The Siren Song of Sustainability: The Theocratic Trifecta’s Third Leg!

    You might know, by now, of my views on ESG, which I have described as an empty acronym, born in sanctimony, nurtured in hypocrisy and sold with sophistry. My voyage with ESG began with curiosity in my 2019 exploration of what it purported to measure, turned to cynicism as the answers to the Cui Bono (who benefits) question became clear and has curdled into something close to contempt, as ESG advocates rewrote history and retroactively changed their measurements in recent years. Late last year, I looked at impact investing, as a subset of ESG investing, and chronicled the trillions put into fighting climate change, and the absence of impact from that spending. Sometime before these assessments, I also looked at the notion of stakeholder wealth maximization as an idea that only corporate lawyers and strategists would love, and argued that there is a reason, in conventional businesses to stay focused on shareholders. With each of these topics (ESG, impact investing, stakeholder wealth maximization), the response that I got from some of the strongest defenders was that “sustainability” is the ultimate end game, and that the fault has been in execution (in ESG and impact investing), and not in the core idea.  

    I was curious about what sets sustainability apart from the critiqued ideas, as well as skeptical, since the cast of characters (individual and entities) in the sustainability sales pitch seems much the same as for the ESG and impact investing sales pitches.  In critiquing sustainability, I may be swimming against the tide, but less so than I was five years ago, when I first wrote about these issues. In fact, in my first post on ESG, I confessed that I risked being labeled as a “moral troglodyte” for my views, and I am sure that my subsequent posts have made that a reality, but I have a thick skin. This post on sustainability will, if it is read, draw withering scorn from the righteous, and take me off their party invite list, but I don’t like parties anyway.

Sustainability: The What, the Why and the Who?

    I have been in business and markets for more than four decades, and while sustainability as an end game has existed through that period, but much of that time, it was in the context of the planet, not for businesses. It is in the last two decades that corporate sustainability has become a term that you see in academic and business circles, albeit with definitions that vary across users. Before we look at how those definitions have evolved, it is instructive to start with three measures of sustainability, measuring (in my view) very different things:

• Planet sustainability, measuring how our actions, as consumers and businesses, affect the planet, and our collective welfare and well being. This, of course, covers everything from climate change to health care to income inequality.
• Product sustainability, measuring how long a product or service from a business can be used effectively, before becoming useless or waste. In a throw-away world, where planned obsolescence seems to be built into every product or service, there are consumers and governments who care about product sustainability, albeit for different reasons.
• Business or corporate sustainability, measuring the life of a business or company, and actions that can extend or constrict that life. 

Burbano, Delma and Cobo (2022)

1. CSO as Yoda: Some of the CSOs described their role as providing vision and guidance to the companies they worked at, about the societal effects of their actions, and doing so with a long term perspective. In short, even though they did not make this explicit, they were projecting that they had the training and foresight on how the company and society would evolve over time, and advice the company on the actions that it would need to take to match that evolution. I was tempted, though I restrained myself, to ask what training they had to be such receptacles of wisdom, since a degree or certification in sustainability clearly would not do the trick. I did dig into Star Wars lore, where it is estimated that it takes a decade or two of intense training to become a Jedi, and left open the possibility that there may be an institution somewhere that is turning out sustainability jedis.
2. CSO as Jiminy Cricket: I am a fan of Disney movies, and Pinocchio, while not one of the best known, remains one of my favorites. If you have watched the movie, Jiminy Cricket is the character that sits on Pinocchio’s shoulder and acts as his conscience, and for some of the CSOs in the audience, that seemed to be the template, i.e., to act as corporate consciences, reminding the companies that they work for, of the social effects of their actions. The problem, of course, is that like the Jiminy Cricket in the movie, they get tagged as relentless scolds, usually get ignored, and get little glory, even when proved right. 
3. CSO as PR Genius: There were a few CSOs who were open about the fact that they were effectively marketing fronts for companies, with the job of taking actions that could not remotely be argued as being good for the planet and selling them as such. I am not sure whether Unilever’s CSO was involved in the process, but the company’s push to have each of its four hundred brands have a social or environmental purpose would have fallen into this realm. 
4. CSO as Embalmer: Finally, there were some CSOs who argued that it was their job to ensure that the company would live longer, perhaps even forever. If you are familiar with my work on corporate life cycles, I believe that not much good comes from companies surviving as “walking dead” entities, but in a world where survival at any cost is viewed as success, it is a by product. 

