From an era of change to a change of era - The role of ESG and Sustainability in times of rapid and brutal disruption

Edition 12 | March 2022 (Special Edition)

The sh*t hits the fan…

The Climate Crisis, Corona, now the #PutinWarAgainstUkraine. Why is it that we accelerate from one crisis to the next? Is it because they are all somehow connected? Yes, they are, would be my immediate response. Above and beyond these three crises I could add the Resource Crisis, the Biodiversity Crisis, and at the end of the spectrum the mother of all crises, the Human Extinction Crisis. I see them as the result of our collective failure to understand humanity’s role in all these crises, their interconnectedness and the fatal consequence of them for all of us on Spaceship Earth. We’re in the middle of the ‘chaordic zone’, in which the old economic system logic, and several layers deriving from that, create more and more turmoil, and the new order hasn’t arrived yet at scalable level, while glimpses of that exist already.

There are many motives for the antagonists to get us into these awkward situations, trying to divert the ‘We’ into ‘Them’ and ‘Us’. Personal enrichment and control over others, up to romantic and moralistic pipe dreams to re-instal old orders and develop cast-in-stone dependencies are just some of them. Since I wrote ‘The Corona Chronicles - Envisioning a New Normal for Regeneration and Thriving’ in 2020/2021 and wrote about basic ingredients of a regenerative and distributive economy as the New Normal, the crude incentives and basic patterns of the current (neoliberal) economic doctrine became more and more clear. What we see is the result of a truly colonial, racist, masculine, opportunistic and nationalistic system that is dependent from and working towards perpetual growth and debt, privatization of ownership, and using philanthropy as palliative care for those in dire need, which is honestly just a drop on a hot stone, but it feels good. But in short, it leads to deadly procrastination, nothing less! All these crises are just symptoms of this economic system logic.

We suddenly realize that due to the spineless doctrine that puts the individual gain above all else we are strait-jacketed and hand-cuffed at the same time. The antagonists refer to the half-truth of the ‘invisible hand’ by Adam Smith as reasoning for greedy behaviour and thereby having created deep dependencies from dictators, oligarchs and global business leaders (the famous 1%). We simply continue to buy their stuff, no matter how much rain forest is burnt down; drilling has poisoned our rivers, seas and land; labour and human rights abuses; we feel good by having created global supply chains as mechanisms for continued opportunistic behaviour and feeding our constant hunger for stuff, and masked it by calling it ‘creating shared value’ or ‘sustainable supply chains.’ Adam Smith had of course assumed a solidarity-based value system as the ground rule for individual acting of the invisible hand, but that part is seldomly cited. Our neoliberal system is simply an exploitation mechanism for the benefit of a few, with unseen consequences. Globalization is the goddess to which we all preach, with no limits, while the system we operate in, Gaia, tells us for long and with endless patience that enough is enough. Unfortunately, we give in to the ‘Don’t Look Up’ culture, referring to the film that came out last year that was trying to open our eyes through exaggeration and satire. Was it such an exaggeration?

…when will the ‘shift’ also hit the fan?

A regenerative & distributive economy wouldn’t be dependent on the hyper-globalization that the current system fooled us into for the sake of ever-cheaper mass production in many countries. The regenerative & distributive economy would mainly be much more local, much more driven by feminine patterns of stewardship, rightsholdership, fairness and equity, with a view on the potential of the individual to thrive with others in a certain bioregion, the only basic unit of measurement that makes sense from a sustainability perspective, as duties and obligations of the players involved would be guiding, overseeable and directly felt. Indigenous wisdom would recover from decades of obstruction. Subsistence would be leading; quantitative growth would be limited to the carrying capacities and allowed allocations of the bioregion and translated for all players. Of course, there would be exchange between bioregions that are closest to each other, and potentially beyond if needed, but the governance, financial processes and decision-making processes would not be based on power or pure financial impact, but on the generic need of a decided upon level of qualitative growth in which bioregions comfort each other in ways that the single bioregions couldn’t achieve, but always within the thresholds and allocations that set the limits and demand frame. A new economic theory based on thresholds and allocations would arise, sustainability context and multicapitalism would allow to look at the totality of contributions made to ‘system value creation’, the measurement mechanics of success. Peace and wellbeing for all is the ultimate supra level aim, with Plato’s ‘The one can only be well unless the whole is well’ as the guiding principle. Or said differently: one alone can never be well! The economic, ecological and social systems would translate the supra level principle(s) into a macro level, they are the guard rails for such balances. The cooperative business model of Social and Solidarity Economy Organisations would be the most prevailing form of collective work. Bringing back meaning to the work of the individual would stop bullshit jobs (as the late David Graeber described it), simply because the fruit of labour would mostly be visible in the same community of the bioregion people live in. We would overcome the ‘illusion of separation’. We would understand the ‘Return on Interbeing.’ Is all of that just a naiveté? 

