Will the WBCSD Vision 2050 deliver (and what, actually)? … the EU Package on Sustainable Finance … the Corona Chronicles develop a 'New Normal'

May 2021 | Edition 4 | by Ralph Thurm

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April and May 2021, at least so far, have created a lot of excitement in the ESG Bubble. The World Business Council for Sustainable Development finally published its Vision 2050 Update, their recipe of how to save the world from human destruction. Shortly after, the European Commission published a whole ‘package’ of Directives, Delegated Acts and Drafts for Sustainable Finance and Reporting. As always, The Lighthouse Keeper will look at these developments with an eagle eye on just one question: does it deliver sustainability, regeneration and thriving? 

And then there’s another event that The Lighthouse Keeper celebrates: the release of ‘The Corona Chronicles - Envisioning a New Normal for Regeneration and Thriving’, a book about hope and direction for all those that start to think about a regenerative & distributive economy as a way out of current economic system stereotypes, and what we may have learned from the Corona crisis.

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Will the WBCSD Vision 2050 deliver (and what, actually)?

I’ve been a fan of the WBCSD since its inception by Stefan Schmidheiny in 1992, author of the book Change of Course: Global Business Prospects for Development and the Environment. Business as a force for change of course sounded like a great idea at that time, it should have tens of thousands of members by today. But the WBCSD stayed at about 200+ members since at least a decade. One could argue that the 200 most important companies, aiming at sustainability, would have a trickle-down effect that’s globally measurable through their sales force and supply chain impact. But did they? Our Global Footprint as humans is still growing, biodiversity loss is at an all-time-high, a resource, climate and biodiversity crisis is already evident and becomes even more evident from year to year. Was this network powerful enough to influence regulation globally towards the necessary, with - as a consequence - accepting sacrifices for their 200+ members on current settings (while strongly developing the future opportunities that shape up)? I can’t help but say, unfortunately not. Their first Vision 2050, published in 2010 created first and foremost one thing: great visuals. So, what can one really expect from a network of business leaders, in which only 40 of them contributed to the Vision 2050: Time to Transform, with no consequence to their WBCSD membership if they put this nicely designed report aside, and did whatever they did anyway, while claiming conformity with the ideas of the vision? Well yes, the markets would tell them, as its close to high noon, one could pretend. So, nearing this new version of Vision 2050 comes with some scrutiny.

A couple of things stick out positively. Peter Bakker, in his foreword to the report makes a distinction that was missing from the first version:

‘The most critical of these mindset shifts is the one about the reinvention of capitalism. This shift will ensure that the economic system, our incentives, the global accounting standards and the capital market valuations will no longer just be based on the financial performance of business but integrates the impact on the planet and people as part of how we define success and determine the enterprise value. The move to a capitalism of true value for all will accelerate the transformation toward 9+ billion people all living well, within planetary boundaries, faster than anything else.’ 

The Lighthouse Keeper says: thank you, the link to a context-based and multi-capital-based reset of capitalism, in which System Value defines success, and not some ESG measures without proper context (through thresholds & allocations), is key for the design of regulation, incentives and market mechanisms, that's how we at r3.0 would translate Peter Bakker’s words, to make it a bit more concrete regarding the consequences of what he posed.

Also appreciated is the language switch from change to transformation. The foreword of the 42 CEOs of the companies involved, says: 

‘We must recognize that a livable planet, an equitable society, genuinely free and fair markets, and strong public institutions are in our individual and collective self-interest. Transformation requires a shift in the mindsets that guide how business leaders think about the long term. We need to reinvent the model of capitalism that we have grown up with, so that it rewards value creation, not value extraction. We must make our businesses more resilient and adaptable to the disruptions that inevitably lie ahead. And we must think regeneratively, moving beyond a “doing no harm” mindset to one in which we enable our social, environmental and economic systems to heal and thrive.’ 

So yes, the text scores all the right words, now will the world listen?

In order to do so, the report offers a) a shared vision, b) transformation pathways, discusses c) a foundational mindset shifts, and finally d) keys to understanding and unlocking transformation. 

‘It’s a framework around which a positive and inspiring agenda can be built, that the business community can come together around and use to accelerate transformation. It aims to provide a collective and comprehensive understanding of the necessary and urgent transformations the world needs.’

