SBTI ... Net Zero Targets ... TCFD ... ESG Investment ... resistance bubbles up that 'trust us, we're big' is not sufficient any longer

March 2021 / Edition 1 / by Ralph Thurm

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Preamble - Inspired by enthusiastic support of the series 'The Big Sustainability Illusion' that showed concerns about the current state of play in what I called 'ESG LaLaLand', I am picking up the wishes of many readers wanting to hear more regularly where things stand regarding sustainability, regeneration and thriving, and maturation pathways on how to get there. The mini-series attracted more than 56.000 readers in just 4 weeks. I am reading, communicating and discussing many articles in this ever emerging field, and as MD of r3.0 I am working actively to stretch awareness to what's necessary. For these more regular articles on Linkedin I chose 'The Lighthouse Keeper - Rumblings of a Positive Maverick About The State Of Sustainability, Regeneration & Thriving' as an analogy of how I see myself contributing, having been in this field for more than 30 years, and having published a quarterly column under a similar name in the German 'Forum für Nachhaltiges Wirtschaften' from 2006 - 2016. These articles will be released as need arises and posted in several groups. Discussion is welcome under these posts. Enjoy!

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Are we seeing a broader coalition of individuals and organisations now wanting to end the incrementalist and irrevocable effects of many players in the so-called ESG realm, something I addressed in my 4-part series 'The Big Sustainability Illusion' in the last couple of weeks? In my view we're seeing at least the start of it, and interestingly they all happen at about the same time. Have we reached 'peak incrementalism?' A look through the various discussion threads paints an interesting picture.

Setting the scene

As a starter, let's sharpen the urgency of what's necessary by listening to UN Secretary General Antonio Guterres, who has sufficiently warned about 'too little, too late' in his last speeches, and calls the latest UNFCCC report, recently released, a 'red alert':

"UNFCCC's interim report is a red alert for our planet. It shows governments are nowhere close to the level of ambition needed to limit climate change to 1.5 degrees and meet the goals of the Paris Agreement”

He also urged emitting organisations to step up to the challenge: 

“Decision makers must walk the talk. Long-term commitments must be matched by immediate actions to launch the decade of transformation that people and planet so desperately need”

A recent longer speech of him at Columbia University is even more pressing in tone:

"The State of the Planet is Broken! Humanity is waging war on nature. This is suicidal! Nature always strikes back! It is already doing so with growing force and fury!"

It is clear that 'business as usual' is not sufficient any longer (and hasn't been for long), and remaining incremental 'steps in the right direction' are wilful predatory delay and not part of the solution. Now, do we have the tools at hand to react sufficiently and responsibly?

Science-Based Targets to the rescue?

Organisations that are willing to step up need reliable science to calculate their emission targets and timelines. The Science-Based Targets Initiative (SBTi) looked like a good and innovative initiative when it was set up a couple of years ago. But what does reality show in the moment of biggest urgency?

Climate Home News recently published an article, saying that “Science-based corporate climate targets are no such thing, says former advisor". Bill Baue, Senior Director with r3.0, has issued a 'formal complaint', addressed to the SBTi Executive Board. The article explains: "Bill Baue was among half a dozen people to start developing the concept behind the Science-Based Targets initiative (SBTi) in 2012 and served on its technical advisory group until recently. Last week, he submitted a formal complaint to the initiative’s executive board and published it on Medium, with a detailed critique of the framework used for major corporations to set climate targets." He explains:

“Science-Based Targets is not a science-based approach, I believe in this instance that SBTi are putting their own interest above the interests of the public. SBTi are basically asking us, the world, to trust them to do this assessment and they are not going to reveal even the methodology that these companies use. They are the lawyer, the judge and the jury in this situation. SBTi now finds itself in what we might call an ‘inconvenient’ position of recommending against the very methodology that is the most robust!”

The article further mentions that Baue gets support from, amongst others, Greenpeace: "To quell the great public skepticism about this initiative, what’s needed is an additional emphasis on transparency and accountability, using the latest science to guide these targets, and for these companies to back up their targets with their investment plans, said Jennifer Morgan, executive director at Greenpeace International."

The article then also mentions "Baue’s complaint followed the publication of an independent study in the journal Environmental Research Letters. The study assessed seven methods for setting corporate climate targets. It found that a target-setting methodology developed by the US-based Center for Sustainable Organizations (CSO), was aligned with the latest 1.5C climate science and offered the lowest risk of an under or overshoot of the global carbon budget. While initially endorsed by SBTi, the CSO methodology was dropped from its toolkit in recent years."

What does this case reveal in essence: First, big players like SBTi, backed by WWF, WRI and CDP (amongst others), can afford multiple discrete skirmishes. Basic activist movement building recognises that bigger players only cede power when their concentrated power is matched and delegitimised by aggregated / networked power. That big NGOs behave in no way different to corporations nowadays is probably the most shocking part of this as we all trusted them to be humanity's advocates. We urgently need governance, including proper complaints mechanisms and ombudsmen that can help cure these situations, and there are many. More articles are now covering the formal complaint, with ESG Investor being the most recent one.

