Know the Why

World Economic Forum Global Risks Report 2023

The World Economic Forum’s annual Global Risks Report is an iconic staple of sustainability-related resources, a must-read (or at least peruse) and often-cited reference. It provides a great explanation (and illustration) of the #concurrent, #interconnected, and #global nature of economic, social, and environmental issues, and explains why it’s so important for us to act. The 2023 edition is no exception, finding that the most severe perceived risk over the next two years is a ‘cost-of-living crisis’, and that the fastest deteriorating global risk over the next decade is ‘biodiversity loss and ecosystem collapse’. Also, among the risks topping the list over both the short and long term we find ‘geoeconomics confrontation’ and ‘erosion of social cohesion and societal polarisation’, as well as two new top-ten entries: ‘widespread cybercrime and cyber insecurity’ and ‘large-scale involuntary migration’. This year’s edition also dives into the concept of a #polycrisis, i.e., the simultaneous occurrence of several crises that are interacting with and reinforcing one another, making things even worse. In this case, the report identifies a ‘natural resource polycrisis’ where the risks to the supply and demand of natural resources, caused by the failure to mitigate climate change and biodiversity loss, interacts with a global supply chain collapse, both of which interact with the cost-of-living crisis as well the risk for geoeconomics confrontation and interstate conflicts... Like I always say, everything is interconnected. Another nugget of insight from the report appears in the chart on page 12 showing our level of preparedness to face various; no coincidence that the ones at the top of the list are those that have given rise to acute crises we experienced firsthand not too long ago. The chart also shows which stakeholders can most effectively manage each risk; no surprise that governments and multinational organizations figure prominently, but perhaps revealing that businesses actually have little effect and a reminder that while the narrative in the public space often points the finger at companies to change their ways and solve for sustainability, they certainly have a role to play but they are not the sole nor indeed the main drivers of change. Food for thought.

What is greenwashing?

This report is a collaborative response to the European Supervisory Authorities’ Call For Evidence of Greenwashing issued last November. It provides a very detailed and nuanced definition and some real-life case studies, and makes recommendations to the policymakers seeking to address the issue. At its core, greenwashing is a disconnect between a company’s poor environmental (and increasingly sustainability-related more broadly) performance and its positive communication of this performance. Whether or not this gap is intentional is a factor to consider in determining whether it’s greenwashing. Interestingly, the report likens greenwashing to ‘selective disclosure’, the practice of companies seeking to gain or maintain their legitimacy by disproportionately emphasizing positive information or performance indicators to obscure negative information or poor performance. It also likens greenwashing to ‘decoupling’, whereby companies make statements and commitments and may act on minor issues but take no concrete or meaningful action to achieve their commitments and manage their most significant issues. The report also suggests a distinction between miscommunication and deceptive communication. In the first, there’s a discrepancy between the attributes of the company’s products and services and the claims that it makes about them. In the second, it’s the process of developing communication that is intentionally misleading to protect or enhance the company’s reputation. The report suggests that when occurrences of greenwashing are discovered and exposed, they undermine the credibility of all companies seeking to inform their stakeholders about their sustainable business practices. In turn, this may have consequences on the practice of securitization and financialization of “green” or “sustainable” investment products. The authors suggest that this risk is further amplified by the growing use of ESG ratings as proxies for assessing corporate sustainability performance. They very astutely quote former SEC Chair Jay Clayton: “I have not seen circumstances where combining the analysis of E, S, and G together, across the broad range of companies, for example with a ‘rating’ or ‘score’, particularly a single rating or score, would facilitate meaningful investment analysis that was not significantly over-inclusive or imprecise”. In other words, use of ESG ratings in driving investment products may compound the risk of greenwashing because “they are not equipped, not designed to verify the information given to them yet they are in a position to effectively signal the greenness of tremendously complicated financial products to a marketplace that clearly does not yet fully understand the concept of ESG, green, and responsible business developments.” Finally, the authors caution that if one solution to address greenwashing lies in the independent verification (read: external assurance) of company claims, this may require adequate regulations of the verifiers themselves to avoid any conflicts of interest. Definitely lots to think about in this report.

Consolidation in the impact measurement and valuation space

The Value Balancing Alliance (VBA) and the International Foundation for Valuing Impacts (IFVI)—a spinoff of the Harvard Business School Impact-Weighted Accounts project—have announced they are officially joining forces to develop one common impact accounting methodology for the public good, bringing together the corporate and investor perspective on impact. Their common ambition with the Capital Coalition’s Global Value Commission is to utilize data inputs from global standard setters and build on the global sustainability reporting baseline currently in progress (read: IFRS Sustainability Disclosure Standards) to develop one common impact accounting methodology that further informs global standard setting. This is very welcome news because it signals the accelerating consolidation of impact measurement approaches. It’s also clearly a methodology—not a new standard! — to inform existing reporting standard setting efforts, converging with the work already being done and not trying to reinvent the wheel. If you are looking for direction of travel, you can read between the lines that impact measurement and disclosures are going to be integrated to mandatory, standardized corporate sustainability disclosures.