When the era of change becomes a change of era

Unfortunately, we humans seem to react only when there’s no other choice. The pace in which Corona vaccines were developed and various rounds of vaccination campaigns were set up, the pace in which the sanctions against Russia were taken, the pace that Europe is ready to take millions of refugees, the pace and breadth in which logistics for humanitarian help for Ukraine was built up in a wave of compassion und helpfulness, speak one language: 

Yes, we can! All of our crises can be solved, the only real shortage we have is collective will above all egoism!

If we ever saw the climate crises, the resource and biodiversity crisis the same way, what would we humans be able to do? It all seems possible if we were to ‘look up’ now. One can only hope the last IPCC assessment report creates that urgency, especially as the Ukraine war now could potentially delay further environmental progress due to longer use of coal and nuclear, especially when Russian gas is ebbing as a consequence of the sanctions. As the IPCC said:

'The assessment report is the sixth since the IPCC was first convened by the UN in 1988, and may be the last to be published while there is still some chance of avoiding the worst.'

This is the year to pull it all together, to start the systemic switch from Old to New Normal, from an exploitative economy to an ‘existential economy’, to use a term coined by Kees Klomp. Or as Thomas Friedman said in his book ‘Thank you for being late’: we need to change from ‘the necessary is impossible’ to ‘the impossible is necessary.’ 

Is ESG Fit for Purpose to get us to the new Normal?

Sustainability was supposed to help us explore the New Normal. It was designed to change our existing economic system paradigm, due to the reasons I summarised above. Readers of this newsletter know by now that one of the most important aims of my writing is to exemplify the shortcomings of ‘pure ESG’ as an ‘illusionary shortcut’ to sustainability. You have heard my plea that just ESG alone is more part of the problem than part of the solution. ESG by definition doesn’t lead to sustainability, it is ‘whimsical’ relativism, with many awkward manifestations on a regular basis. But didn’t we start decades ago to reach at least sustainability, or even better regeneration? So no, ESG won’t get us to the New Normal. Let’s again be clear about the obvious blind spots of ESG:

• ESG is just delivering performance information about topics that are deemed to have an impact on sustainability. They compare information to earlier information or industry averages.
• Any use of that information for strategy setting, investment decisions and benchmarks can per definition just lead to ‘less degeneration’, it can’t claim it has anything to do with sustainability.
• Progress in ESG is mainly to do ‘less bad’, and benchmarks or ratings can only say who is best in class of those that became less bad. But as there are too many black box approaches, even that becomes random. Again, this says nothing about sustainability.

And still ESG performance information is necessary, as it delivers numerator information that needs to be put in context with the allocations of allowed resource use, and these are defined by the thresholds of still available resources, on the denominator side. Any performance that goes above (for environmental indicators) or below (for social indicators), the respective allocation is unsustainable. ESG information is necessary, but not sufficient to make sustainability claims.

Nearly all so-called sustainability information ignores this very basic logic. It was fed by the idea that those data weren’t available, but that claim can’t be held up any longer. That’s why IMP calls for thresholds and allocations as an authoritative basis of a majority of standard setters, why r3.0 and UNRISD worked and will soon release the first ever set of thresholds and allocations-based Sustainability Performance Indicators. There is no reason for international standards setting organizations like EFRAG or GRI, working on the EU CSRD, or the ISSB as a part of the IFRS, or any other standards setter or rating agency in the field, to ignore this homework done for them. No corporation, no policy setter, no stock exchange needs to wait longer to include this simple logic in their requirements. That’s also why r3.0 started its ‘Transcending Incrementalism’ Campaign and sees a high level of interest. 

Let’s sum this up: ESG by now is simply performance measurement towards less degeneration. By adding thresholds and allocation information it can have a true sustainability gene. It just needs this one simple step.

What does the Ukrainian War tell us about ESG?

