Being Intentional
In this edition: Mitigation vs. Adaptation, EU Taxonomy, People Taking Offense, and much more!
Welcome to this installment of Being Intentional, Motive’s bi-weekly newsletter focused on helping people navigate the rapidly changing world of corporate sustainability and ESG.
We’re trying something new for this newsletter–an audio version. The goal of this newsletter is to provide timely and actionable insights into the ESG and sustainability world. We’re delighted when people tell us they enjoy the newsletter but we know it’s not always light reading, and sometimes schedules are full and reading a long(ish) newsletter doesn’t always work. This is what led us to the idea of an audio newsletter. Technically this is a podcast but we’re going to stick to an audio book-style narration (for now 😉).
If you prefer to read the newsletter then keep going, you’re in the right place! If you’d like to listen to the audio version of this newsletter just click on the link below. This is our first attempt at this experiment and we’d love your feedback. Love it? Hate it? Please let us know.
We also wanted to mention our newly launched website. If you’ve been a reader of Being Intentional you already know what we do but our site might help to fill in some gaps. Again, your feedback is very much appreciated. Check out our new site at www.esgmotive.com.
As always, we are grateful for your support. This newsletter is something we love doing and we hope you enjoy reading it—and please consider sharing it! Thank you.
What We Are Seeing
There’s something very interesting happening in the world of climate action. It’s still early, but a shift is perceptible. The last two years in climate action have been marked by a push to mitigate the worst outcomes of a rapidly changing climate. But now, it seems like the narrative may be shifting from mitigation toward adaptation, and this could be big.
Mitigation vs. Adaptation
The mitigation effort is framed as marshaling all resources to keep global climate warming to below 1.5C above pre-industrial levels, as modeled by the IPCC. The context here is that even if we stopped all GHG emissions, warming would continue for decades due to the nature of the legacy emissions already present in the atmosphere, and so all efforts must be directed toward limiting the consequences of this ‘baked-in’ warming and preventing any further warming. Climate models predict that if we can keep warming to below 1.5C, we can avoid some of the most consequential impacts of a changing climate, but urgency is required as we have already surpassed the 1C milestone in 2017 and are forecasted to reach 1.5C potentially as early as 2030.
It has been this focus on mitigation which has fueled the rise of Net-Zero movement and ever-increasing pressure on companies to report their emissions profiles and adopt aggressive plans to reduce these.
It has been this focus on mitigation which has fueled the rise of Net-Zero movement and ever-increasing pressure on companies to report their emissions profiles and adopt aggressive plans to reduce these. So much of the environmental movement in general, and of the Business & Society relationship more broadly, has been subsumed by a focus on mitigation in efforts to keep warming below 1.5C.
But lately, we have been noticing more and more of the voices which were strong proponents of climate mitigation openly questioning if--and some even now stating that--keeping warming to 1.5C is simply no longer feasible.
The journal Nature surveyed over 200 climate scientists who authored the IPCC report seeking their perspectives on our collective response to climate change so far, with results published in November 2021 (LINK). Of the 92 responding climate scientists, fewer than five believe we are on track to keep warming below 1.5C by 2100, with the vast majority believing we will instead see warming in excess of 3C.
That climate scientists were increasingly skeptical of our mitigation efforts is not necessarily surprising, and most ‘science communicators’ and environmental organizations continued to push to not lose hope and to double down on our goals--defeat was simply not an option. But here we are in February 2022, and it seems the narrative is perhaps starting to shift.
The climate is changing, much of it is now inevitable, and so the focus should be on adapting to a changing climate and all that this brings.
The alternative narrative which has long been suppressed is that of climate adaptation. The context here is that the climate is changing, much of it is now inevitable, and so the focus should be on adapting to a changing climate and all that this brings. This narrative has been pushed back against by many storied environmental organizations because it is believed to undermine mitigation efforts. It is clear that the two--mitigation and adaptation--go hand-in-hand, but in a landscape of limited social attention and governmental resources, mentions of adaptation are actively suppressed in the interest of mitigation. If we open the door to adaptation, we lose the urgency for mitigation and the goalposts must be moved, or so the thinking goes.
But early signs of change are surfacing. The climate mitigation narrative is still dominant, but not quite as clearly as it used to be. To demonstrate, look at a recent high-profile Twitter exchange from this past weekend:
With nearly 40 thousand likes so far, Adam McKay’s original tweet is already one of the most-liked climate tweets in history. More interestingly, it is also receiving far more push-back from other reputable climate scientists and communicators--all push-back which would almost have never surfaced even 12 months ago. These tweets don’t use the words ‘mitigation’ or ‘adaptation’ in whole, but the themes are irrefutably present.
