3.0 Opinion Paper

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Starting this regular series of ‘The Lighthouse Keeper’ was grounded on the huge success of the 4-part series ‘The Big Sustainability Illusion’, now also available as r3.0 Opinion Paper, please find it here. This Opinion Paper sets out the general problem with pure ESG and offers solutions for those that want to extend their views towards full sustainability and for the more transformational actors.

Wishing you all a great start after the Easter break, if you took one. Watch out for the next edition coming to you soon, depending on the continued rollercoaster in ESG LaLaLand and the many attempts to misuse this fantastic concept we all depend on.