Investor Sustainability or Human-Planetary Regeneration – ESG LaLaLand at the crossroads! A Year-End Reflection


Edition 9 | December 2021

As 2021 comes to a close and we look at the precursors of 2022, a big question starts to present itself: as we are standing at the crossroads of so many issues, e.g. the pandemic, climate collapse, resource depletion, biodiversity loss, and not to forget how to safeguard social cohesion that is in danger due to the stress effects of all these crises, given that our current economic system is unable to move from ego-nomy to interbeing:

How will we report ‘success’, if we were to achieve it, and how do we know? What is needed systemically and how can all sorts of players then adhere to that ideal and tell us what contribution they made (or plan to make)? And how do we know if our cumulative successes add up on time?

So, what’s the future role of corporate reporting and benchmarking in era of unrecoverable resource depletion, failing monocapitalism, and ongoing social division. And what can ‘pure ESG’ deliver, while we need to see success of sustainability, or better regeneration as a necessary endgoal? This is one of the underlying reasons why I wrote ‘The Big Sustainability Illusion’ in April this year, now viewed over 72.000 times, and triggered the start of ‘The Lighthouse Keeper’, of which you now read edition 9 (the last one in 2021). 

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I coined the term ‘ESG LaLaLand’ on purpose, constantly reminding of the ‘deadly procrastination’ of pure ESG so far. Let’s be totally clear about that and not constantly try to defend a failing concept, just simply because so many spent so much time using it, and so many incremental-based business models lean on it as the quick fix for the last 20 years. And let’s repeat that we just mean the ‘ESG only’ type that simply denies the need to measure performance data on a range of sustainability-related topics against thresholds and allocations, the language of what I see to be the new supply and demand in an age of unrecoverable resource depletion (and supposedly the essential new basis for economic theory). 

The only thing I – and now so many others – ask for is the addition of these ‘denominator data’ to the ESG ‘numerators’. It is totally surreal that this simple ask hits so many walls. That speaks to a huge cognitive dissonance of the ESG ‘industry’. Or as a friend recently reminded me: ‘Prejudice is a mental pattern of utter ignorance.’

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And here we are, at the crossroads which way reporting will take. There are two parallel developments. Let’s look at both in detail:

FIRST: Is there a future for ‘ESG-based financial sustainability reporting’ and benchmarking approaches?

The first combines ‘pure ESG’ with financial reporting and will continue to pretend it leads to ‘sustainability.’ Well, it may lead to ‘financial sustainability’ in the short term, but does any of that solve any of the crises we have to solve? Of course not! It’s an illusion that has been put on the table here, just to satisfy the financial market machinery that right from the start didn’t want non-financial disclosures to intrude their logic, but had to somehow get along with it due to external pressures. So that’s what we – those in the sustainability field that were keen to see sustainability being picked up by financial markets – gave them, with a huge collateral damage as the result. Or as the late Brendan Leblanc, ex-Partner of EY, and initial Steering Board member of r3.0, said: ‘the only thing worse than no progress is the illusion of progress.’ And that’s exactly what continued this year as well.

It starts with calling the IFRS add-on ‘ISSB’, the ‘International Sustainability Standards Board’, with experts coming from the Value Reporting Foundation (IIRC/SASB) and the Corporate Disclosure Standards Board (CDSB), because it was said – as one of more reasons – they are the experts. Excuse me, experts in what? Well, surely not in sustainability. And the best way to cover that up is to add to that that new team needs even more external teams, with ‘experts’, chosen by those who don’t understand what sustainability really is. Oh my….

Or take the other example, EFRAG and GRI, asked by the European Commission to develop the ‘CSRD’ (Corporate Sustainability Reporting Directive) Standards. The same GRI that has ignored its very own Sustainability Context Principle (really the only connection of GRI Standards to sustainability) for close to 20 years, and has just watered it down even more in its recently new Universal Principles, castrating this essential Principle by getting rid of the word ‘performance’ and replacing it with the clueless word ‘impact’ (that says nothing to people) and refuses to guide users on how to set thresholds and allocations. Actually, GRI issued a very telling note in which they responded to the public comments they received in the run-up of the new Universal Standards, including a submission by 19 experts of the Sustainability Context Group that urged GRI to not water down the Principle in the proposed way. Their response: ‘GRI doesn’t set any thresholds or allocations.’ Well, nobody has ever asked GRI to do that, this response is simply ridiculous and misguiding. All that was asked for was that GRI specifies the need for thresholds and allocations (what are they and why do we need them?) and starts to develop ‘guidance’ on how to set thresholds and allocation. It is a giant oversight by GRI’s Global Sustainability Standards Board (GSSB, should it not be called G-ESG-SB?) and its Due Process Committee to ridicule the joint submission of 19 global sustainability experts in such a way. This is unacceptable and will be addressed adequately. 