Here are the roles in table form, with the training that would prepare you best for each one:

I am sure that I am missing some of the nuance in sustainability, but if so, remember that nuance does not survive well in business contexts, where a version of Gresham’s law is at work, with the worst motives driving out the best.

Sustainability and ESG

    In the last two or three years, corporate sustainability advocates have tried to distance themselves from ESG, arguing that the faults of ESG are of its own doing, and came from ignoring sustainability lessons. I am sorry, but I don’t buy it. If ESG did not exist, sustainability would have had to invent it, because much of the growth in sustainability as a money-maker has come from its ESG arm. As I see it, ESG took the abstractions of corporate sustainability and converted them into a score, and it was that much maligned scoring mechanism that caused a surge of adoptions both in corporate boardrooms and among the investment community. It is worth noting that both ESG and sustainability draw their rationale from stakeholder wealth maximization, with the core thesis being that businesses should be run for the benefit of all stakeholders, rather than “just” for shareholders. It is in this context that I used the “theocratic trifecta” to describe how ESG, sustainability and stakeholder wealth are linked, and have been marketed. 

I use the word “theocratic” deliberately, since like theocrats in every domain, some in the sustainability space believe that they own the high ground on virtue, and view dissent as almost sacrilegious. 

    While a scoring mechanism, by itself, can be viewed as having a good purpose, i.e., to create a measure of how much a company is moving towards it sustainability goals, and to hold it accountable, it creates natural consequences that come with all scoring mechanisms:

• Measurers claiming to be objective arbiters, when the truth is that all scores require subjective judgments about what comprises goodness, and the consequences for business profitability and value.
• Businesses that start to understand the scoring process and factors, and then game the scoring systems to improve their scores. Greenwashing is a feature of these scoring systems, not a bug, and the more you try to refine the scoring, the more sophisticated the gaming will become.
• Advocates wringing their hands about the gaming, and arguing that the answer is more detailed definitions of things that defy definition, not recognizing (or perhaps not caring) that this just feeds the cycle and creates even more gaming.

With ESG, we have seen this process play out in destructive ways, with the scoring services (Sustainalytics, S&P, Refinitiv) using not only different criteria to come up with scores, but also changing those criteria in time and companies with the most resources to do so gaming those scoring systems to deliver better ESG scores. Accountants and regulators have added to the mix, by increasing disclosure requirements on almost every aspect of ESG, with little or no tangible benefits to show in terms of actual change.

   Taking a step back and looking at ESG and sustainability as concepts, they share many of the same characteristics:

1. They are opaque: Both ESG and sustainability are opaque to the point of obfuscation, perhaps because it serves the interests of advocates, who can then market them in whatever form they want to. To the pushback from defenders that the details are being nailed down or that there are new standards in place or coming, the argument runs hollow because the end game seems to keep changing. With ESG, for instance, the end game when it was initiated was making the world a better place (doing good), which evolved to generating alpha (excess returns for investors), on to being a risk measure before converting on a disclosure requirement. Defenders argue that there will be convergence driven by tighter definitions from regulators and rule makers, and the EU, in particular, has been in the lead on this front, putting out a Corporate Sustainability Reporting Directive (CSRD) in 2022,  outlining economic activities that contribute to meeting the EU’s environmental objectives. While ESG advocates may be right about convergence, looking to the the bureaucracy in Brussels to have the good sense (on economics and sustainability) to get this right is analogous to asking a long-time vegan where you can get the best steak in town. 
2. They are rooted in virtue: While some of the advocates for ESG and sustainability have now steered away from goodness as an argument for their use, almost every debate about the two topics eventually ends up with advocates claiming to be on the side of good, with critics consigned to the dark side. 
3. Disclosures, over actions:  The path for purpose-driven concepts (sustainability, ESG) seems to follow a familiar arc. They start with the endgame of making the world a better place, are marketed with the pitch that purpose and profits go together (the original sin) and when the lie is exposed, are repackaged as being about disclosures that can be used by consumers and investors to make informed judgments. Both ESG and sustainability have traversed this path, and both seem to be approaching the “it’s all about disclosure” phase of the cycle. While that seems like a reasonable outcome, since almost everyone is in favor of more information, there are two downsides to this disclosure drive. The first is that disclosure can become not just a substitute for acting, but an impediment to the change that makes a difference. The second is that as disclosures become more extensive, there is a tipping point, especially as the consequential disclosures are mixed in with minor ones, where users start ignoring the disclosure, effectively removing their information value. 
4. Underplay or ignore sacrifice: Of all the mistakes, the biggest one made in the sales pitch for ESG and sustainability was that you could eat your cake, and have it too. Companies were told that being sustainable would make them more profitable and valuable, investors were sold on the notion that investing in good companies would deliver higher or extra returns and consumers were informed that they could make sustainable choices, with little or no additional cost. The truth is that sustainability will be costly to businesses, investors, and consumers, and why should that surprise us? Through history, being good has always required sacrifice, and it was always hubris to argue that you could upend that history, with ESG and sustainability.

