Best of: ESG, carbon offsets, climate tech

Hello and welcome back to Sustainable Views. In this last episode of our first series, we bring you the best bits of our most popular shows. We will revisit how to speak the ESG language, whether you should offset your carbon emissions, and what it means to be a climate tech activist. I'm Silvia Pavoni, your host, and these are some of our inspiring guests. Topping the chart is our very first episode where I tried to make sense of the language used and misused to deal with environmental, social, and governance factors. My guest was the fabulous Alison Taylor from NYU Stern School of Business. We talked about whether all the jargon in this space is a distraction from achieving ultimately simple goals: cutting emissions and being good, responsible businesses, and whether the overwhelming requests for transparency may also get in the way of change.

This is an area with a ton of jargon. And I think that is a feature, not a bug. There is a tendency for people to constantly try to coin the latest language and latest term and get the world behind them. And I think that seems to suck up a lot of energy that we could be spending on more productive things.

But what underpins this language? Should ESG be understood as ethics?

I'm not sure it should just be ethics because What we are trying to do is identify ways of holding businesses accountable for their negative externalities that they haven't been held accountable for financially in the past. We are also trying to identify opportunities to innovate and grow and ways to make more money from the fact that the world is changing and consumer demand is changing and what we're worrying about is changing. And there are ethical obligations that stem from these negative externalities. So I think that one of the challenges is we're trying to get a lot of different goals achieved under this umbrella. And I think you really, really start to see that show up when we start to look at incentive design, where you end up with companies setting a lot of goals where it's not necessarily clear whether what they're trying to incentivize is more innovation and more business development, or they're trying to set ethical guardrails around what we're doing. And so So because we don't differentiate adequately between these two concepts, we can't design the kind of governance incentives that we need to get the job done.

Alison has actually written about ESG incentives for Sustainable Views. You'll find the link to her opinion piece in the show notes.

But I think you really, really see those conceptual contradictions and problems with ESG when you start to look at what we're trying to incentivize businesses to do. And then more broadly, I would make that point about reporting frameworks in general, where we are saying simultaneously, just be transparent and give us all your data and keep disclosing more and more and more things and everything will be great. And that will drive win-win shareholder value and stakeholder engagement and all these wonderful things. We say that and just give us all this data and we will use it to score you and rate your company and decide what we're going to do with capital and whether we're going to withdraw it and punish you if you're are not doing a good enough job.

What she's referring to is the proliferation of ESG disclosure frameworks over the years, some of the terms mentioned earlier, and the growth of data providers and rating agencies scoring companies based on those ESG metrics. So where does that leave companies and investors?

Are we treating transparency as an opportunity or a weapon? Um, and so given that we're not clear about that, I don't think it's It's super surprising that what we tend to get out of corporations is a sort of curated impression management and trying to tell our stories.

Transparency is important, essential, actually. But trying to meet the needs of different users, shareholders versus stakeholders, is a complex task. And the different point of views of different bodies designing those frameworks is, at least at this stage, adding to the confusion. Are these efforts making things better or worse? And are they useful?

If you look at how companies are reporting on their carbon emissions, for example, at the moment, it's a complete free-for-all. And if you're trying to compare across companies, it's almost impossible. So I certainly don't think it's a bad thing to require some set of disclosures. I think we are fooling ourselves if we think that that is going to be sufficient. If company— if we think that companies are not going to try to curate those disclosures to show themselves in the best light possible. And also, if we think that's going to tell us everything that we need to know about a company, the reality is that we can't treat these data points as objective performance metrics. Whether your water use is high or low depends very much on the operating context of your industry and also the geographies that you're in. And so none of this data makes any sense out of context. And I fear that what we are doing is trying to please investors by providing them apples-to-apples data so they can put companies in a portfolio and create a score. And that kind of incentive towards a company is not necessarily what you need in terms of finding what the real strategic priorities are and focusing. I have never spent more than 5 minutes in any corporation that can meaningfully prioritize 30 or 40 issues, not least issues that are not seen as core to the business, but there are issues that you need to get right for some kind of, I wouldn't say necessarily side reason, but these are not core strategic growth imperatives. They're other priorities that we've now decided business should meet. It is not, to me, sensible to think that any business is going to be able to execute and be ambitious on 30 or 40 issues. They may be able to prioritize 1 or 2 meaningful strategic priorities. So So there's a massive tension between breadth and depth. And what I would always say to a company, if I'm advising a company, is these metrics are useful. They're a useful part of the landscape. They're a terrible guide to strategy, and they're a terrible guide to thinking about what you need to be doing as an organization to really make sustainability happen. So yes, pay attention to these frameworks, pay attention to how social and environmental pressures are evolving and what investors are focusing on, but do not do not manage to the metrics and do not think this is going to help you in any way come up with some kind of corporate strategy around these issues.

That was Alison Taylor Taylor. You will find her full interview, including what she thinks will help companies with their sustainability strategy, in the show notes. Our episode on carbon offsetting was also very popular. There is mounting criticism over the voluntary carbon markets, or VCMs. There, companies buy carbon credits to offset their emissions and to meet their net-zero goals. But there are concerns about the quality of those credits, whether the organisations behind projects generating them, say a reforestation initiative, are being paid fairly, and whether more broadly VCMs are just a sophisticated form of greenwashing. Here is my colleague Marie Kembley summing up the main points. Marie looked into this area in detail, and in the show notes you will find some of our most recent carbon market coverage too.

