09 Jan Sustainability and the Damage Done
The following commentary/analysis is one I wrote in my capacity as a senior fellow at “the nation’s oldest consumer protection agency,” Consumers Research, where, among other things, I compile a weekly letter for public pension-fund managers. I am sharing it here today because I thought it might be useful to some of you.
Right. Wait. What?
Everyone knows that “sustainability” in business is a good thing. More to the point, everyone knows that everyone knows that sustainability in business is a good thing, which is to say that it has become something of a truism.
Of course, the problem with truisms is that they’re not always true. The fact that something is nearly universally accepted as “self-evident” doesn’t mean that it is necessarily accurate. Some things require actual substantive evidence to be considered valid. And the use or misuse of corporate funds – i.e. shareholders’ funds – is one of them. Or at least it should be.
The good news is that the Harvard Law School Forum on Corporate Governance recently published a handy guide to calculating return on investment (ROI) for corporate sustainability “upgrades.” The guide, written by Matteo Tonello of the Conference Board, is extensive and detailed.
The bad news is that it’s also mind-bogglingly heavy on stakeholder jargon and, as a result, is nearly useless – at least for the purposes its author intended:
Unlike traditional ROI, which mostly emphasizes investments’ short-term financial returns, sustainability ROI adopts a longer-term view, measuring financial, environmental, and social value. Its complexity lies in the multidimensional nature of sustainability and in factoring in intangible benefits, among other factors. To assess it accurately, companies should first unpack the concept, ensuring that all relevant elements are considered for a comprehensive evaluation.
Sustainabilityencompasses the full range of initiatives designed to promote the longterm welfare of a company, its multiple stakeholders, society at large, and the environment. It includes efforts to ensure compliance with sustainability-related laws and regulations, including disclosure requirements….
Moreover, sustainability ROI is more difficult to measure than traditional ROI due to its multidimensional nature and intangible benefits that are not physical in nature. For instance, a company reducing plastic use may lower costs over the longer term, gain customer trust, and enhance its brand image, creating long-term value beyond just financial savings.
The game is given away here by the first three words in the above passage: “Unlike traditional ROI….” What these three words tell us is that everything that follows is intended to shift the Overton Window, to confuse readers – and investors – about what is and is not material in corporate behavior. They tell us that the author has no intention of addressing return on investment as it is rightly understood and, instead, intends to offer a new and entirely fabricated definition of the term.
The game is also given away by the last four words above: “beyond just financial savings.” What these words tell us is that all of this is pure rationalization. It is an attempt to justify corporate policy changes and capital expenditures motivated by something other than the corporation and its shareholders’ best interests. It is an attempt to explain away politicized decision-making and/or capitulation to political pressure. In short, it is an attempt to enable and excuse corporate executives’ blatant and unremorseful violation of their fiduciary duties.
To put it bluntly, the definition of ROI advocated by The Conference Board, based on its research, is one that relies on double materiality, a concept that is widely accepted in Europe and codified in EU regulations but that is still extremely controversial in the United States and, indeed, was largely rejected by the Gensler-led SEC last March when it issued its (currently suspended) final rule on emissions disclosures. The idea that corporations should adopt such a widely mistrusted and derided idea to justify their policies and expenditures – especially with the new, Paul-Atkins-led SEC likely to take an even dimmer view of double materiality – is worse than foolish. It is, indeed, a recipe for accusations, and perhaps even formal charges, of fraud.
Unfortunately, that’s not even the end of it. The worst news is that accusations of fraud are almost certainly justified in some cases already, even without the implementation of the double-materiality-inspired ROI. Tonello continues:
Despite its importance, determining the ROI of sustainability initiatives remains a nascent practice. Data from The Conference Board show that 41% of polled executives either believe their companies are underperforming or are uncertain when it comes to assessing the ROI of their sustainability investments, while only 17% express similar concerns about measuring traditional ROI.
I’m sorry. What?
According to The Conference Board’s data, 41% of corporate executives believe (i.e. “know”) that their companies are “underperforming” or are “uncertain” about the return on their sustainability investments? 41% of executives really have no idea what the ROI on their sustainability expenditures is? 41% — more than four out of every ten executives – have engaged in sustainability “investment” and have no clue if it did the company any good? They are completely in the dark about whether or not they’ve been wasting their shareholders’ money playing sustainability games? Are you serious?
If this data is representative, if it can be extrapolated to American corporate behavior more generally, then the American capital markets are, unbeknownst to most investors, riddled with fraud and corruption. American corporate executives – at the insistence of and under pressure from a handful of exceptionally powerful but politically unrepresentative financiers – have spent billions of their shareholders’ dollars doing things that, in theory, look good from a stakeholder perspective but that may not have helped improve their companies’ bottom lines and may, in fact, have hurt their companies financially.
Again, if this data is representative – a BIG “if,” I’ll grant – then American corporate executives have engaged in fraud detrimental to their shareholders’ interests. Worse still, they did so only because they were, more or less, compelled to do so by people who wielded a ridiculous amount of power over them. In his 2020 letter to CEOs, Larry Fink was blunt: “We believe,” he explained, “that sustainability should be our new standard for investing.”
It’s all well and good that Fink should now follow the crowd and withdraw his firm from the Net-Zero Asset Managers Initiative, but that is a small and purely symbolic step. If The Conference Board is right, then the real damage from the initiatives undertaken by Fink and his cohorts is long since done. Repairing that damage can only begin once it’s been acknowledged. And the odds on Fink doing that are next to none.