Both described developments in the ‘pure ESG’ camp are highly concerning for three additional reasons:

1)  The constant misbelief that ESG would have anything to do with sustainability

Let’s just go back to GRI Co-Founder Allen White (which we do again and again), who had voiced this concern in 2013 already:

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Acadamic studies, such as the one carried out by Anders Bjørn et all, tell us that more than 99% of all so-called sustainability reports fail to deliver. They are simply ‘ESG Progress Reports’, nothing more.

So it seems we just need to thank Bloomberg for their recent article which they called the ‘ESG Mirage’,  referring to ‘MSCI, the largest ESG rating company, that doesn’t even try to measure the impact of a corporation on the world. It’s all about whether the world might mess with the bottom line’. As the article says: ‘Yet there’s virtually no connection between MSCI’s “better world” marketing and its methodology. That’s because the ratings don’t measure a company’s impact on the Earth and society. In fact, they gauge the opposite: the potential impact of the world on the company and its shareholders. MSCI doesn’t dispute this characterization. It defends its methodology as the most financially relevant for the companies it rates. This critical feature of the ESG system, which flips the very notion of sustainable investing on its head for many investors, can be seen repeatedly in thousands of pages of MSCI’s rating reports.’

The article continues: ‘In MSCI’s system, companies are measured not against universal standards but against their industry peers. And the starting proposition is that an average company in each peer group is worthy of a BBB rating. MSCI doesn’t use the term “investment grade,” but that’s what BBB has meant for decades on Wall Street. By default, an average fossil fuel producer, utility company, automaker, used-car dealer, bank, retailer, chemical manufacturer, or arms maker earns that grade from MSCI. When a peer group swings, or MSCI changes its methodologies, companies can get upgraded for doing nothing other than staying the same. Businessweek found half of the 155 companies that got upgrades did so in significant part because of changes to the way MSCI calculated scores, not because of any change in the companies’ behavior.’ 

Duncan Austin’s Linkedin post on the Bloomberg article and the discussion below his post is madly interesting to read, and Kate Bennett’s response to the post is most revealing: ‘MSCI has been around for years, well before the recent age of ESG-hype and advanced global consciousness on this topic. They have served a purpose and driven necessary change over the past decade. And we can attack them (and other ESG rating agencies) all we like but they are servicing their clients, not society as a whole. If their clients (financial institutions) really care about impact on society then they will seek out a provider of that data. Then MSCI might consider integrating more impact metrics to tap into that market. But their clients aren’t interested. And if we’re honest THAT is the more concerning reality. ESG is what ESG is and has always been. An evaluation of ESG risks on a company’s financial performance – and this itself does stimulate some improvement in a company‘s social and environment performance. ‘ And I may add: unfortunately ESG never tells us if that improvement is good enough, we just know it’s potentially less degenerative. We are flying totally blind.

I think you get the gist. The article is nothing else than a ‘declaration of bankruptcy’ for ESG in the way it has been promoted for close to two decades.  ESG serves ‘Elevating Suicidal Greed’ by design and at little risk, it’s a perverse sustainability bypass. 

2) Mounting examples that call ESG into question and signal decay, voiced by relevant ESG protagonists. This has slowly built up through the whole year 2021.