What is then finally the WBCD’s VISION 2050? The report says

‘we believe that 9+ billion people can live well, within planetary boundaries, by 2050. “Living well” means that everyone’s dignity and rights are respected, basic needs are met, and equal opportunities are available for all. Living “within planetary boundaries” means that global warming is stabilized at no more than +1.5°C, and nature is protected, restored and used sustainably. It also means that societies have developed sufficient adaptive capacity to build and maintain resilience in a healthy and regenerative Earth system.’

This means that the ‘ultimate end’ (to use Dana Meadows & Herman Daly’s words) is defined, the need for rapid transformation within the set vision is clear, and that mindset shifts are needed. The rest of the report then describes industry-specific transformation pathways:

And here’s where my critique begins: there seems to be a belief that clustering industry areas into silos again (same as done in the 2010 report) would deliver overarching change. That hasn’t worked in the past version of Vision 2050 and there seems to be an expectation that that has to be done by others. Governments? Multilaterals? NGOs peer pressure (while NGOs appear to have more and more the same attitude and issues as businesses)? Of course, the report mentions collaboration and education, but will the economic system change be driven by enough advocacy? The report offers ‘10 to-do’s’ for each industry, they are useful and necessary, but will the sum of all lead to a sufficiently strong enough transformation of our economic system in a rather automatic way? Will the miracle happen? I doubt it.

At r3.0 we have long made recommendations: better back-cast from an ideal of a regenerative & distributive economy (that is possible, we first did this in 2015), don’t rely on true value (meaning true costing) alone, market-driven approaches need true costing, but in addition true benefiting, true pricing, true taxation, true compensation as simultaneous triggers to drive transformation. The report shies away from aspects like defining an end to growth or debt, looking at diametrically different taxation regimes, recommending governance overhaul (for example, do we need a WTO in a regenerative and distributive economy, and what may be needed instead?). The report remains pale when it comes to the great design questions of our times. The biggest weakness of the report is that there is no imagination that these industry sectors, globalised and with huge supply chains and footprints, may not survive in this highly aggregated form of today, with drastic consequences for their current setup. While we agree on many of the goals to achieve and actions to be taken, the report misses out on the description of the ‘ideal’ to work towards in concrete terms, necessary and totally different rightsholder dialog processes and their elements on how to get there. By that it shares the same weaknesses as the SDGs, so the report is, while well intended, still somewhat ‘hanging in the air’. It’s a huge progress from the 2010 version, but it misses that one overarching alternative design step that would have made it a brilliant report. 

The EU Package on Sustainable Finance

On April 21 the European Commission released what they called a ‘package’ around their ‘Financing Sustainable Growth’ Action Plan, started in 2018, and leading to the EU Sustainable Finance Taxonomy, described already in earlier Lighthouse Keeper editions with the necessary criticism about its wobbly politically-biased definition of thresholds, opening a pandora’s box for natural gas and nuclear to potentially be called ‘green solutions.’ This point is still not decided upon, just delayed. This package now released is still not the end of the regulatory process, but is a culmination point of several important releases on the same day, so that the contours of how everything is connected becomes clearer. But make no mistake, we’re still only starting to define what ‘sustainability’ means in all this.

The Sustainable Finance Taxonomy

To summarise where we are: A Technical Expert Group took 2 years to design a taxonomy of green products, processes and projects that should be invested into as they should deliver positive impact, measured against ‘some sort of threshold’ (please see the first part of the Big Sustainability Illusion as deepening) and differentiated in a sliding scale from substantial contributions to climate change mitigation to climate change adaptation, or to do no significant harm to environmental objectives; remarkable that the latter also falls under that very same basket ‘sustainability’, which in my view is highly questionable as they mostly produce less degeneration. The delegated acts to the earlier legislation now describe these in details, in total 515 pages! For now, they only cover climate protection, more delegation acts will follow in the years to come, as so far only one of the sustainability topics range is covered.