Another study then looked at the performance of companies using SBTi, as in the end it's the actual impact that following SBTi that makes the difference for humanity. Here's what they found: "Though the majority of targets assessed were on track and, in some cases, had already been achieved, just under half of the companies assessed were falling behind on one or more of their targets. Progress varied significantly by target scope, with more limited progress against targets focused on Scope 3 emissions. Company reporting practices were highly variable and often of poor quality."

Let's hold our breath and see how this serious issue now bubbles up further. As Bill Baue has received an unsatisfactory response from the SBTi's Executive Board, he now sees the need to further escalate his formal complaint.

TCFD - can risk avoidance be the primary focus for climate change?   

The TCFD - initiated by the FSB / G20 and instigated and now chaired by Michael Bloomberg, after leadership of Mike Carney (formerly Governor of the Bank of England, whose speech 'Breaking the Tragedy of the Horizon - Climate Change and Financial Stability' initiated this movement), was one of the great buzzes of the last years. Hundreds of companies committed to assessing climate risk and scenario planning.

The title of a recently published study by ETH Zürich however leads to raised eyebrows: "Cheap Talk and Cherry-Picking: What ClimateBert has to say on Corporate Climate Risk Disclosures". Here's what the researchers found: "Voluntary disclosures such as those based on the recommendations of the Task Force for Climate-related Financial Disclosures (TCFD) are being hailed as an effective measure for better climate risk management. We ask whether this expectation is justified. We do so with the help of a deep neural language model, which we christen ClimateBert. We train ClimateBert on thousands of sentences related to climate-risk disclosures aligned with the TCFD recommendations. In analyzing the disclosures of TCFD-supporting firms, ClimateBert comes to the sobering conclusion that the firms' TCFD support is mostly cheap talk and that firms cherry-pick to report primarily non-material climate risk information. From our analysis, we conclude that the only way out of this dilemma is to turn voluntary reporting into regulatory disclosures. "

Net-Zero Goals - just another scam?

Just when this study came out, another article in the Guardian revealed that - you can't believe it - exactly the same Mark Carney (also climate adviser to Boris Johnson), "who recently described the $600bn Brookfield Asset Management portfolio as carbon neutral, despite investing in fossil fuels". Carney argued: "The reason we’re net zero is that we have this enormous renewables business." He continued that "renewables avoid carbon emissions that would otherwise have happened, so they 'offset' his investments in fossil fuel emissions". The Guardian article's author opposed that in a sharp tone: "This is not net zero. It is an accounting trick. Emitting carbon at the same time as building solar capability does not equal zero emissions overall. Offsetting needs to be used to remove carbon dioxide from the atmosphere to counter difficult-to-remove emissions, and not just be an enabler of business-as-nearly-usual". Given more widespread criticism Carney felt forced to peddle back, noted in another article by Bloomberg News.

The already mentioned Guardian article, written by Simon Lewis, who is professor of global change science at University College London and University of Leeds, and titled "The climate crisis can't be solved by carbon accounting tricks - Disaster looms if big finance is allowed to game the carbon offsetting markets to achieve ‘net zero’ emissions" goes further by tackling this new buzz. He notes: "Long-term commitments have not resulted in sufficient near-term actions. The world is on track for emissions to be just 0.5% below 2010 levels by 2030, compared with the 45% needed on the road to net zero by 2050. The pivotal Glasgow Cop26 climate talks in November will need to tackle this. But a more insidious problem is emerging. Net zero increasingly involves highly questionable carbon accounting. As a result, the new politics swirling around net zero targets is rapidly becoming a confusing and dangerous mix of pragmatism, self-delusion and weapons-grade greenwash."

He continues: "The science of net zero is simple: every sector of every country in the world needs to be, on average, zero emissions. We know how to do this for electricity, cars, buildings and even a lot of heavy industry. But in certain areas, including air travel and some agricultural emissions, there is no prospect of getting to zero emissions in the near future. For these residual emissions, greenhouse gasses will need to be sucked out of the atmosphere at the same rate as they are added, so that, on average, there are net zero emissions.

Making this work requires carbon removal, also known as 'negative emissions'. This can be low-tech, like restoring forests, as this takes carbon out of the atmosphere and stores it in trees. Or it can be hi-tech, like using chemicals to strip carbon dioxide from the atmosphere and then pumping it deep underground into safe geological storage. In theory this is all fine, as pragmatically some carbon removal is needed to balance hard-to-reduce emissions: but negative emissions and offsetting alone are not a route to net zero.

In practice, by believing in the promise of these methods, we are too often deceiving ourselves, in three major ways. The first is an unrealistic overreliance on carbon removal to preserve the status quo. Shell recently published its net zero plan, that actually projects high oil and gas production through to 2050 and beyond, which voila, are magically removed with negative emissions. Critically, there is far too little land to plant enough trees to counter today’s emissions, and large-scale hi-tech methods do not yet exist."

