Kids are leaving school to strike for the climate again. Their list of demands does not include more consistent, comparable and decision-useful data.
To be clear, the data is essential. Trillions of dollars via myriad investor alliances are committed to keeping the goal of holding temperature increases to 1.5 degrees Celsius alive, and they can’t do so without it.
The kids — your future employees and colleagues — and much of society want to see accountability, but there is a misguided narrative in the sustainable finance space that conflates accountability and transparency. One requires the other, but the link (or lack thereof) between them presents a key barrier to a shared goal: a sustainable, and sustainably financed, economy.
As Harvard Business School professor Deb Spar put it at the school’s Accelerating Climate Solutions conference last week, "To have accountability, you have to have accountability to some entity … Governments are still the best thing we have."
Future cash flows and our collective future
To be clear, there is a ton of exciting momentum around the key stepping stone on the path to accountability that is transparency.
By the close of 2023, we should see the Taskforce on Nature-related Financial Disclosures issue its final recommendations, the International Sustainability Standards Board doing the same and the Securities and Exchange Commission publishing its final rule on climate disclosure.
But transparency doesn't mean that the companies being transparent will necessarily take the actions required to mitigate climate breakdown.
In the paradigm we work in — one built on a carrot-fueled voluntary and market-led transformation — we put a lot of faith in the market getting things right.
Markets don't care about vulnerable populations in the developing world, about future generations or about non-financial aspects of quality of life … They just see prospects for future cash flows — it's what they do.
But as London Business School’s Tom Gosling captured well in a response to a piece by Adam Matthews, chief responsible investment officer at the Church of England Pensions Board, which argued that the lure of short-term profit maximization by European oil and gas companies is working against the financial interests of long-term investors: "Markets don't care about vulnerable populations in the developing world, about future generations or about non-financial aspects of quality of life … They just see prospects for future cash flows — it's what they do."
No market for virtue
In Europe, the market hasn’t rewarded energy companies that seek to lead in the energy transition. BP boss Bernard Looney likely isn’t apathetic about the consequences of fossil-fueled climate breakdown, but when Europe Brent Crude hits $128 a barrel, the calculus to pump the brakes on his firm’s net-zero journey unfortunately makes sense.
Back at Harvard’s Accelerating Climate Solutions conference, Carter Roberts, president and CEO of the World Wildlife Fund, captured the key dilemma well: "Corporations are engines of innovation at their best and engines of destruction at their worst. There is a moment when every CEO says, ‘I can’t get there until they do their thing,’ pointing to the policymakers."
The question to which I have no answer to offer is just how much we’ll allow the market to chase future cash flows at the expense of future everything else. Overemphasizing the value transparency can deliver as a lever for change — without recognizing that clarity only compels action when it delivers commensurate consequences in the market — isn’t going to serve anyone in the medium and long term.
Again, back to Gosling: "The market is assuming that governments don't have the stomach to push policy anywhere near what is required to limit global warming to 1.5C, and who's to say they aren't correct in that assessment?"