Companies will need to report from 2022 onwards how much revenue they make through green products and how much they invest in green products. That in return helps finance institutions to determine their strategies towards green investments. That all helps policy makers and governments to see how much capital goes into plans of greening the economy. Not a bad plan, but do the delegated acts as the decisive basis for the definitions deliver what they should? Well, first they just cover climate change adaptation and mitigation measures, anything else still needs to follow, again undergoing the necessary politically-biased and lengthy process. Financial actors then got their own six (!) delegated acts on fiduciary duties, investment and insurance advice, ensuring that financial firms, for example advisers, asset managers or insurers, include sustainability in their investment procedures and their investment advice to clients. Those I don’t cover here.

Now, have the delegated acts brought further strengthening since the wobbly thresholds definition that the TEG massaged into the process? 

Upon inspection by a group of experts of r3.0 and the Center for Sustainable Organizations, we think they provide a useful taxonomy of  - at least - Areas of Impact (AOIs). In other words, they consist of material dimensions of analysis for use in assessing the performance of organizations relative to climate change mitigation and adaptation.

However, what the taxonomy doesn't do is provide either (a) related thresholds AND allocations for making sustainability assessments, or (b) criteria for determining such thresholds and allocations in organization-specific terms. Rather, they seem grounded in the view that impacts to any degree are sufficient for performance accounting purposes, without regard to questions of whether or not such impacts are enough, or sufficient, in organization-specific sustainability terms.

This is all very reminiscent of GRI, which  ultimately took the form of a framework that relied very heavily on the concept of ‘contributions’ to sustainable development in purely incremental terms, and not to sustainability at all. What we see happening now with the EU is more or less the same thing, albeit with a more sophisticated taxonomy being used. Still, the most it can do is provide an illusion of progress. The fact that the AOIs have been articulated in a more sophisticated way does not make the overall approach any less incrementalist. Indeed, it may only have the effect of delaying true sustainability accounting even longer, thanks to the distracting effect of the new model. Why bother worrying about thresholds and allocations when there is a new EU-based framework to work with? People will now spend the next 10+ years orienting themselves to the new framework in which sustainability context, thresholds and allocations do not come into play at all.

That doesn’t mean one can’t use the same taxonomy in a context-based way. And I think we should. It is still primarily aimed at climate-related impacts only and therefore does not address at all the many other areas of environmental impact, not to mention social and economic areas, as well. So as a full-bodied sustainability performance accounting taxonomy, it fails. But that’s what words like “green” do — they pull people into narrow frames of reference. 

Phew…that’s a ton of friction between what's presented and the potential the Taxonomy could have if properly developed on the basis of science-based and ethical norms. 

The CSRD

The other big part of the ‘package’ includes a proposal of what is now called ‘Corporate Sustainability Reporting Directive (CSRD)’, adapting the guideline on CSR reporting (earlier called the ‘Non-Financial Reporting Directive’ (NFRD) from 2014. This one now requires far more companies than before to disclose their sustainability risks and services; the number of companies expected to fall under the CSRD in Europe is close to 50.000. The CSRD is to be adopted by the end of 2021 and implemented in national law by the end of 2022, in order to be effective for the 2023 reporting period. What are some of the most important changes?

• Management should be actively and demonstrably responsible for sustainability reporting. As before, the Supervisory Board is also responsible for monitoring the sustainability report.
• From 2024 onwards, sustainability reporting must be included in the management report. They should be digitally tagged, an issue for many smaller companies. Bigger companies may develop an integrated report for the public.
• Mentioning smaller companies, the reporting requirement is now extended to companies with more than 250 employees (previously 500) and also includes owner-managed and family-run companies, while previously only captured capital market-oriented companies. 
• External auditing of the content is planned in order to increase the reliability of the sustainability reporting. In the beginning limited assurance should be sufficient though.
• Looking into the future, binding standards should lead to more substantial information and more comparability. These standards should be drafted by October 2022, which should then also integrate key financial figures in accordance with the taxonomy regulation. That looks like a very ambitious timeline.

Good steps in the right direction! But there are a couple of aspects, mostly not recognized by the majority of readers, that could have greater implications for ‘true’ sustainability reporting. Richard Howitt, long-time member of the European Parliament, former CEO of the IIRC, and a r3.0 Steering Board member, reports in a Reuters article on three main developments: ‘As a longstanding proponent of integrated reporting, I was heartened to see the specific inclusion of a “multi-capital” approach’, furthermore ‘Indeed, the requirement for companies to publish information on how their strategy aligns with limiting global warming to 1.5C and to the EU’s own climate transition benchmarks, is an important step towards closing the gap between what an individual company is reporting and its performance necessary to meet globally agreed sustainability goals.’ And finally, and one could say necessary for the last point mentioned, 

‘Critics who have long argued that companies fail to address the sustainability context in their reporting can also now use the clause for “contextual information”, to argue their case for reporting to properly address global thresholds and allocations at the macro-level.’

