Global sustainability standards – cannot be radical enough?

Let’s return to the Consultation Paper recently issued by the Trustees of the IFRS Foundation “to assess demand for global sustainability standards and, if demand is strong, assess whether and to what extent the Foundation might contribute to the development of such standards.”

I’ve several times expressed my view that this initiative is more about preserving investment returns than saving the planet, or however you’d put it. As I said before, to put it bluntly, as environmental conditions and long-term prospects steadily get worse, the task of picking investment winners and losers will become increasingly strained, increasing the need for a common reference point. But this doesn’t necessarily mean that (for instance) chronic polluters and all-round environmental criminals will be severely punished by the market, only that the risk-return opportunity they exist, relative to their then-current stock price, will be tricky to evaluate (for instance, in determining when to get out before the whole thing collapses).

A recent commentary by IFRS Foundation Teresa Ko is mostly consistent with that line of thinking, noting:

  • In 2006, when ‘ESG’ was first mentioned by the United Nation, there was US$6.5tn of funds under management. As of April 2018, this has grown to US$81tn in assets under management with net inflows of US$71bn between April and June of this year. All of this is startling considering that there isn’t even a commonly accepted definition of what constitutes a green finance product! Aside from the risks of cherry picking and ‘greenwashing’, the landscape is increasingly chaotic, inefficient and ineffective in addressing our growing concerns around the complex and critical areas of sustainability and climate related risks. Many corporates lament the frustrations, complexity and costs of having to disclose against multiple standards and metrics, which often add nothing to the quality of data or information being provided.

However, Ko can’t resist lending her article an extra flourish in its opening and closing paragraphs:

  • Sir David Attenborough joined Instagram recently and became the fastest person ever to hit a million followers. The 94-year-old’s life work as a naturalist, broadcaster and documentary maker is legendary, but his message that the climate stability that we have enjoyed for 12,000 years is unlikely to continue has never resonated more urgently with so many people. “Our planet is heading for disaster if we do not act now to put it right,” Attenborough says.
  • Remember the words of Sir David Attenborough: “We cannot be radical enough and the time for a global solution is now…”

Attenborough’s most recent documentary, A Life on our Planet, surveys the highlights of his indeed remarkable life, before musing grimly (and to me quite persuasively) on what a person born today might experience over the nine decades to come, given current trends. The film’s last twenty minutes or so then attempt to offset the gloom by pointing out some slightly more hopeful signs and data points. But, to say the least, these are random and underdeveloped – for example, Attenborough comments favourably on the prospect of population growth leveling off, but doesn’t consider at all the demographic, political, cultural or other implications of such a development. It’s very hard to see how the comprehensive realignment of priorities he envisages could coincide with the steady preservation of economic returns (or the maintenance of what global peace we currently have) as we’ve come to expect them. My own view is that that the goal of enabling more resilient, efficient financial markets, assuming an aspect of the desired resiliency is that they continue to make money for those who participate in them, is almost certainly inherently inconsistent with that of addressing climate change. But whether or not you see it that way, it’s absurdly fanciful to imagine that the IFRS Foundation’s efforts in this area are in any way equal to the “radicalism” that Attenborough is talking about, or that they possibly could be

For a more informed expression of somewhat related concerns, you could look at an open letter to the IFRS Foundation from a group of accounting professors and editors of accounting journals. The letter asserts that the Foundation’s proposal is inconsistent with the large body of research already conducted in the area, and that the proposals “will exacerbate the lack of corporate and investor responsiveness to sustainable development  issues and accountability thereon.” In a related interview, Carol Adams, one of the letter’s signatories, called the proposal not “informed by research into what drives corporate change aligned with sustainable development.” She went on: “There are various myths that seem to be perpetuated to support a goal to make things simpler for companies and investors. Yet sustainable development issues are complex and must be considered in decision making.”

You might have thought that anything the IFRS Foundation were to do in this area would be better than doing nothing. But the letter suggests that even this slender success measure might be suspect. For a reference point, look at how executive compensation disclosure was promoted as a contribution to promoting better control and discipline; plainly it hasn’t worked, and there’s plenty of reason to think the disclosure actually makes things worse.

Put another way, rather than being the “best disinfectant” as the overdone old saying goes, maybe sunlight – or at least the human-filtered kind of sunlight – sometimes just helps out the germs….

The opinions expressed are solely those of the author

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