The Big Sustainability Illusion – how a whole crowd of incrementalist ESG progress proponents wants to make us think they support “Sustainability”
Reform of corporate disclosure on sustainability is highly discussed at this moment; triggered by the illusion that stakeholder capitalism is the new horse to bet on (should that not have happened 20 years ago?), pledges made by several networks advocating for further convergence in the last couple of months added to a considerable additional ‘illusion of progress’: the idea that convergence around ESG (numerator data) would get us to more sustainability. Will IFRS develop mandatory sustainability disclosure? Will the new EU Taxonomy for Sustainable Finance influence new non-financial disclosure requirements through the update of the relevant Directive in the EU? Will selective sets of indicators, as the WEF and the Big 4 accounting firms propose, actually lead to stronger results in sustainability? Will Larry Fink’s revelations of seeing the light ever go beyond risk reduction tactics for the assets they hold, supported by ESG data (as that’s what SASB and the TCFD help with)?
At #r3dot0 we have looked at all of the proposals, and they leave us behind in devastation. None of them actually cover … you guessed it, sustainability! They all stay at an ESG Progress level, hardly properly contextualised, lacking necessary thresholds and allocations. The maximum we learn about is an organisation’s contribution to less degradation. And so we have yet to see the first real sustainability report on planet Earth, we have yet to see the first ever true sustainability ranking or rating, as the more than 1.000 products out there currently only tell us ‘who is best in class of those that say that they became less bad.’ And if the word threshold is now and then mentioned, it’s mainly not based on thermodynamic realities or ethical norms, but some sort of practical or political interpretation! As if we could negotiate a ‘deal’ with Gaia?!?
In r3.0’s experience convergence around ESG (numerator) data hasn’t worked for at least a decade. What has the Corporate Reporting Dialog [CRD] ever delivered within its many years of existence? What have the pledges for Stakeholder Capitalism of the WEF and the Conference Board (that also suggest to achieve more sustainability) resulted in, except from certain companies using their lawyers and intervening at the SEC to not report on their contribution? It will also never work in the future as the landscape and the vested interests are way too scattered. The only way to actually harmonise (and reach agreement on) is through the denominators, technically called thresholds & allocations, representing a connection to ‘real life’. Anything else is just a continuation of a blind flight. As John Elkington tends to say ‘it’s like flying an airplane into a mountain, while the captain tells the passengers that the cabin temperature is fine.’
Here’s just one striking example of this failure. This is wording from the EU TEG Report on the EU Sustainable Finance Taxonomy from 2019, showcasing the basic fake of the Taxonomy (related to wanting to address sustainability). On page 41 of r3.0’s Sustainable Finance Blueprint (https://www.r3-0.org/wp-content/uploads/2020/09/r3-0-Sustainable-Finance-Blueprint-Final.pdf) we quoted the TEG and commented:
‘We like to first point out one quote from the EU Taxonomy Report that is a posterchild of the problem of sustainability (context): the use of the term threshold in a non-scientific way, something that corrupts the complete intention of the ‘Sustainable Finance’ idea:
“To ensure the broadest usability of the Taxonomy possible, the TEG had to arbitrate between granularity and flexibility as well as between complexity and clarity. A very granular Taxonomy, which uses precise metrics and thresholds, is expected to provide clarity and to minimize the risk of greenwashing. Nevertheless, there is a risk that requirements that are too granular and stringent lower the willingness of stakeholders to take up the Taxonomy, due mainly to the costs to access the necessary data and adapting their internal processes. On the other hand, more flexibility in the definition of screening criteria may facilitate the use of the Taxonomy but increase significantly the risk of divergent interpretations and greenwashing. Another challenge regarding the definition of the screening criteria is setting the adequate level of thresholds. Setting too low or too high thresholds, which do not reflect best market practices, would undermine the Taxonomy’s ultimate goal of redirecting financial flows towards sustainable investments. Consequently, the selection of the Taxonomy’s thresholds has been carefully considered, based on existing standards and consultation processes with experts in the relevant sectors.”
This explanation makes it clear that the EU Technical Expert Group is approaching thresholds not as biophysical realities that must be abided in order to achieve sustainability in the real world, but rather as political variables open to negotiation amongst those with diverse positions of power. Therefore, it’s vital to understand that the term “thresholds” used throughout the document is not sustainability thresholds, but rather thresholds as defined to “reflect best market practices” with the “ultimate goal of redirecting financial flows towards sustainable investments.” Of course, this raises the question of just how those investments can possibly be “sustainable” if the thresholds used to measure them are divorced from biophysical reality?’
At r3.0 we started to make it a standard practice to scan all relevant documents for the terms “thresholds” and “allocations”. We either come up empty-handed or quickly discover the misuse of these terms in some wishy washy ways. And then we know enough. I am inviting all of you to use the same litmus test before you engage in yet another proliferation of white noise in the field.
How on Earth is it possible that the whole ESG, Rating & Ranking world, and the political (green) elite surrounding them, suffer from such a huge cognitive dissonance, while GRI was crystal clear since 2002 that sustainability context is the core principle to transparency around ‘true’ sustainability. As GRI co-founder Alan White said many years ago ‘Sustainability requires contextualization within thresholds. That’s what sustainability is all about.’ Yet, to this day, this part of the homework hasn’t been done. The answer to this stagnation and hibernation since 2002 is simply that our economic system strait jacket doesn’t allow for that transformation to happen, so better use all sorts of excuses than getting the job done. When we at r3.0 asked GRI when they planned to enforce their very own core principle (and we did it many times), we only heard ‘well, nobody’s asking for that’. And yes, if enforced, it would lead to painful revelations about how businesses managed to survive their un-sustainability so far.
How to cure this ongoing standard disease? End of 2020 the United Nations Research Institute for Social Development (UNRISD) and r3.0 announced a pilot testing of Sustainable Development Performance Indicators which UNRISD, developed with support from r3.0. The initiative invites enterprises to pilot a comprehensive set of Sustainable Development Performance Indicators that are unified by common reference to real-world thresholds that demarcate sustainability — and the transformations from business-as-usual necessary to respect the limits and demands for vital capital resources.
The Thresholds of Transformation project invites both For-Profit Enterprises (FPEs) and Social & Solidarity Economy Organizations & Enterprises (SSEOEs) to pilot this set of indicators, which measure not only incremental performance, but also performance in reference to external constraints. We believe that such reality-based measurements will enhance real-world business performance. We also believe that these next-generation indicators deliver on the deferred promise of the Sustainability Context Principle, and can finally offer a common sense approach to harmonisation. Want to pilot these pioneering indicators? Let me know asap as the train is just leaving the station.
P.S. More links and examples of the ESG Progress Scam can be found in the Sustainable Finance Blueprint (see link above). It also contains longer annexes that assess the non-sustainability of many other ESG Progress endeavours in quite some depth.
The article was updated on Feb. 11, after some encouraging first feedback from readers.
A second part was published here: https://www.linkedin.com/pulse/big-sustainability-illusion-how-limited-esg-progress-ralph-thurm/