A couple of days later, in another Guradian article, authors Tzeporah Berman and Nathan Taft title "Global oil companies have committed to 'net zero' emissions. It's a sham - the energy industry is like a smoker who goes from one pack a day to two – but claims they’re quitting because they switched to filtered cigarettes."

They explain: "If it wasn’t so serious, the premise would almost be comical: oil companies are claiming that not only can they keep their current levels of production, but expand their operations that extract and refine fossil fuels. They would have us believe that by planting trees and using largely unproven, expensive, and thus far inefficient carbon-capture technologies, they can reach “net-zero” and solve the climate crisis – all while continuing to grow fossil fuel production. This argument is delusional and based on bad science. To have any realistic shot at maintaining a 1.5C world, we need to be winding down and phasing out fossil fuel production, not growing it – as its executives are incentivized to do. Even as fossil fuel companies admit the climate crisis is a real and pressing issue, they’re continuing to build out infrastructure to support 120% more fossil fuels than the world can burn in a 1.5C scenario. Not to mention that they’re also spending billions of dollars lobbying governments to weaken climate policy. Let’s be clear – “net-zero” is being used by incumbents to obfuscate what actually needs to be done to meet the Paris climate goals. The rush to build out more infrastructure, the inordinate amounts of spending to influence elected officials – all of this is a last-gasp attempt by a dying industry to lock in as much profit as possible while it still can."

EU Taxonomy - questionable political thresholds?

Already discussed in depth in part one of my 4-part mini-series in the last weeks the EU Taxonomy for Sustainable Finance now also sees more and more resistance from those that see thresholds as 'non-negotiable' with regard to thermodynamics and ethical norms. Like I said repeatedly "you can't negotiate a political deal with Gaia."

In a recent article in Private Banking Magazine called "Lobbyists delay and water down the EU Taxonomy", Rosl Veltmaier, of Triodos Investment Management, joins the plea for science-based thresholds. "The EU Taxonomy needs to be meaningful and science-based. We need to avoid that greenwashing-lobbyists water down important content."

What is happening now around the EU Taxonomy is a classical case of opening up a pandora's box due to technical mistakes and setting political-based thresholds over science-based thresholds, trying to play nice to all. They are now the prey for the lobbyists, double in number to members of the European Parliament in Brussels.

ESG Investment - is the reckoning coming?

The Harvard Business Review picked up on another disaster in the making in a recent article about ESG Investing. "What actually happens when investors with $100 trillion of assets commit to investing more responsibly? The answer is not much — at least so far. According to research last year, investors who signed onto the United Nations Principles (For Responsible Investment [added]) did not improve the social and environmental performance of their investments. According to the researchers, signatories 'use the PRI status to attract capital without making notable changes to ESG.' Similarly, signatories to the Business Roundtable statement have performed no better than other companies in protecting jobs and worker safety during the pandemic. When companies offer insincere commitments or overpromise transformation, they risk undermining the real work being done by others. Most people struggle to differentiate bad-faith recycling claims from substantive actions to eliminate waste, like Unilever’s commitment to cut its plastic use in half or Philips’s to repurpose all of its used medical systems. Or to differentiate temporary payments for workers during the pandemic from permanent improvements, like Costco’s announcement it would raise baseline pay to $16 an hour, more than double the national minimum wage. Token programs and philanthropic side projects erode the public’s trust and invite backlash against the reform movement itself. A movement meant to benefit the public good risks becoming a buzzword coopted to keep maximizing short-term profits."

On top of that claim-game rests a way bigger issue: are ESG Scores an outdated concept to drive ESG investment? Author Tom Steffen, Quantitative Researcher at Osmosis Investment Management, writes in his (unfenced) article in Responsible Investor: "In an attempt to summarise corporate sustainability performance, ESG scores combine information from hundreds of indicators, i.e., specific metrics within the distinct E, S, and G categories. Examples might be the number of non-fatal work incidents, or the number of independent directors on the board. Given a lack of adequate knowledge, expertise and perhaps even willingness, investors have until now struggled to gather and interpret this information; rather they have relied on ESG providers to produce condensed scores. The ongoing reliance on externally prepared ESG scores means that a large part of the investment management industry is failing to engage in the detail of corporate environmental and social practices, even when charging clients extra fees for ESG products. The market ethos of ‘do your own research’ often seems to have been forgotten when it comes to ESG. As a result, many who claim to be adding alpha through ESG will struggle to provide proof of their bespoke effort. If we accept that the market quickly adjusts prices to reflect new information - including that generated by ESG providers - then there can be little reward for individual managers from building strategies around those same ESG scores."

For those who have read my four-part series will remember that I have called the ESG information food-chain as totally flawed. Apart from the fact that ESG doesn't say anything about sustainability due to reliance on just 'numerator data' and not actually measuring that performance against thresholds and allocations, there is even more problematic handling of 'claiming alpha' at all, as the above mentions.

More to come soon in edition 2 of "The Lighthouse Keeper". Stay tuned and become a positive maverick, too. Humanity depends on you!