Sustainability reporting moves forward, or: welcome to Faberland!

A recent press release announced that the Trustees of the IFRS Foundation had appointed Emmanuel Faber to serve as Chair of the International Sustainability Standards Board (ISSB), effective January 1, 2022.

Here are some extracts:

  • As the former Chair of the Board and CEO of Danone, a multi-national food products company, Faber has long championed the importance of sustainability information to the global capital markets and its relevance to the investment decision-making process. Under his leadership, Danone introduced various innovations to help investors and credit providers better understand how sustainability factors might affect their assessment of enterprise value over the short, medium and long-term.
  • Faber has significant global experience, having lived in and held senior leadership positions across four continents—Africa, the Americas, Asia and Europe. He founded and chairs several international organisations and initiatives, including the One Planet Business for Biodiversity coalition and the G7 Business for Inclusive Growth coalition―co-chaired with the OECD Secretary General. He initiated Danone Communities, a social business initiative providing funding to bring nutrition and water access for vulnerable communities, as well as the Livelihoods Venture, which provides funding for ecosystem restoration and the development of sustainable farming in emerging economies.

Faber seems like a strong choice, a leader likely to emphasize substance and to resist hollow rhetoric, for whom sustainability is an inextricable part of his professional identity.  He stepped down from Danone in early 2021 after pressure from activists who cited “a combination of poor operational record and questionable capital allocation choices”. Danone, said one of these, “did not manage to strike the right balance between shareholder value creation and sustainability”. opined: “Unfortunately Danone’s share performance has been very weak compared to rivals Nestlé and Unilever. Danone is perceived to have cared more about people, the planet and social responsibility than its shareholders, and Faber is paying the price.” (What was he thinking?!)

In an interesting interview with Time, asked “What makes you so hopeful that people are going to act in the common good rather than in their own self interest?” he responded as follows:

  • I’m not sure they will. I’ve seen the worst and the best in this pandemic. We see all over the place that growing inequalities are a danger for democracies. So I’m not optimistic. But we’ve seen solidarity, social bonding, people changing their behaviors in many ways, again for the worse and for the best.
  • I see climate change as such a huge frontier for us as a species, that I’m sure it will bring the worst. And I see signs that it can also bring the best. It would be illogical to blame capitalism and the global financial markets for ruining the resilience of our species.

The interview ends on the following prediction: “Put it this way, if you’re not able to lead climate strategy 10 years from now, you should not be a CEO. It’s as simple as that. Your company will not find capital. I’m pretty clear on that.”

Again, one imagines that the work of the ISSB can only benefit from such wide-angle realism and urgency. On the other hand, his view of capitalism may still be too forgiving, for all the challenges that he’s brought to it. Faber says: “I’ve defined myself as a business activist. I’m an activist of business being part of the solution, being the fundamental solution, the solution.” But his explanation of the mechanics seems to assume a perhaps improbably high degree of collective rationality:

  • Each company will have to report on its targets on CO2 emissions and its pathway to reduce that. If a company is ahead of its plan, the market will look at this positively. If you’re late, it means that there are some capital expenditures that you need to do in the future. That will mean additional debt. So immediately, the valuation of companies in the stock market will be impacted.
  • Which means as for profits, when you are ahead of your forecast, you get a bump on your share price, and a bump down if you’re super late on your emissions trajectory.
  • Suddenly you can be compared, within peers, within an industry. And you start having a situation where the capital allocation can be based not only on profit but also on carbon. So it’s a huge change.

Given the likely continued frenzied chase after market returns, and noting that even in an environmentally challenged world this won’t be the only thing that affects stock prices, it’s far from clear it will always work that way. Even by Faber’s own version, the valuation-impacted and bumped-down companies would likely strike many as a short-term buying opportunity. And even if their cost of capital were to be adversely impacted, it would be rash to predict a permanent collapse in resource-company survivability any time soon.

Still, that’s only to say that Faber seems likely to be a leader capable of sparking, and responding to, debates equal to the magnitude of the task on hand. That’s only a first step, but at least it’s that much…

The opinions expressed are solely those of the author

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