Art, Science and Context Based Targets

I saw this slogan on a wall at EPFL in Lausanne recent, and it got me thinking. “We have a science based target” is the only phrase that needed to be uttered in climate circles for the last few years. Everyone nods in agreement. You are one of us. So its no surprise that the “Science Based…” bandwagon is moving onto biodiversity, water, land and more.

I have written before about complex issues and the notion of quantum sustainability. Yet before we jump headlong into science based targets (SBTs) we need to realise the unintended consequences of trying to navigate this complexity and uncertainty with a simple tool. It may well divert attention from the real issues that we need to be working on to tackle the climate emergency.

Science or Art?

The concern about SBTs is the artistry that goes into the whole process. There is a flexibility to choose the baseline year, the climate scenario and which parts of the business to include. This leads to a lack of comparability across companies. Then there is the question of Scope 3 emissions.

A few years ago, a colleague pointed out that science based targets for scope 3 emissions are “pure speculation”. The point being that you can’t have science based targets where there is no science. It’s a good line, and essentially true. Calculating scope 3 emissions is a fraught process that relies upon a range of methodological estimates, assumptions and dodgy data.

1.5 Degrees to the Rescue?

Thank heavens therefore for the IPCC 1.5 degrees report. This states that to limit global heating to 1.5 degrees we need to halve GHG emissions in the next decade. This has just simplified the whole SBT process and saved companies a whole lot of consultancy fees.

However, a new angle in the climate discourse has come onto the scene. The TCFD (Task Force on Climate Related Financial Disclosures) introduces a new type of science and artistry into the climate debate. Companies reporting to TCFD have to show their resilience under different scenarios.

This is where things get really interesting for some industry sectors. In thinking through the scenarios it turns out that transition risks become arguably as significant as the physical risks that we are used to talking about. And more immediate, as business decisions and responses are needed now. Which got me reading up about game theory.

SBTs bump up against Game Theory

Game theory can help us work out likely strategies and actions to address climate change (and even other sustainability challenges such as plastics). However, applying game theory to climate change produces some sobering results. As an article in Wired magazine highlighted, climate change is likely to get a lot worse before it gets better.

SBTs might even make the situation more painful for those companies that have signed up to them, in good faith. There are currently close to 600 companies signed up to the SBT initiative. That leaves tens of thousands who have not. Despite those 600 managing their operations to achieve a 2 degrees of heating, we are still heading for 4-5 degrees. Which means that the next round of SBTs have to get stricter. Game theory suggests that this cycle will repeat itself. Potentially repeatedly.

Yet with the easy stuff now done, signatories to SBTs will soon be required to implement disruptive business models and make significant investments that will pay off if the climate stabilises. But if the majority maintain their business as usual approach the climate will still head for 4-5 degrees of heating.  Those investments will then be completely lost, and those companies will need to invest all over again to adapt to an outcome they tried to avoid. Investors will not be so forgiving regarding these transition risks. Which suggests its time to focus more upon context.

Context Based Targets

Context Based Targets reflect systems thinking, taking into account not just thresholds, but allocations, and adjustments for changes in the world. A few years ago Mark McElroy wrote a good description of the difference between science and context based targets. I would go further and suggest that the context needs to include the actions of competitors, government and society (especially investors and consumers).

Which starts to explain the commitment recently made by the UK Government. It committed to “net zero emissions” by 2050, but said that it would revisit this commitment (and its consequent actions) every 5 years. Given the current unknowns regarding the actions of other Governments, under a game theory this looks entirely logical*.

The New Climate Leadership

The difference between “business as usual” and “1.5 degrees” scenarios is now dramatic. Once companies understand the actions needed to halve all value chain emissions, transition risks will become the primary consideration for many. This means getting a handle on the actions of others, and the consequences of “free riders”. Getting too far ahead of mainstream society will need to be weighed up against the bragging rights of being “a climate leader”.

This is not a fatalistic justification for inaction. It is clear though that legislation will be the only way forward, and so corporate leadership will be demonstrated as much through advocacy as from actions. And context based targets, with their rationale clearly communicated will say more than SBTs can.

As for the end game, Extinction Rebellion look to have nailed it.   

*I do accept that the commitment is pretty hollow when put against the actions of the UK Government that recently approved a new coal mine and continues to push for a new runway at London’s main airport. But that just emphasises the context that companies need to factor in.