Notwithstanding the money, time and resources that have been poured into ESG and sustainability, there is little in terms of real change on any of the societal or climate problems that they purport to want to change. 

1. Be clear eyed about what can be achieved at the business level: There is truth to the Milton Friedman adage that the business of business is business, not filling in for social needs or catering to non-business interests. It is true that there are actions that businesses take that can create costs to society, and even if the law does not require it, it behooves us to get businesses to behave better, without asking them to do what governments and regulators should be doing.  For business sustainability to deliver results, that line between business and government action has to be made clearer, and adhered to in practice.
2. Open about the costs to businesses of meeting sustainability goals: Be real about the sacrifices in profitability and value that will be needed for a company to do what’s good for society. To the extent that in a publicly traded company, it is not the managers, but one of the stakeholders (shareholders, bondholders, employees or customer), who bear this cost, you need buy in from them, if the sustainability actions are voluntary. For companies that are well managed and have done well for their stakeholders, the sacrifice may be easier to sell, but for badly managed businesses, it will be, and should be, a steeper hill to climb. To the extent that corporate executives and fund managers choose to create costs for others (shareholders in a company, investors in a fund), without their buy in, there is clearly a violation of fiduciary duty that will and should leave them exposed to legal consequences.
3. Clear about who bears these costs: I was recently asked to give testimony to a Canadian parliamentary committee that was considering ways of getting banks to contribute to fighting climate change (by lending less to fossil fuel companies and more to green energy firms), and much of what I heard from committee members and the other experts was about how banks would bear the costs. The truth is that when a bank is either restricted from a  profit-making activity (lending to fossil fuel companies) or forced to subsidize a money-losing activity (lending at below-market rates to green energy companies), the costs are borne by either the bank’s shareholders or depositors, or, in some cases, by taxpayers. In fact, given that bank equity is such a small slice of overall capital, it is bank depositors who will be burdened the most by bank lending mandates, and that opens the door to bank failures and worse. 
4. And honest about cost sharing: One of the benefits of recognizing that being good (for the planet or society) creates costs is that we can then also follow up by looking at who bears the costs. It is my view that for much of the past few decades, we (as academics, policy makers and regulators) been far too quick to decide what works for the “greater good”, at least as we see it, and oblivious to the reality that the costs of delivering that greater good are borne by the people who can least afford it. 
5. Above all,  drain the gravy train: Both ESG and sustainability have been contaminated by the many people and entities that have benefited monetarily from their existence. The path to making sustainability matter has to start by removing the grifters, many masquerading as academics and experts, from the space. I won’t name names, but if you want to see who you should be putting on that grifter list, many of them will be at the annual extravaganza called COP29, where the useful idiots and feckless knaves who inhabit this space will fly in from distant places to Azerbaijan, to lecture the rest of us on how to minimize our carbon footprint. If you are a business that cares about the planet, fire your sustainability consultants and stop bending business models to meet disclosure needs, and while you are at it, you may want to get rid of your CSO (if you have one), unless you happen to have Yoda on your payroll.