I already issued a longer list of critical articles in earlier editions of The Lighthouse Keeper, but the ones that came out in the last couple of weeks seem to be even more disturbing, starting with CJ Clouse’s ‘From joke to hoax, a short history of ESG.’ The next article that got released was Matt Moscardi’s ‘I want to make an official request of regulators and the ESG community: Stop it.’ And then came ‘A letter to sustainable finance professionals: ESG burnout is real. I know because I have it.’ The author, wanting to stay anonymous, offers a pretty well (sometimes funny) fetched interpretation of an ESG expert:

‘The ESG industry is experiencing an extreme pace of change. News flow, regulatory intervention and ESG deniers who call themselves experts. Is what I do now SRI or RI, or is it ESG? I think I need more data, but do I use GRI, CDP, CRREM and/or BREEAM, UNGC, GIIN, TPI, WBA or SASB? We require ambitious NDCs to lower GHGs, along with corporates committing to SBTs. Find me investments supporting the SDGs that DNSH. Keep a check of the SEC, IIGCC, IGCC, Ceres, UNEPFI, NZAOA, NZAM, CDSB and any of the SIFs, as well as ASCOR, TEG, GTAG, GFANZ, TNFD, IFRS/ISSB, PCAF. Fall behind at your peril. Most importantly, write an award-winning report in line with TCFD, PAII, SFDR and NFRD, which can also be used for PRI. What have I missed? In the mad rush to firefight, sell, buy, market and keep up, I’m not getting enough time to think deeply. I sometimes lie awake, worried I’ve missed an obvious investment risk. What if the conversations I’ve had with clients, issuers and policy makers exacerbate problems I’m trying to solve? Worse still, what if I’m feeding the ESG bullshit machine?’

3) Who are these constant ESG hooray-sayers?

The constant hooray song sheet about the convergence with IFRS and the EU comes from those who benefit most from these continued incrementalistic approaches, preferably from Partners of Big 4 organisations, other big and small consultancies, lobbyists and those that spend decades in influential ‘defenders of the faith’ circles, and even certain academics, whose business models love ‘step-by-step’ processes as their business models so much depend on it. Let’s be honest: this is the biggest boost for these assurance providers and consultancies that ever happened (e.g. PWC announcing they want to add 100.000 staff to increase their ESG capacity in the next years), you see the $$$ signs in their eyes with every hooray they shout out. Real and radical transformation however is an impossible ask, and they argue their clients would not support that. Quite an unholy alliance and ping-pong argumentation that cements ‘deadly procrastination.’ One example: several big 4 Partners made posts on Linkedin that ‘sustainability now goes mainstream’ and received a massive amount of critique. But instead of engaging with that criticism they cocoon and disappear. They just send, with no real substance or willingness to engage.

IFRS/ISSB and EU/EFRAG/GRI will of course continue, the train has left the station. But it adds nothing to sustainability, and they and you should be very clear about that. They comfort financial sustainability of the subjects they cover. But that’s it. Anything else is a continued illusion. I’ll finish this part by offering my colleague Bill Baue’s excellent recent LI post, with interesting reflections from ex-SASB CEO Jean Rogers and HBS’s Bob Eccles: 

’So far, ISSB is just ‘blah, blah, blah’,’ she says, riffing on Greta. She adds: ‘Adopting standards before following due process that their own constitution requires is concerning right out of the gate.’ 

Carol Adams also identified this fatal flaw.

Rogers continues: “The second area of concern is the lack of harmonization with GRI and the EU, as the EU is a major IFRS jurisdiction. It’s just setting up a needless power struggle, and nothing will have been accomplished — just a different flavor of soup. Companies are caught in the crosshairs of political posturing & standards setters are providing an excuse for inaction. [C]ompanies will begin … developing their own metrics … because the chaos is impractical to implement. There will be a backlash if things don’t stabilize. The opportunity for ISSB is not to achieve global standardization, but to align global markets around an approach to susty standards setting & core principles … allowing for jurisdictional differences in implementation.’ Thus it’s vital for ISSB to embrace thresholds!

Rogers: ‘Using the language of performance is critical to achieve progress on anything.’ This is why Global Reporting Initiative (GRI) removing the language of performance from the Sustainability Context Principle in its new Universal Standards is a fatal move. Rogers concludes: ‘We have to use baseline data to present performance in context.’ 

Bill ends by saying ‘I can assure you that her use of the term ‘context’ is not accidental, but a conscious reference to the Sustainability Context Principle. Oh, and Robert Eccles didn’t conflate ESG with sustainability!’

