Here we go again
A hopeful return to action before everyone says, well, you know...
An insightful post by Daniel Aronson caught my eye on LinkedIn this week. In it, he writes about Kanter’s Law, which states that “in the middle, everything looks like a failure."
For those of us working in ESG, sustainability, and DEI, many days feel like a failure as we are in the middle of the transition of companies and governments around these topics. Across the increase in attention to ESG issues from 2020 and COVID to last year’s rollback of social justice protections from SCOTUS to Attorney General pushback on ESG through to the resulting greenhushing and asset manager pullback through to the march of company and country climate commitments and UN SDGs to 2030, we are in the thick of a transition.
Phew, I’m exhausted just thinking about all of this.
However, those who ignore ESG often repeat the verbal manifestation of Kanter’s Law: “Here we go again.”
Yet, we have the tools to plan for and weather the storms. To get there, we must move past disclosures and compliance and return to action. This trend appears to be taking shape, but beware not to miss the window!
Progress waxes and wanes
A few weeks ago, I wrote The Plagues of an ESG Career about the feedback regarding the progression of ESG-related jobs into Environmental accounting. Progress has given way to disclosures, but there is a reason to be hopeful. Let’s look at the high-level stages of the work cycle to understand the challenge.
Meaningful work → The Great Disclosening → Greenhushing → ESG Integration
First, those working in ESG, sustainability, and DEI for more than ten years have shared that there was a time when they were engaged in meaningful and valuable corporate work. It wasn’t always personally lucrative from a salary perspective, but they found meaning in the values and the business value.
Over the past few years, pressure for comparable ESG data from the financial markets has moved regulators and created "The Great Disclosening.” To meet growing regulatory needs, companies pivoted their ESG leaders hard to gather metrics and report out. While you can’t manage what you can’t measure, you can’t manage if all you’re doing is measuring.
Next, the anti-ESG pushback in the US has created a stage that is unfortunately worth noting due to its stickiness over the past year. As companies disclose, work is giving way to a shift towards greenhushing. This is where ESG teams continue the work but don’t discuss it and report what they need to. Yet, we know that progression on ESG topics requires internal teams to be open with each other and even extends to industry collaborations.
Ideally, companies will eventually return to meaningful work and arrive at a stage where they advance it further by return integrating ESG across the company as an additive perspective alongside operational and financial information. This summit is indeed a challenge to reach for many, but the tide may be turning.
Is ESG Integration around the corner?
The progression of these stages (note: nothing in business is ever this linear) has made me question everything from my career pivot to my upcoming ESG book. Still, a new hope popped up on February 29th that maybe progress in ESG integration is on the horizon.
A Financial Times article titled Companies pull back on sustainability advice as demand shifts points to a return to company progress. The article centers around a study (which I could not locate and is likely gated) from Source Global Research. According to the FT, the report identifies a slowdown in the growth of sustainability consulting spending, including the investment moving into other material areas, which could be interpreted as a growing maturity for corporate sustainability and a return to meaningful work.
That might be an overly optimistic take, but I’m willing to add some optimism and agree.
In the article, Tamzen Isacsson, chief executive of the Management Consultancies Association, stated this:
We’re now entering the difficult stage of sustainability [consulting], which is about managing business change and really pushing it through companies.
In other words, sustainability consultancies are moving from disclosures to progress.
Observationally, this makes sense as companies are automating and streamlining their efforts to record and report their environmental metrics with tooling, not just manually gathering it annually. Once those systems are in place, compliance and reporting can shift to another function, and the various ESG offices can focus elsewhere.
As companies mature on these topics, this leads to transitional business change, which is problematic. For those ESG professionals who jumped ship from the corporate world due to the shift to environmental accounting, it may be time to return to champion these projects (but I know you’re all having too much fun).
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However, a few forces will conspire against the shift from disclosures to progress in the near term, perpetuating what feels like failure while we drown in numbers.
First, we have the climate rule that the SEC is dropping on March 6th. While this likely will align well with a minimum overlap of what is required for CSRD, it will garner attention to environmental metric accounting. At the same time, companies will assess and plan around it (again).
Second, the ISSB frameworks must be developed and implemented jurisdiction by jurisdiction, meaning we’ll likely see emerging regulations at various country levels for the foreseeable future.
In other words, here we go again with disclosures. Still, that’s not all.
The Wall Street Journal, like many and as always, seems confused about ESG. In an article over the weekend, Step Aside, ESG. BlackRock Is Doing ‘Transition Investing’ Now, you can read how CEO Larry Fink and BlackRock, who famously spun everyone up and then back down around ESG, are working to shift the firm to decarbonization around the infrastructure transition—in other words, materially moving away from fossil fuels.
Make no mistake. This is an ESG and Impact Investing opportunity. It’s also a point for those keeping score around TCFD.
The article contains a bizarre quote from Terrence Keeley, who ran BlackRock’s official institutions group until 2022. He contradicts himself or shows that he doesn’t understand ESG, which seems to be a theme for ex-BlackRock employees.