Okay, so let's, yeah, let's start at the beginning with these. And the clue a little bit is in the name with these voluntary carbon markets, you know, unlike the compliance markets, which are managed by governments. So we're thinking of things there like the EU's emissions trading system, or, you know, China's emissions trading system as well. And where participation in those is compelled by regulatory requirements, as the name suggests, participation in the voluntary carbon markets is just that, it's voluntary. And we see entities such as companies, you know, they're voluntarily seeking to offset their greenhouse gas emissions via the purchase purchase of carbon credits and carbon projects on the other side of the transaction, such as, for example, a scheme to plant new trees, so reforestation schemes, they will sell carbon credits in order to fund their work. That's the basic premise there. And a common thread is the idea that each individual carbon credit should represent 1 ton of carbon emissions removed from the atmosphere or a ton of carbon emissions that have been prevented from entering the atmosphere. That's the kind of basic idea.

First thing to notice, Marie mentioned that one credit equates to one ton of CO2 removed from or prevented from entering the atmosphere. We will go back to this point later, as not everyone is convinced about this equivalence. So VCMs can be useful if offsets are used judiciously.

I guess the biggest argument for them is really that they are a vehicle for channeling some much-needed, very needed investment into technologies and initiatives that are going to have a positive impact on reducing emissions already in the atmosphere or preventing them in the future. And of course, we don't need to say that that's an urgent area where there needs to be a lot more investment and a lot more activity. And to be, yeah, let's be honest about it. There is going to be this transition period. And even if all the companies right now put in as much investment and as much effort as they possibly could to get their emissions down as quickly as possible, which we would all love to see, obviously. Even if that was to happen, they can't do that overnight. So there is this argument to say, okay, well, given that that's the case, why not allow them to at least invest some money in offsetting and to direct it towards these things? But you've already said it, you know, that leaves open some really big questions about the integrity of them in two main ways. One, that they're enabling companies to greenwash effectively. They're overstating the amount of positive action they're taking. So maybe they they do X amount of carbon offsetting and they talk about that in a really positive way, but they kind of neglect to mention actually they're still doing a lot of bad stuff on the other side. Or perhaps even worse, you know, that companies— there's a risk that companies might offset and avoid actually taking the action that they need to take. So it's even worse than them just trying to market themselves as looking better than they are. They just don't do the stuff that they should be doing. That's obviously a clear risk. Because I don't think I said this already, these markets are largely unregulated at the moment. So that's something— there are no kind of set rules at the moment about how companies can talk about how they're using these carbon credits. And secondly, the other big issue is around the integrity of the carbon credits themselves. So, you know, as I said at the beginning, there's this idea that each carbon credit should be 1 tonne should equate to 1 ton of carbon that's not in the atmosphere. But that's obviously a very nice idea, but in practice, how you actually measure that and guarantee that that happens is very, very difficult. And similarly, there isn't regulation about how carbon credits should be described and exactly how they should work, etc. But there are— I don't want to be misleading— there are schemes and there are people that would say, hang on a minute, there are processes that have evolved over This is still a relatively nascent market, but still it's been going for a couple of decades now, at least in a very early sense. And these schemes have developed. So there are verification schemes. The biggest one is the Verified Carbon Standard, and that's managed by a nonprofit, Verra. But there are others such as the Gold Standard and the American Carbon Registry. And what they would say is, well, actually, these processes have evolved over a number of years, and there are these schemes such as ours which do verify the quality of these carbon credits. And Verra in particular, you know, they would say that although they manage that verification scheme and ultimately they are responsible for the integrity of it, what they are keen to do is they have enabled these methodologies for how the carbon credits are verified. They are approved via a kind of peer-reviewed process of open consultation. So what they say is actually the carbon credits are subject to verification via methodologies that have been approved and discussed among, you know, a lot of leading climate scientists. So they would say there is integrity in the market. There are a lot of people that also have concerns that there isn't enough integrity. So it's actually a very hot debate within these markets at the moment, I would say.

Lastly, one of my personal favorites. Here are some highlights from my chat with Mattias Vikström, the founder and CEO of Doconomy, a Swedish startup that It, among other things, helps consumers measure the carbon footprint of the products they buy through their credit cards. Since it was launched in 2018, Doconomy has grown rapidly. It has partnered with Mastercard as well as with the United Nations. And on its website, you will find a lifestyle calculator that will help you to find out your carbon footprint. I've taken it and it is really helpful. It does help you to focus on the way we all consume and travel. This is the part where I ask Mattias if because of his work, he feels like a climate activist.

I was actually thinking about this a few weeks ago because I really admire the activists. I really admire the passion and the grit. And sometimes I feel like I should be there side by side with them by the coal mines or the factories. And maybe one day I will see that as the most efficient, but I think for now my role is, is by enabling rather than protesting. So I wouldn't know. I think I would call myself a factivist. So I'm trying to get facts across so that people can act on facts that are reliable and best in class and comparable so that you can also see your, your progress compared to others. So if you were to refer to me as a climate factivist, that would make me very proud. And in all fairness, I'm coming back to media's role in this. I think you guys play pretty much the same role, right? You are also activists in the climate, in the climate space, bringing tangible data and true, true reporting to, to the many so that everyone can make their mind up and deciding on how to contribute. And that's where I think language are utterly important so that we're not creating a language that is disqualifying of those not socializing with the climate crisis every day. And I also think that data is a language that is a very efficient one, making use of the numbers to bridge the intention-action gap in going forward. You don't need to know only what does harm, but also the effects of you trying to do good.

So we go back to language and communication and how we define and discuss sustainability. You will find the link to the episode featuring Matthias and the links to our other most popular episodes in the show notes. That's it. This wraps up our first season. We will find each other again soon. In the meantime, do get in touch with me on social media. You can find me on LinkedIn, Twitter, and Instagram. I hope you enjoyed the first season of Sustainable Views, the podcast.