This month has been full of articles (see Bloomberg here and here, the Financial Times here and here, LA Times here) and essays about the role of ESG in the war situation we face right now. Can we blame ESG for its continued failure in the light of decisions made in the past? I think this discussion misses the point: ESG was never made to do the things it is now accused for, and that adds to the shortcomings mentioned above:

• ESG was always blind to transformative politics. It’s not able to change the existing economic system logic. It was built to create comfort in the existing economic system logic. The fact that there can’t be a sustainable organization in an unsustainable economic system design was always ignored, at least for the last 20 years.
• ESG is totally helpless in the light of decisions already made. Their cemented facts in globalized supply chains can’t change anything, just a bit of tinkering around the edges. In its degenerative form ESG has often been instrumentalized to defend a bit of palliative care. That’s it. Or how else can we explain that there are no successes on scale?
• ESG can’t support risk management that is only based on outside-in risk, while ignoring inside-out risk. How have corporations become conspirators of the Putin regime through looking away and putting trade over ethics? ESG information gathering doesn’t use backcasting from an ideal and therefore can’t imagine the unknown (as we don’t know what we don’t know).
• ESG doesn’t make radical transformative claims as it doesn’t have an expected end goal in sight, it’s a literally a blind flight. Would any oil company stop drilling because of ESG? We all know the answer. Therefore, ESG plays no role in smoothening or solving war-like situations as it doesn’t do (or know) what’s ‘necessary.’
• ESG has no ‘ethic’ apart from aiming at less degeneration. It’s only now that we see first attempts to create Chief Value Officer or Chief Integrity Officer functions aside or integrated with sustainability strategies. In consequence ESG has nothing to offer to create ‘a reputation.’

What can sustainability and regeneration do to prevent war in the future?

I’ve always seen sustainability and regeneration for thriving as a peace program. Let us imagine what we can learn from the Ukrainian war to then seek a longer-term peace agenda.

Let’s start with one positive effect of the war in Ukraine, as it may have a longer-term impact, while of course current activities of Russians on the ground in Ukraine are beyond words to describe. I believe this war creates a chance for us all:

This war in Ukraine isn’t just about Ukraine, it’s questioned right to exist in the light of past romantic Russian hegemonial territory claims or just about oil and gas dependencies. It’s true core is the challenge that I often described in the ‘chaordic zone’, namely the question who do we want to be in a New Normal, a regenerative and distributive economy? Are we now forced enough to finally start to understand the ingredients, while the existing structures, ideologies and institutions can’t solve the underlying elephant in the glasshouse: how to come into balance with Gaia again (technically speaking of intra-and intergenerational equity), and not bursting the limits, overshooting environmental ceilings and undershooting social floors. What’s the human ethic that globally governs a regenerative & distributive economy and which institutions would represent that (the value system in Adam Smith’s preconditioned invisible hand paradigm)? This war helps to push us right at it, and it does already.

In a world of violence and fanaticism - and it makes no difference whether fanaticism has its cradle in a mosque or in the Kremlin - the longing for measure and balance is growing again. Society gathers at its center. Populism is withering! In the face of external danger, the bourgeoisie, the business community and the political elite moved closer together again. Values such as freedom of speech, equality before the law, or the rule of law are again understood as the core of our identity. This core is no longer a result of the ashes of our ancestors, but is the ember of our current lives, the west is literally warming up again due to the fire in our hearts! Putin's iron fist is being heated, deformed and possibly melted down in the foreseeable future by the pro-democracy movements in both countries, Russia and Belarus. Just as in Hungaria, the Prague Spring and Poland’s Solidarnosc provided the spark for the later implosion of the Soviet Union.

This European war is likely to fundamentally change our understanding of the economy. The idea of free trade taught in economics seminars, which allows goods and services to find each other by magic in the global game of supply and demand, is no longer the fixed star of our conviction. Thresholds and allocations will become the new supply and demand, simply because they must. Globalization has lost its innocence in times of the climate catastrophe and war. Laissez-faire doesn’t create prosperity in the long run, it has strengthened those political forces that want to get rid of freedom. Without the billions in gas that we have transferred to Russia, Putin could not be the Tsar he thinks he is. Without the cheap Chinese offensive that turned parts of the world into a subsidiary of China's export industry at a huge environmental and social expense, the Chinese Communist Party would have remained a sect and would not have shot up to become a major geopolitical power. This war offers a look into the mirror for us in the Western world and asks us to take necessary consequences. This year might be seen as the tipping point in future history books. We don’t accept betrayal of our values any longer, we don’t accept to be blackmailed, we don’t accept exploitation of workers and decline of nature any longer. The market logic can continue, but not for environmental sinners and aggressors of all kinds.

This in my mind is the seed bed in which the idea of a regenerative & distributive economy can explode, with the ingredients as described above, and it must, or does anyone of you see a different viable option without huge collateral damage globally? The IPCC claim is explicit and couldn’t be any clearer. We all need to make binary choices and decide which side of history we want to be on. Let’s all make this a change of era and let the shift hit the fan!

Feel free to join us at the 9th r3.0 International Conference on 6/7 September 2022 (hybrid - in-person in Amsterdam and livestream), the agenda covers a lot of what's discussed here and will be a crucial moment, as we're also celebrating r3.0's 10th anniversary. It's free!