BlackRock is logically prioritizing decarbonization because it is a win-win-win. Good for the environment, good for investors and good for BlackRock shareholders.
While this description is inspiring, there are always trade-offs and externalities, which👏is 👏why 👏ESG 👏matters. For those of you familiar with the meteoric rise of ESG from 2018-2020, you’ll remember the false alignment of a win-win. So, here we go again (again).
Still, Keeley also states that ESG is "unquestionably in a death spiral.” Not entirely, as what BlackRock is doing is still ESG; they are just choosing not to call it that. No one seems to, but if you observe trends and listen to the words of company and industry leaders, ESG is very much still a thing.
The pullback rhetoric around ESG is another trend that will slow progress on action and needs to stop. It’s as if the WSJ is leading the campaign to correct the over-ambitious messaging of the financial markets that put ESG in the confusing position it’s in today.
Warren Buffet’s secret to understanding risk: ESG
So, don’t pay attention to media outlets pushing against ESG; instead, look to companies and their leaders. In the spirit of articles calling out Warren Buffett’s folksy brilliance and how his observations can apply to you, this week, we have an example of ESG risk from Warren Buffett, even though he famously does not like the acronym and, like BlackRock, doesn’t use it.
NOTE: Admittedly, he dislikes cumbersome ESG reporting, which differs from ESG risk.
If Larry Fink’s CEO letters were a wake-up call to the corporate world, the notes in Buffett’s Annual Letter and Berkshire Hathaway’s 10-K should be a smack in the face because he writes about ESG risk in practice, and it’s a doozy.
Wildfires are mounting liabilities for Berkshire Hathaway’s utility companies (FT). None of this should be a surprise if you’ve paid attention to PG&E’s woes over the past few years ($1.9B fine + others), which don’t include the cost of new mitigation efforts (estimated at $18B through 2025). The Hawaiian Electric Company faces a similar challenge after the horrific Maui wildfires last year and is consulting with PG&E on its mitigation efforts.
Wildfires are becoming an increasingly tricky risk to manage and can impact a company’s operations. The risk is different for utility providers, as power lines can cause wildfire risks. “More than 32,000 wildfires were ignited by transmission and distribution lines in the U.S. from 1992 to 2020, according to U.S. Forest Service data” (CNBC).
Transition risk
In its 2022 and 2023 Annual Report, Berkshire Hathaway has pretty standard boilerplate language around broad climate risk but does acknowledge transition risk indirectly:
Additional GHG policies, including legislation, may emerge that accelerate the transition to a lower-GHG emitting economy and could, in turn, increase costs for our businesses to comply with those policies, including BNSF and BHE, which combined represent more than 90% of Berkshire’s direct emissions. The failure to comply with new or existing regulations or reinterpretation of existing regulations relating to climate change could have a significant adverse effect on our financial results.
It is unclear whether or not something is being done other than identifying the risk. Still, for those scoring at home, that is another point for TCFD.
Climate risk
The mentions of wildfires jumped from four in 2022 to twenty-seven in 2023. This particular climate risk appears throughout, but its risk is focused only on the utility sector.
According to the FT article, Buffett’s mention of this risk and its effect on profitability and possible bankruptcy of utilities was big enough that it caught senior leaders off guard. What’s odd is this statement in the letter:
But the regulatory climate in a few states has raised the specter of zero profitability or even bankruptcy (an actual outcome at California’s largest utility and a current threat in Hawaii). In such jurisdictions, it is difficult to project both earnings and asset values in what was once regarded as among the most stable industries in America.
Let’s be clear. It isn’t the regulatory pressures raising the specter of these risks but climate change pressuring governments to regulate utilities to protect citizens and their property. The government manages the utility company’s externalities because the utility isn’t.
Buffett goes on to admit the costs of managing this externality are high right here:
Underground transmission may be required but who, a few decades ago, wanted to pay the staggering costs for such construction?
A stunning conclusion follows this statement.
When the dust settles, America’s power needs and the consequent capital expenditure will be staggering. I did not anticipate or even consider the adverse developments in regulatory returns and, along with Berkshire’s two partners at BHE, I made a costly mistake in not doing so.
Alright, so follow the ESG thread:
A few decades ago, wildfires caused by power lines were not commonplace.
Underground lines were an option, but the risk wasn’t high enough to invest.
Utilities didn’t update their infrastructure over time, but as the weather changed, the risk grew.
A late transition risk means a higher cost for the company, which may be insurmountable.
This last point is Buffett's ESG lesson. If you don’t consider long-term ESG risks, you’ll likely face them in a short-term crisis. Hmm…the infrastructure investment needed here sounds like the strategy that BlackRock is developing, doesn’t it?
Company leaders: take note!
You don’t need a letter from an investor or listen to a transient group of politicians to mitigate your risk and do the actual work. Stop looking for direct messaging around ESG or what others care about. Learn your business, understand your risks across ESG, operations, and financials, and then get to work.
If you don’t, these risks will pile up, and you’ll hear a common refrain at every meeting: “Here we go again!”