The path to sustainability runs through miles of clouded disclosures
It's time to begin, isn't it?
This year, the theme for NYC Climate Week was "It's Time." There was energy around the overcast and rainy city streets and excitement and skepticism around new topics like AI and sustainability. Still, there were too many discussions around double materiality assessments, data collecting, and reporting.
There are no mentions of data or disclosures in the keynote speech from Climate Group CEO Helen Clarkson. She talked about how it is time for action and, from a financial perspective, that it has been a long time since the Global North paid its fair share.
It’s Time to think about the crucial decisions and action we need to start taking right now.
Say it louder for the people in the back!
Yet, when I sat down for lunch on Tuesday at an event, the conversation quickly turned to global regulations, standards, and disclosures. After chatting with an EU banker later in the day, I was reminded of how banks pick projects to finance and companies to invest in: returns.
Something isn’t right. We need finance to fund action, and there is a belief that comparable data is the path to accessing that finance, but is it?
Reflecting past the inspiring speech to the surrounding news and content around Climate Week, it seems like “It’s Time” really means, “It’s Time to figure out how to report more accurate data, learn about interoperable standards, and communicate point-in-time metrics that occurred in the past to shareholders.”
Out of focus
I encourage you to remember, re-read, and re-listen to some of the content you’ve seen around Climate Week. If you look past the fantastic companies engaged directly in climate work, like those doing carbon removal verifications or EV charging infrastructures, each conversation with corporates, even if impact, progress, or capital flows are mentioned, always comes back to one thing: the disclosures.
Take the press release from IFAC, IFRS, and IOSCO around a Climate Week event called Accelerating Climate and Sustainability-Related Disclosures: A Global Perspective. Even the title shows the problem. If Climate Week’s theme is “It’s Time,” why wouldn’t this event be called Accelerating Climate and Sustainability-Related Progress from Disclosures?
The only progress mentioned in the press release concerns standards adoption, sustainability disclosures, and assurance.
Before jumping to disagree with me that everyone knows this is the point of the disclosures, that isn’t what I see in practice. After all, we don’t talk about disclosures and standards regarding outcomes. We talk about how difficult they are, what jurisdiction is enacting new laws, and how best to get the data.
While these are all critical questions, we have taken our collective eyes off the prize, and the outcomes are lost in translation. In the assumption that every company understands why we are disclosing (they don’t), we are losing the intention of the disclosures altogether to celebrate the progress of the disclosures themselves.
For a while now, paragraphs like this would be followed by something from me like: “Look, I get it. We need comparable data to drive capital responsibly and create long-term market resilience and stability. Companies need to transparently inform the markets of what they are doing.”
I’m not sure that pragmatic excuse is warranted anymore.
Do financial players need this data to act, engage, or fund work? They certainly don’t seem to be paying attention to the obvious.
Recently, Bloomberg called out how Norfolk Southern CEO Alan Shaw was fired by the board, not in their recognition of leadership accountability for the East Palestine, Ohio train crash, but for an inappropriate relationship with a subordinate. Similarly, Dave Calhoun, former CEO of Boeing, was allowed to coast into retirement rather than be held accountable for Boeing’s disastrous record under his leadership, which the effects continue today.
Would disclosures have helped point out the obvious Governance issues here? Didn’t we already know what was happening in both cases at the leadership level already?
Similarly, do the markets need to indiscriminately understand carbon emissions to funnel capital where we need it to make the most impact? In Clarkson’s keynote speech, she calls out the obvious:
This is the fight of our lives. It’s an enormous challenge that involves undoing decades of influence, lobbying and systems that have benefited the fossil fuel industry for far too long. It’s about fundamentally re-engineering an economy of the past to build a better future that benefits us all.
Do disclosures get us to that future responsibly?
Seriously, the rhetoric about the latest regulations or how great it is that standards are consolidating has to stop. Sustainability offices are undoubtedly interested in hearing what standards bodies and regulators are up to, but that recognition is evidence of the problem. What we’re asking sustainability offices to do is not what they should be doing. Let Controllers take over efforts to disclose their data collection and reporting rigor and move the standards bodies and regulators to compliance-related conferences.
Moving companies and pushing metrics
The value of the disclosures and regulations is starting to be questioned, which means trouble might be on the horizon.
Bloomberg published a piece in September titled An ESG Backlash Erupts in Europe on World's Strictest Rules. The article posits that the EU’s “reputation as the ultimate Hydra of bureaucracies” has become too costly and complex. It also compares the US legislation to make $3.3T of incentives available as a carrot to the EU’s regulatory stick.
In one way, CSRD seems to have unintended positive consequences.
European energy firms broadly trade at a 40% discount to their US peers.
On the other hand, the article points out that companies are considering moving investments, and possibly the company, outside the EU. If you’ve been reading up on the new Texas Stock Exchange, it could be an interesting (and I’m sure) low-disclosure landing zone for these stocks if they choose to move and correct that discount.
Meanwhile, out of its 27 member states, 17 have not adopted CSRD for various reasons, including overburdening SMEs, exclusions for specific industries, complexity of adoption, or even simple legislative delays. As a reminder, each country must adopt CSRD into its national law.
The EU Commission is putting those member states on notice. There are two things worth calling out in its note about what CSRD is all about:
This helps investors and other stakeholders to evaluate the sustainability performance of companies.
In the absence of transposition of these new rules it will not be possible to achieve the necessary level of harmonisation of sustainability reporting in the EU and investors will not be in a position to take into account the sustainability performance of companies when making investment decisions.
As always, the disclosures are for the financial markets, and the wording the EU Commission uses here is consistent.
