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March 01, 2012
On a Bumpy Road Toward the Sustainable World
    by Robert Kropp

A morning's reading ranges from Davos to ESG metrics, and the prevailing message is that improved collaboration among all stakeholders is necessary to rescue the world from an unsustainable future.

My daily commuter from bed to desk wasn't delayed at all by the snow that's still falling, so as I settled down to write I had a little while yet in which to meander.

I had planned on covering a new report by Peter Soyka and Mark Bateman, which argues that "substantial, non-incremental progress" on environmental, social and corporate governance (ESG) requires greater focus, by companies and investors alike, on value creation rather than risk mitigation.

I've interviewed Bateman twice before, most recently in 2009, for reports co-written with Soyka addressing disclosure of environmental information by US corporations. Both reports, I found, were rigorous in their research and unsparing in detailing how far companies had yet to go.

But first to the meandering. Thanks to the excellent aggregator 3 Quarks Daily, I read a first-person piece by Nick Paumgarten in the New Yorker on this year's meetings at Davos.

Hosted by the World Economic Forum (WEF), "Davos is like Congress, the Factory, the Mormon Tabernacle, the Bohemian Grove, the 'best dinner party in the world,' the financial system, Facebook, Burning Man, boot camp, high school, Los Angeles, Quogue," writes Paumgarten, "Davos is an onion, a layer cake, a Russian doll."

The WEF, and its annual meetings in Davos, were founded by Klaus Schwab, who in 1971 argued for "a new notion of the corporation," according to Paumgarten, "Of one beholden not only to shareholders but to 'stakeholders,' meaning a wider array of constituents, including the government, the community, the workers, and the customers."

At this year's meetings, Schwab called for international collaboration to address geopolitical shifts in power, respect for diversity, a sustainable approach to economic development, and the encouragement of micro-entrepreneurship.

Paumgarten viewed the meetings with a somewhat more caustic eye. "Davos is, fundamentally, an exercise in corporate speed-dating," he observed.

I then encountered the Quarterly Letter written by Jeremy Grantham of GMO, an investment management firm.

In the letter's intriguing second section, Grantham addresses the lack of meaningful sustainability of corporations, particularly in the US. "For the time being, capitalism has tuned itself to rapid growth at almost any cost," he writes. "It is quickly apparent that capitalism in general has no sense of ethics or conscience."

"Why would a company give up a penny for the common good if it is not required to by enforced regulation or unless it looked like that penny might be returned with profit in the future because having a good image might be good for business?" Grantham continued. "We can roast our planet and firms may offer marvelous and profitable energy-saving equipment, but it will be for profit today, not planet saving tomorrow."

Furthermore, the ability of US corporations to use their treasuries to influence the political process means that the very issues necessary for long-term sustainability will be ignored, or denied outright. Congress, Grantham writes, "is desperately short of scientists and basic familiarity with things scientific…about 100 Congressmen do not believe in evolution."

"Capitalism, by ignoring the finite nature of resources and by neglecting the long-term well-being of the planet and its potentially crucial biodiversity, threatens our existence," Grantham concludes. "Fifty and one-hundred-year horizons are important despite the 'tyranny of the discount rate,' and grandchildren do have value."

The Regeneration Project, recently launched by GlobeScan and SustainAbility, appears to agree with many of Grantham's concerns. The Project's inaugural white paper states, "Humanity is living beyond its natural means. We are in debt to future generations and to the Earth itself."

However, representatives of the same corporate world that Grantham views as buying Congress and imposing its ethic of short-term profits above all else are among the Project's collaborators, and the Project takes a more understanding view of business. Bill Ford of Ford Motor states in the white paper, "The role of business in the broader agenda really has changed and I think for the better…if you think back 20 years ago, business was the enemy."

In fact, the key focus of the Project is business performance. "Business has started to realize it cannot continue to deliver narrowly on the imperative of shareholder return without wider attention to the systemic conditions that determine and support its long-term success," the white paper argues.

The institution in need of the most improvement, according to the Project, is government. "Governments have the longest way to go," states Nitin Desai, Deputy Secretary-General of the 1992 Earth Summit. "International relations is designed for national governments to protect their national interest…not issue interest."

In the end, what gets measured gets managed, which brings us back to the new report by Soyka and Bateman. The authors' analysis finds that while leading businesses disclose substantial ESG information to investors and other stakeholders, "the broader population of US companies…reports far fewer metrics, with large numbers of firms reporting none at all."

ESG researchers, who evaluate companies on the basis of their disclosures, assess management quality on the basis of "both materiality and values," the authors state. Such assessments provide the researchers with data to predict the future performance of companies.

"The substantial overlap…between the internal management interests of leadership firms and the information sought by ESG researchers to construct their ratings should serve as a wake‐up call to companies that are not yet disclosing substantial ESG information to their investors or other stakeholders," the authors warn.

Recognizing the need for improved articulation of the linkages between ESG assessments and corporate financial performance, the authors conclude their report with a call for dialogue and sharing of information between researchers and companies, "to forge communication mechanisms that are more effective and less burdensome."


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