Quantum Sustainability

A different perspective on the rigging of the Cutty Sark

The sustainability world used to be so simple. There were a few topics, such as climate, water, forests, oceans, and some commodities. They all operated in their own silos. If you wanted insights and guidance then WWF (in Europe) and Conservation International (in North America) could help. It was then just a case of getting the commitment of management to act, and the rest was easy. You could almost call that the classical theory of how to approach sustainability.

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How many complex global sustainability challenges can the world tackle?

This question was front of mind earlier this year as my daughter received her masters degree. For her thesis she analysed the international climate change process from Copenhagen to Paris. She wanted to understand what changed between these two meetings that allowed the global community to move from complete failure to modest success. Then she related those insights to the efforts to get an effective implementation of the global compact on forced migration and the rights of refugees.

It’s an interesting comparison. There are many similarities between these two topics in terms of the challenges of getting an international agreement and action to tackle them*. Both climate and migration/refugees impact large numbers of countries; those being harder hit are usually not countries where the international media are based; there are different opinions on the subject, often not informed by facts; and there is the concept of “responsibility sharing”. The community addressing forced migration and refugees is passionate, determined, and morally and ethically right. But it’s struggling to get governments to put in place an effective legally binding instrument.

* Just to be clear I understand that the issues are somewhat conflated: climate change can drive migration, but there are very many causes of migration.

On climate change, scientists, the media and civil society, (comprising indigenous peoples, communities, citizens, personalities and NGOs) all played their part in keeping the issue front and centre. And yet progress really took off once roles, responsibilities and contributions were included not just from governments but from businesses, regions and cities. And it was the combination of voluntary pledges and legally binding agreements made up the package of measures that constituted the Paris Accord.

It’s a blueprint that could equally be applied to solving the refugee and migrants challenge, a conclusion reached in my daughter’s thesis. A summary blog can be found here.

Extreme lengths

In discussing this with my daughter, one thing struck me – the effort needed to change the circumstances that allowed the world to get from Copenhagen to Paris, and to get the agreement in place. It wasn’t just the meetings, the reports, the science. It was the constant attention. Everything became framed in terms of climate change. This went to extreme lengths when scientists even started blaming Arctic Ground Squirrels for contributing to climate change

Far be it from me to blame the Arctic Ground Squirrels, but the article does illustrate how climate change was the lens through which everything was framed. It still is, often to the detriment of other subjects.

No more than two or three

It made me wonder. If this is what is needed to get a global agreement to tackle a global problem, then how many other complex global sustainability challenges can the world tackle? It’s hard to imagine governments and stakeholders building up the same momentum as was needed for climate change, to tackle more than two or three global challenges. 

“What about plastics?” I hear you say. It’s true that plastics became a global issue of public concern very very quickly. Like climate change it mobilised opinion across the world, not just in the west. And we are now seeing an impressive array of interventions from governments and companies across Africa, Asia, Europe and North America. Yet it hardly required much media or civil society pressure to get there.

I had some correspondence with Sam Vionnet recently about sustainability challenges. He remarked that only two things have ever changed our world – disasters (disruption) and social movements (linked to public opinion). I would add that both are needed together. Plastics fits this hypothesis well. The disaster of plastics is well illustrated by the multitude of photos and videos of plastics polluting the environment. And that’s before David Attenborough starts his voice over. We have yet to see a social movement, but public opinion is firmly against plastics. Aside from a few material scientists, I’ve yet to meet anyone who has a positive view of the stuff. OK, there was that cucumber 

So plastics had the perfect storm. Climate didn’t (pardon the pun). Neither does forced migration and refugees, how ever much outrage and injustice there may be on the issue.

We’d better choose wisely

Which highlights the phenomenon that was the climate change agreement. Clearly the constant wall-to-wall attention, and just the threat of disaster was enough to get the world to move. Climate change had not just a global reach with different cultures engaged in different types of activism but it focussed upon systems change. So far the responses to plastics are rather superficial (banning straws, plastic bags etc), but there are signs of more systemic responses. Whether these will go far enough in addressing the root cause of our linear society remains to be seen. This would require consumers to start making choices on a big scale – something that has not even happened with climate change.

So what chance is there of creating a similar unstoppable momentum to tackle some of the other complex challenges? And how much bandwidth does the public have? How many issues can rise up in the public consciousness to rival climate change and lead to global coordinated action? 

I suspect only one or two more. So we probably need to choose them carefully.