This change is evident in more than just weekend Twitter exchanges. Turning to our Dynamic Materiality engine, we can see that climate change mitigation is mentioned an average of 642 times per day across the global news media landscape over the last 30-days. In contrast, climate change adaptation is mentioned an average of 516 times per day across this same landscape and timeline. (For reference, climate change--without mention of adaptation or mitigation--is mentioned an average of 14.2 thousand times per day. Clearly, we still prefer to discuss the causes and consequences of climate change more than we do our responses to climate change!)
Where the early indication of change comes through is in the fact that daily mentions of climate change adaptation are growing 10% faster over the last 30-day period than are mentions of climate change mitigation. This relative growth pattern is not present if we go back to 30-day periods 6- or 12- months ago. This is new.
This is very interesting, and we will be keeping an eye on it. If the popular narrative of climate change tilts in favor of adaptation over mitigation, it completely re-writes the Business & Society relationship dynamics in this area.
Mitigation, at its base, is an acrimonious relationship: it’s about blame and responsibility, disclosure and regulations, and of never truly doing enough--it's about working to prevent the worst. Adaptation, on the other hand, is an aspirational relationship: it’s about research and innovation, collaboration and possibilities, opportunity and improvement--it's about working together to bring about better.
We can’t give up on 1.5C…but we also can’t lose hope that we can bring about better.
Business of Sustainability
Take a moment to think of a few of your favorite companies, maybe ones you’ve worked with, invested in, or purchased from, and try to break them down into identifiable economic activities. If I think of Nike, I think of sportswear and equipment and filter it down into the economic activities of apparel manufacturing and consumer non-durable goods, as an example. Companies are great at coming up with poetic or empowering descriptions of who they are or what they do, but in the end, everything can be filtered down to basic economic activities, and these can be identified and labeled.
Labels matter…and they are about to matter even more.
That’s because the EU Taxonomy has finally been released!
Not sure why a ‘taxonomy’ is being celebrated, or even what it is? Don’t worry, you are definitely not alone.
The EU Taxonomy is a technocratic development which likely means absolutely nothing to the majority of the world, but means so much to those of us working deep in the sustainability world…and now that it has been released, things in the sustainability world are about to change.
For so long, sustainability could mean whatever we wanted it to mean. Although empowering for some, this vagueness proved paralyzing for most. What exactly should companies and investors focus on? How should efforts be measured and communicated? What should we benchmark against? When do we know if we have done enough…or far too little? We always say that sustainability is business strategy, but that doesn’t mean it is easy to figure out what that strategy should be.
The EU Taxonomy is a ‘green’ classification system translating the EU’s climate and environmental objectives into criteria for specific economic activities and investment purposes.
Enter the EU Taxonomy. The EU Taxonomy is a ‘green’ classification system translating the EU’s climate and environmental objectives into criteria for specific economic activities and investment purposes. It builds upon the EU Corporate Sustainability Reporting Directive (CSRD) which provides a reporting framework/mandate for corporate sustainability performance and also ties into the EU Sustainable Finance Disclosure Regulation (SFDR) which provides a reporting framework/mandate for financial products and asset & investment managers.
This coordinated series of mandates and frameworks has been years in the making and is fueled by a recognition that companies and capital markets hold significant potential and responsibility to address climate and sustainability challenges while at the same time also recognizing that the field is derailed by ever more greenwashing and subterfuge. The CSRD tells companies, and the SFDR tells investment managers, how to report on sustainability. A corporate sustainability report should provide meaningful information on actual sustainability, not simply marketing claims, just as a ‘green’ ETF should hold positions in sustainable companies and not simply be a re-branding of existing non-sustainable ETFs.
A corporate sustainability report should provide meaningful information on actual sustainability, not simply marketing claims.
The EU Taxonomy is the key to making all of this work. It labels which economic activities are sustainable and which are not. A company reporting on sustainability can no longer spin whatever it is they want--the taxonomy is the definitive account of what is and is not sustainable. Investment managers can no longer market whatever they want as being ‘green’--the taxonomy is the definitive account of what is and is not sustainable.
In this first iteration, the taxonomy is starting quite broadly. Economic activities are identified as they pertain to these sectors, with intentions of expanding the taxonomy in both scope and detail in future iterations:
Agriculture, Forestry and Fishing
Manufacturing
Electricity, Gas, Steam and Air Conditioning Supply
Water, Sewerage, Waste and Related Remediation
Transportation and Storage
Information and Communication Technologies
Buildings
All of this applies to the EU market but certainly has global implications. Much of the ESG and sustainability market is voluntary and non-standardized, so much so that having a strong keystone regulation from the EU leads many non-EU companies with exposure to the EU market, or ambitions thereof, to align with these standards. The EU gains first-mover advantage in this regulatory space. In a void of uncertainty, global companies and global investors will increasingly be benchmarking activities against the EU standard…and in turn, regional companies and regional investors will be benchmarked against their global peers. So all companies--not only those in the EU--should take heed of what is, and certainly what is not, considered sustainable within the EU Taxonomy.