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SECOND: Is there a future for ‘true sustainability reporting’ approaches?

Now let’s shift to the alternatives. Loyal readers of The Lighthouse Keeper are already aware of a whole set of developments that got a real boost in 2021. 

Most prominently at r3.0, we ran a major pilot project with UNRISD, involving 22 organisations, testing a set of ‘Sustainable Development Performance Indicators’, based threshold & allocation-based denominators. The project is just coming to an end and UNRISD will publish the final report early next year, followed by an awareness-raising campaign towards other UN bodies as well as major other constituencies in this field. 

Amongst those that worked with us at r3.0 were companies like Anglo American, Manulife/John Hancock, Weleda, GLS Bank, the World Bank, SK Hynix, and two Mondragon Cooperatives, to name a few. We also worked with the World Benchmarking Alliance (WBA) and the Integrated Management Project (IMP, now Integrated Management Platform, and in transition to be led by UNEP FI and the OECD). We can already say that it will take some time for companies to adhere to denominator-based indicators (with ESG data in the numerator), and a certain external infrastructure for conventionalised denominator data is necessary, but it is all doable, if there is the will to do so. 2022 will be exciting as these deliberations will see the light of day, and can’t be denied as ‘impossible’ any longer.

Speaking of IMP, November 17th was a day to celebrate, as we described in our recent r3.0 Medium article. We noted ‘At its launch today, the Impact Management Platform (IMP) unveiled a new website with a standalone page devoted to Thresholds and Allocations that explains just how to apply these necessary elements of sustainability measurement, management, and reporting. Thresholds & allocations — the key concepts first suggested in reporting frameworks in 2002 in the Sustainability Context Principle that calls for assessing ‘the performance of the organisation in the context of the limits and demands placed on economic, environmental, or social resources at a macro-level’ — are also embedded throughout IMP’s ‘wheel’ of actions organizations can take to measure, manage and report their sustainability impacts (especially when it comes to the “Assess Impact” stage). And last but certainly not least, thresholds & allocations are the primary focus of the excellent video animation on the About page of the IMP website.

IMP’s embrace of thresholds & allocations represents a huge step in the right direction for the future of sustainability reporting that warrants applause. The path is now paved for sustainability reporting standard setters (see IMP member list below) to advance authentic, rigorous sustainability reporting in ways that reflect real-world impacts.’

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Many more things will be initiated by r3.0 in 2022, also thanks to a group of more activistic investor funders of r3.0’s work, all of those activities tackling ‘pure ESG’ to be insufficient, but always connected with the invitation to do what’s necessary, however also to be very clear in communications when greenwashing, greenwishing and even ‘greenphishing’ continues, like trying to find loopholes in the EU Taxonomy to sneak in gas or nuclear power and get it funded by investors that support ‘green investments’ as per the Taxonomy. 

Is there a chance to let both roads come together again in the future?

Of course there is! IMP sends positive signals! But is there enough willingness overall? Will rational thinking prevail over the delusion of ESG-based financial sustainability that continues to destroy our human-planet balance? The future will tell, and honestly, if you read the above, it’s not so hard to get there (just one step for each single person, but a huge step for humanity), but has enormous consequences when it succeeds. I am therefore ending 2021 with lots of hope that we will get there.

A Year End Message to all Lighthouse Keeper Readers

My nine editions of The Lighthouse Keeper (now moving from LI articles to the Newsletter format) showed a kaleidoscope of the ‘daily madness’ in ESG LaLaLand, political failures, but also a lot of suggestions on how to escape the madness and avoid failures. The reactions I get are a good representation of the spectrum of readers, from those that think I should tone down and only want to see my criticism as negativism, up to those that explicitly love the language clarity. It’s time we all take the quieter period to spend time with our loved ones and regain clarity what an enormous responsibility we have for future generations, simply because we can’t hide behind ‘I had no idea.’ With knowledge comes responsibility. And with responsibility comes a call to act accordingly. 

And if you haven’t done so, my book ‘The Corona Chronicles – Envisioning a New Normal for Regeneration and Thriving’ might be the one book you’ll like to read in this holiday season. Find it on many platforms or even better order it through your local bookstore. 

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See you all back in 2022! Enjoy the festive season!