I’d cast a vote for food systems. However, having learned a little about the topic I’d also suggest migration/refugees. Forced migration is perceived as quite a eurocentric problem. It has yet to break out and be recognised for the global issue it is. And the outrage is not there yet. Those working on it would do well to connect it to other issues to spread the understanding. Ironically (given my daughter’s thesis), at some point climate change will connect these issues all too well.

 

 

ESG? No, its Time to Become Activist Investors

About 20% of all assets are now managed using some form of ESG principles. You wouldn’t know it though.

According to the Economist there were 70 activist campaigns in Europe last year. It feels like there will be more this year. The impact upon the progress of more sustainable business practices is notable.

ESG to the Rescue?

Meanwhile ESG is becoming more mainstream – McKinsey has published a blog claiming it the new normal. The Economist has also just pointed out that those with a millennial mindset are far more interested in ESG investing. There are however many shades of ESG.

At its simplest, a passive filter is applied which excludes a few sectors, whilst allowing investments in a range of companies and sectors that might surprise many. More active strategies introduce different levels of rigour. Then there are themed funds that focus upon specific sectors such as renewable energy. Finally impact investors concentrate on companies that explicitly deliver upon social outcomes as well as financial ones.

As a recent FT article points out though, there is not enough consensus on exactly what ESG is or how to measure it. It seems that all our efforts to fill out the questionnaires for DJSI, CDP and BBFAW et al are making little difference.

Activist Investors March On

Meanwhile, activist investors have cut through the fog with a very clear and simple narrative of margins and share prices. Lets face it, for those of us with pensions and savings, who would not want higher share prices and bigger pension pots.

Well actually not me if it is at the expense of the company and thus society itself. As I have argued before, activist investing is an extreme, that is “changing the circumstances”. The expectations on companies to make money for shareholders is drowning out the need to contribute to society. The important advances that have been made in recent years are under threat.

It seems to me though that the issue is not with activist investors, but the passive ones.

Asset Owners and Asset Managers

Passive funds are starting to have an important impact upon the market. Whilst their popularity is based (largely) on reducing the costs of asset management, they are weakening governance in companies. Index funds have no voice and do not talk to companies. This just amplifies the voice of the activist investors who do.

Asset managers of course do speak to the management of companies, but I wonder if they really speak on behalf of the asset owners. This is especially the case for pension funds.

Twelve years ago I set up my own self managed pension fund and transferred several of my company pension funds into it. I started to manage it and invest in companies that I wanted to invest in, according to my own beliefs. I became activist – putting my money where my mouth is.

Until recently however I was passive when it came to the pension fund managed by my employer. So I have decided to start asking a few questions and become more activist there too. Its worth doing, and sends an important signal.

We can all be Activists

There have been some concerns that ESG managed portfolios do less well than “traditional” assets. Yet there are plenty of studies that now show that assets managed with an ESG filter perform as well as or better.

Assets under management using ESG principles now total US$20-25Tn (trillion). Meanwhile activist hedge funds account for just US$150-200Bn. To give some perspective to this, the top four UK pension funds are valued at more than US$200Bn.

Its not too hard therefore, to see how relatively few pension fund members can easily make an impact, so we can all make a difference.

Its time to all become activist investors. We all need to ask our pension fund managers about their strategies regarding ESG. The more they hear interest, the more they will invest our money based upon these principles.

But we need to go even further. If we are to truly respond to the activist investor narrative, then we need to be activists for the other extreme of the investment spectrum – social businesses and impact investing. This will offer the alternative narrative to help change the circumstances again in the direction of creating shared value – for our pensions and for our society.

We need to ask our asset managers to increase their exposure to “impact investing”. My own self managed pension is seriously “overweight” (as they say) to deliver societal impact.

Glaciers: Going Going…

 

I went hiking this summer above Ferpècle in the Val d’Hérens to look at the Ferpècle and Mont Miné Glaciers. These are situated in grandiose scenery, with the mighty Dent Blanche towering above, yet are also quite easy to get to.

Mont Miné in the centre. The Mont Miné glacier is to the right, the Ferpècle glacier to the left. In 1960 they were joined together in the foreground

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The Context of Targets

Thank you one and all for the comments on “The Problem with Targets”. With comments across LinkedIn, Twitter and on this site, let me respond here and develop the arguments a bit further.


To recap, I believe that there are three problems with targets in the sustainability world. Firstly there are too many. Secondly, the attention is on the setting not the delivery, and finally we need to recognize the differences between complicated and complex problems.

Continue reading “The Context of Targets”