In a void of uncertainty, global companies and global investors will increasingly be benchmarking activities against the EU standard.
As an example, and to the dismay of environmentalists worldwide, nuclear and natural gas activities were included in the final EU Taxonomy. The draft taxonomy had initially omitted these activities and sent industry lobbyists into hyper-drive. Why? Because omission from the taxonomy could result in significant increases to cost of capital.
The last two years have seen record inflows of investment funds into ESG assets, and most of these assets have been into ETFs and managed funds. Typically, these funds benchmark off of a ‘green’ index to determine which holdings to include. Under the EU Taxonomy (and the concomitant SFDR) these underlying indices will not be considered, nor permitted to market themselves as being, ‘green’ if they include economic activities in contravention of the EU Taxonomy. And just like that, trillions of dollars of ESG investment flows are gradually being redirected.
And more is coming. With the Taxonomy, the SFDR, and the CSRD in place, the EU is moving on to draft frameworks for ESG rating agencies.
ESG and Sustainability have grown quite organically and are now a bit of a wild-west frontier--the onus is on the individual investor, consumer, employee to figure out what is what. This has provided a great deal of flexibility and independence to all companies to shape their sustainability programs as they wish--some have taken this opportunity to gain a structural competitive advantage by acting on sustainability as business strategy, some have opted instead to seek short-term gains through deceit and misinformation, while others still have simply ignored it all convinced that sustainability was just another passing trend.
The tide is turning and labels are going to matter more than ever. Take a look at the EU Taxonomy (LINK). As a company, how does your current sustainability programming and reporting correspond to EU guidance? Are you active in any economic activities which are not considered sustainable? If so, are these activities important revenue streams for you or rather legacy programs that were simply never truly shut down?
Any company can issue a sustainability report, but with emerging regulations, not every company is going to be able to be labeled Sustainable--and this matters in the world of sustainable consumerism and ESG finance!
CSR Spotlight
We had a lot of fun reviewing this CSR report--not only because it was so well done but because it was from a company that we almost never think of even though it’s products are all around us…even on us.
It’s not home decor, foodstuff, or consumer electronics. It’s much more fundamental--basic, even--than that.
It’s zippers…or fasteners to use the industry term.
YKK--maker of over half of the world’s zippers--released their 2021 Sustainability Report, and it is a great case study in integrated reporting.
Honestly, if you are a company looking for guidance to get into integrated reporting, a financial analyst looking for excellent comparative data, or a VC looking to help their portfolio companies prepare for markets which prize disclosures, you really do need to take a look at the YKK Integrated Report.
[Side Note: Did you know the YKK Group controls over 106 companies with over 44 thousand employees globally? We didn’t!]
What We Liked
First off, this is not actually a sustainability report, it’s an Integrated Report…and this is excellent. We typically see companies release their annual report with a focus on strategy and financials and later release a distinct sustainability report with a focus on environmental and social developments. This is common, but unfortunate as it frames sustainability as being something outside of the business, and as we always say: Sustainability is business strategy. The YKK Integrated Report is a great case study in this respect. All elements of management strategy and outcomes, financial performances, environmental innovations and impacts, social considerations, and strategic planning are fully integrated one with the others.
YKK is driven by a guiding philosophy and this is obvious throughout all sections of the Integrated Report. YKK’s philosophy is the Cycle of Goodness where “No one prospers without rendering benefit to others”. It’s not a philosophy to guide sustainability efforts or stakeholder engagement, rather it’s a philosophy shaping all of YKK and everything it does. Reading through the report, it is clear that the philosophy was not chosen to reflect the company’s ambitions but rather the company’s ambitions have long been shaped to reflect this philosophy. So many corporate mission statements or values seem like empty words strung together by a marketing consultant…but not in this case!
All performance metrics are provided with full context and measured against a transparent benchmark. It’s not just that YKK has committed to reducing emissions, but rather we know they have reduced 20% of Scope 1 &2 and 36% of Scope 3 emissions against a 2018 baseline. This is a level of detail that allows for much more meaningful performance analytics.
As impressive as the Integrated Report is, YKK goes even further and provides a distinct Data Book containing all ESG and Financial metrics. Full transparency and convenience--what’s not to like!
What We Would Like to See
More of this. We had no idea YKK was so advanced in integrated reporting…but now that we know, we are that much happier with the fact that most of our clothing has YKK zippers (we checked!).
What We Are Saying
Someone Will Take Offense
There’s something that corporate sustainability and ESG teams are never truly prepared for. It’s not the reams of unstructured data, the vague definitions, the shifting goalposts, or even the mis-aligned incentives within their own organization. It’s the simple fact that the better you do, the more likely it is that you will offend someone. Sustainability is effectively a shifting of power balances, and when power balances shift, someone always feels they have lost something.