In how far the drafting team purposefully addressed these issues as a door-opener to the long-lasting plea of r3.0 (and many more recently) isn’t clear, and only time will tell. 

As mentioned in edition 2 of the Lighthouse Keeper, the European Financial Reporting Advisory Group (EFRAG) is currently commissioned to develop reporting standards for better comparability of sustainability risks and services within the framework of the CSRD. It will certainly also incorporate the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD), a key requirement from investors. But my conclusion from there still stands: ‘does EFRAG recognize thresholds and allocations as the necessary building block to respect carrying capacities (in all fields regarding ecological, social and economic performance) and accepting the need of a ‘fair share’ of allowed capacities? My result, going through the 228-page EFRAG report is…I come up rather empty handed.’ As mentioned by Richard Howitt, the opening in the CSRD is there, but will EFRAF take action, also given the fail of the taxonomy? So far, the ESG Bubble just doesn’t want to listen. Take articles from ESG Investor, Datamaran, Social Europe, as examples that suppose ESG would deliver sustainability. It doesn’t, so more work is needed to clarify the gap, groundhog day continues.

And here’s also where the different pieces of luggage of the package are connected: the whole EU Sustainable Finance Action Plan is based on the wobbly definitions of thresholds in the taxonomy, leaves allocation to financial market players and their allocation of investments (not resource budgets), supported by fiduciary duties for investors that are mainly risk-oriented, without a rock-solid thresholds-and-allocation-based regime. It will not deliver sustainability, it will deliver ‘steps in the right direction’ with a politically-biased mechanism of ever-increasing delegated acts, too little, too slow in the remaining timeframe. Here’s the current data of the climate clock, a reminder of the remaining time until the carbon budget (threshold) for 1.5 degrees global warming is eaten up and Net Zero emissions has to be reached. 

Boiling it down to the heart of the matter, and as an attempt to summarise the ongoing challenges, the taxonomy has to be crystal clear on science-based thresholds and ethical norms, allocations can’t just be left to financial allocations of investors alone, and reporting needs to reproduce organization-specific sustainability performance based on these crystal-clear thresholds and allocations (context based multicapital accounting and reporting). 

As mentioned various times in earlier The Lighthouse Keeper editions, r3.0’s current project with UNRISD delivers these, and not just for climate indicators, but for a whole range of sustainability topics, whereas the EC is just covering a tiny bit of the spectrum. In the interest of the Green New Deal and the European Climate Law, we recommend the EC officials to take note of this progress, and recommend to companies to get active in seriously determining thresholds and allocations when UNRISD releases the indicator set later this year.

The Corona Chronicles

The Lighthouse Keeper is delighted to present ‘The Corona Chronicles’, a book about hope in troubled times. What can the sustainability and economy experts learn from #flattenthe curve, the no.1 meme of the COVID-19 crisis, and how will that learning help to create a regenerative & distributive economy?

A cartoon designed for the book went viral before the book was published and showed what is still ahead of us if we don’t learn how to treat a crisis like a crisis. The book establishes what’s wrong with the current economic system and evenly shows how to rethink towards the ‘necessary’ better.

And, as you would potentially guess, the role of thresholds & allocations is a key one, as they establish the new supply and demand in an age of scarcity. As you have seen from the above topics, that is why The Lighthouse Keeper is so keen to get this done right. It all stands and falls with now establishing the right governance, processes, discussion threads and then standards, guidance and political decision making. It is an act of love for each other, nothing less. And a question of human survival on this fine planet. 

If you are interested in reading more, please see www.aheadahead.earth for all order options (pdf, print, ebook). You’ll also find reviews, podcasts and webcasts, and what other experts say about the book. Enjoy the book in your forthcoming summer vacation and set your antennas for what’s possible. The Lighthouse Keeper thinks: the space in front of you is wide open, don’t look back where all step on each other’s toes. Be the change you want to see in the world!