Davos and the 'Polycrisis'

The snow arrived in Davos just before the rich and powerful participants for the annual meeting of the World Economic Forum (WEF). The word of the event is 'polycrisis,' referring to the multiple, simultaneous global emergencies: recession, inflation, the war in Ukraine, climate change and more.

Reinforced by the barely snow-touched streets of Davos itself, climate emerged as a top issue. Frustrated with a lack of progress on climate disclosures, U.N. Secretary-General Antonio Guterres used his stage time to call on business leaders to make credible, accountable net-zero pledges. By credible he meant using the new UN guidelines adopted in November.

The only G7 leader present at WEF is German Chancellor Olaf Scholz - so don’t expect any international breakthroughs. U.S. Envoy John Kerry kept climate on the top of the international agenda, observing that thawing U.S.-China tensions could make a huge difference to the climate fight. 

Climate activist Greta Thunberg, arrested in a coal mine protest in Germany earlier in the week, was freed in time to meet International Energy Agency (IEA) executive director Fatih Birol in Davos (the IEA, makes policy recommendations on global energy). Thunberg said: "As long as [energy companies] can get away with it they will continue to invest in fossil fuels, they will continue to throw people under the bus." 

Climate Arsonists

Backing Thunberg’s point, a paper by Geoffrey Supran showed that Exxon knew about the mounting threat of climate change as early as the 1970s despite lobbying against climate action and seeding doubt about climate science.  

Similarly, a new report showed the finance institutions in Glasgow Financial Alliance for Net Zero (GFANZ) that have signed up to net zero pledges are still investing heavily in fossil fuels. Some have even labeled them as acting as “climate arsonists.” The report by Reclaim Finance found that few of the GFANZ members have investment policies barring new fossil fuel projects.

In fairness, the GFANZ is still very new and its members are working out the processes to achieve their goals. This week a GFANZ subgroup - the Net-Zero Insurance Alliance - Introduced its Target-Setting Protocol to Accelerate Transition to Net-Zero Economy with the UN.

Business Now The Most Trusted

Diametrically opposite of these criticisms, PR giant Edelman released its annual “trust barometer” under the headline that business is now the only global institution to be both competent and ethical. 

For years, Edelman has taken fire over anointing itself as an arbiter of trust as it promotes its brand and pursues clients with sketchy trust profiles such as ExxonMobil, the Saudi government and members of the Sackler family (former owners of the opioid manufacturer Purdue Pharma).

Nonetheless, the survey showed that business now holds a “staggering 53-point lead over government in competence and is 30 points ahead on ethics. Its treatment of workers during the pandemic and return to work, along with the swift and decisive action of over 1,000 businesses to exit Russia after its invasion of Ukraine helped fuel a 20-point jump on ethics over the past three years. Business remains the most and only trusted institution globally.”

CEO Richard Edelman commented - "The increased perception of business as ethical brings with it higher than ever expectations of CEOs to be a leading voice on societal issues…respondents want more societal involvement by business on issues such as climate change, economic inequality, and workforce reskilling. But business…[must] avoid being politicized when it addresses contentious societal issues."

A Deloitte study released this week backed this conclusion - reporting that 97% of high-level executives at large companies around the world expect climate change to impact their organizations’ strategy and operations over the next three years. Climate change ranked second in the survey’s list of top 3 most pressing issues behind economic outlook and ahead of supply chain and competition for talent.

Deloitte Global CEO Joe Ucuzoglu said: “If there was any doubt that climate change is an enduring part of the business agenda, the increased focus on sustainability by leaders over the past year should put it to rest. In a year of continued uncertainty, disruption, and competing business challenges, leaders ranked climate change as a top issue.”

The Backlash is Hype  

BlackRock CEO Larry Fink minimized the political backlash facing the firm over climate and ESG issues by pointing out that ESG-related cash inflows were 100 times larger than outflows.  

In an interview from Davos, Fink said: “We lost about $4 billion of flows from various states, but in long-term flows last year we were awarded $400 billion. So you tell me.”

Sustainability Defined 

The International Sustainability Standards Board (ISSB) released their definition of “Sustainability” as “the ability for a company to sustainably maintain resources and relationships with and manage its dependencies and impacts within its whole business ecosystem over the short, medium, and long term.”

The Board clarified that “a company’s ability to deliver value for its investors is inextricably linked to the stakeholders it works with and serves, the society it operates in, and the natural resources it draws on.”

The intention of these statements is to help companies use the new ISSB sustainability reporting standard (IFRS S1) to determine the material ESG issues to report. 

Meanwhile, the head of the International Financial Reporting Standards Foundation (IFRS) - Erkki Liikanen - confirmed that the new ISSB standards will be finalized by June. 

Scope 3 Included in ISSB Standards 

While I don’t often quote myself here, this week I had the privilege of being interviewed on ISSB’s progress by Emmy Hawker of ESG Investor. The thrust of the article is ISSB’s recent decision to include “scope 3” - that is, the ESG impacts that occur in the value chain (the supply chain and/or products) of a reporting company.  

I took a stand on this one: “The purpose of the IFRS Foundation, and by extension the ISSB, is to provide financially relevant, reliable, consistent, and comparable information to investors. By now adopting Scope 3 across the board, the ISSB could be straying from its core purpose,” 

ISSB has a massive workload to stand up credible international ESG standards without venturing into areas that many of their constituents may not support nor be capable of achieving. This move will dilute its resources and may lead to a backlash.

Backing this position are the standards from the Sustainability Accounting Standards Board (SASB) - which were acquired by the ISSB. SASB standards are based on financial materiality as determined by investors and companies. Notably, very few of the SASB standards include scope 3 impacts.  

This is not to say scope 3 is not important - it is often the biggest portion of a company’s carbon footprint and other impacts. The point is that ISSB must focus on its core mission of providing investor-grade information and leave the rest to voluntary disclosure standards and/or regulation.  

Nukes Now!

Hollywood director Oliver Stone is screening his new film “Nuclear Now!” at Davos. The movie mogul who produced hits like “Platoon” and “Wall Street” is making a controversial pitch that nuclear power is the key to solving the climate crisis and has an unfair reputation from disasters (think Chernobyl and Fukushima). The Davos crowd appeared eager to listen to this message as the screening was standing room only.

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