So, if the disclosures are for the financial markets, there must be little market progress while we wait for the first rounds of CSRD reporting.
Of course, that’s not what is happening.
Paul Polman, former CEO of Unilever, recently wrote an op-ed in Barron’s that showed how responsible investing is still growing.
Morgan Stanley data shows that, in 2023, sustainable funds continued to outperform their peers. The market grew 15% last year, reaching a high of $3.4 trillion. Over 50% of investors plan to boost sustainable investments in 2024, and when asked if they are interested in this as an investment strategy, 77% give a resounding yes.
He calls out that most sustainable funds (90%) are in the EU, where we haven’t seen CSRD reports yet. Polman also balances out the US Inflation Reduction Act’s advantages on clean energy investments and jobs.
Green regulation plays an important role in giving companies and investors the certainty and guidance they need. They are getting it from the U.S. Inflation Reduction Act, which helped unlock a record-shattering $303.3 billion in clean energy investments last year and has created over 300,000 new jobs, including in red states and disadvantaged communities. Historic investment in clean and affordable energy through the IRA is projected to create more than 9 million new jobs by 2030.
This type of direction is driving action. And again, over half of EU member states haven’t adopted CSRD yet, and the first round of companies won’t report until 2025. Are financial services firms moving ahead of the EU regulation, or is CSRD data unnecessary?
Yep, I just wrote that.
A University of Cambridge whitepaper called Survival of the Fittest: From ESG to Competitive Sustainability has been making the rounds. There is a section titled Understanding where ESG went wrong, but that entire section is about where ESG disclosures (and the regulators) went wrong.
It was believed that disclosure, reporting and good governance across environmental and social performance, along with company targets for this performance, would drive change…in spite of all of this action and rhetoric, capital is not yet moving at scale out of damaging activities.
No, disclosures are not moving the world’s companies fast enough. Companies need transparency around material information, but disclosures are not the path forward when we know the most significant problems. Data can be used to inform action, but disclosures are largely useless and shouldn’t be the focus of sustainability offices over action.
Eventually, investors will figure out the value of the disclosures against actions the company is taking. When they do, it might just create the seismic shift we need.
A misquote creates a misfire
I know you’ve heard the axiom that launched a thousand ESG regulations, “You can’t manage what you can’t measure.” Sure, that seems logical, but let’s dispel some myths, starting with how management expert Peter Drucker never said it. The other guy to whom this quote is attributed, Dr. W. Edwards Deming, actually said something quite the opposite, but only the middle of his quote survived.
It is wrong to suppose that if you can’t measure it, you can’t manage it – a costly myth.
Deming put the issue of running a company by only knowable metrics as one of the “Seven Deadly Diseases of Western Management.” Companies cannot run only by dealing with what they know; they must think about what is unknown.
How does a disclosure capture the unknown exactly?
Data is essential to inform decisions, but it isn’t a panacea, and companies need material ESG data to drive meaningful progress inside the company and out. Data not related to disclosures, when paired with an incentive program, can make a big material difference while driving impact, even when facing the unknown.
For example, on October 3rd, EVgo announced “that it has received a conditional commitment for a loan guarantee of up to $1.05B of debt financing, from the U.S. Department of Energy (“DOE”) Loan Programs Office (“LPO”) under its Title 17 program to accelerate the expansion of its fast charging network in community locations across the U.S.”
The DOE’s LPO does rigorous due diligence during the loan application process that includes various data related to the project at hand, but not disclosure-type data, with the exception of one thing—significant and credible GHG emissions reduction. This is precisely where Title 17 of the Inflation Reduction Act differs from a simple disclosure mechanism.
This news is a lot to unpack at the end of an article, so stay with me, yet this is a billion dollars given to a publicly traded company to invest in charging infrastructure. Yet, in EVgo’s ESG report, you won’t find any scopes of emissions and only one declaration about carbon: Reducing the US Carbon Footprint. This is the only thing that matters in getting the loan and moving this project forward.
I couldn’t even find an ESG score for EVgo from MSCI or S&P Global, but LSEG rated them low at 13/100 and have them ranked near the bottom of their industry. Still, the board gets a pretty high rating when checking Free Float Analytics data, which measures governance and the board.
It is worth noting that, according to the above press release, Goldman Sachs was their financial advisor on the deal. After the news, JP Morgan upgraded EVgo’s stock. Somehow, those banks advised and made decisions without comparable ESG data or ESG scores.
To recap, without the minimum reported ESG data, EVgo secured significant transitional funding to drive material impact around the Environment and Social. One project doesn’t define the carrot vs. stick argument, but it does serve as a powerful example of spending time chasing data for a report vs. doing the work that drives a transition.
During Climate Week, the Climate Group released a To-Do list video with seven actions we must take globally. There are seven ideas, and none of them are ‘better and more integrated regulations to ensure financial markets have comparable data.’ Two of them appear to intersect with this EVgo announcement:
Unleash Renewables
Buy Clean
The To-Do list video is worth a watch, as it illustrates the importance of action. It is indeed time to stop measuring the minutiae of our business activities and get on the path to a transition. That may or may not mean the disclosures, but they are an unavoidable requirement for now. If they end up supercharging the markets or progress, no one will be more thrilled than me, but there’s no linear path requirement to disclose before action or in place of it.
Pay attention to the regulations, but don’t overlook the incentives. Make plans around the transition as you would for any business problem. Regardless of disclosure regimes or interoperable standards, you must figure out what to do and advocate for change in your value chains and with your governments.
Nothing less than the long-term resilience of your company depends on it. And no disclosure is going to be able to capture that.