ESG, Circular Economy and ‘Sustainababble’
By: David Jenkins
Tags: Sustainability, Circulareconomy, Esg, Capitalism, Investing

Can we reconcile the corporate model and societal good?

Disclaimer: I think about things and I write about them. All opinions and commentary are entirely my own and I welcome other viewpoints.

Having read the news of Jeff Bezo’s commitment of ten billion (roughly 6% of his fortune) to saving the planet (aka. Bezos Earth Fund), I can’t help but wonder about the mechanism’s at work across the capitalist system and the billionaire philanthropy that falls out of it. There is little there in the way of detail about how the fund would be administered, along which criteria, other than; ‘Scientists, Activists and NGO’s’ and whether it is in alignment with the broader profit generating objectives of Amazon.com and it’s variety of enterprises.

Then there are question whether, if it isn’t in alignment, then does this just create more asset bubbles similar to that of quantitative easing? Where commercially unsustainable or unviable, but no doubt good natured projects, become the targets of vast amounts of philanthropic capital directed toward them?

There’s no doubt lots of corporations (and individuals) are keen to be seen as ‘green’ or ‘saving the planet’, when the bulk of their wealth is sustained through unsustainable practices. It seems to be that the capitalist’s response, to the view that companies have only benefited a small number of shareholders to the detriment of the vast majority of the public¹, is asking corporations to now become the vanguards of social responsibility.

Based on the traditional definition of the ‘company’, it is certainly somewhat of a conflict of interest. Not to mention the risk of either companies or individuals to be close to the line on ‘greenwashing’.

To the rescue of the capitalist model comes the socially aware corporation, based on sustainability principles. Even a cursory look at the media shows there is a clear momentum around socially responsible investment and mobilization of investor funds to do greater good for the planet.

This is certainly a noble pursuit and directing investor funds toward addressing the challenges of climate change and social inequity is certainly a good way to bring attention to these causes, but how do these initiatives stack up and what is their potential versus their pitfalls?

The Malevolent Corporation

Companies as we know them today have become all powerful entities even larger than governments. If we take Amazon as one of the more extreme examples, with a market capitalization in excess of 900 billion and employee count of around half a million people, it dwarfs sovereign economies such as Singapore and Russia. Briefly this year it also joined the club of companies valued over 1 trillion dollars such as Alphabet, Apple and Microsoft, which is an almost unimaginable number for a single corporate entity.

The ability to combine capital and wield economic power has been incredibly successful. These structures have led to lifting vast swathes of the population out of poverty and into the middle class and they remain the single most important mechanism for wealth creation and distribution in society today.

Perhaps as described by Christopher Wright and Daniel Nyberg², they have been too successful and efficient, and are now beyond the ability of governments to even control them and are engaged in what they refer to as ‘Creative Self-Destruction’. The inherent model behind corporations is one of liability limitation and externalization of cost. The idea that a relatively small group of shareholders receives all of the economic benefits of the company, yet externalizes all of the environmental, social and long term disposal impacts to the public, is becoming less and less palatable to all corners of society.

So what can be done then to take advantage of the potential that these company structures provide but reduce their impact to society at large? Enter emergent concepts such as ESG, Circular Economy and Corporate Social Responsibility, or the concept that ‘instead of being part of the disease, they can be part of the cure’².

Advent of Corporate Socialism

Under this new found role of corporations as socially responsible entities, with a new care around ‘externalities’, we find ESG, or the inclusion of environmental, social and governance considerations as well as financial performance in the investment process. This may include several other categories depending on the definition (e.g. SI, SR, SRI, II etc) and also guidelines such as the 17 UN Social Development Goals. In any of these definitions, we’re in early stages of acceptance and lack consistent standards, measurements and global disclosures. This lack of maturity makes navigation of the field complex and costly however the field is evolving rapidly and seems at this moment to be coalescing around Sustainable Accounting Standards Board (SASB) and Task Force on Climate-Related Financial Disclosures (TCFD),.

There are also indications that governments are taking the adoption of ESG more seriously. For example the European Commission currently has a consultation period open for revision of the rules around ‘Non-financial reporting by large companies’, with other sovereign governments likely following also with mandatory sustainability disclosures. However for much of the world, at least from a manufacturing power standpoint, participation is still voluntary and disclosures still very low. Even among those that do disclose, standardization is a challenge.

The variation of standards presents the most immediate challenges to funds with ESG investment mandates, who require quality and timely data to be in compliance with their investors directives. They also require the ability to take this data and make comparisons, across different collection methods, calculations and methodologies. This diversity in implementation has led to a nascent business for data and modelling vendors such as Bloomberg, Refinitiv, Sustainalytics, MioTech and TrueValue, who then supply their own proprietary ESG models, to allow funds to make some sense out of the deluge of information.

In addition to ESG, and also under the realms of corporate responsibility we find Circular Economy. Circular Economy being a response to the traditional linear manufacturing process, the linear process defined with a start, finish and then a sale, including externalization of all costs associated with the long term management, recovery or disposal of the end product. Circular Economy proposes that right from the start of the manufacturing process, during design, that we factor recovery in and feed these outputs back, as inputs into the manufacturing cycle.

So we have an answer to both the concentration of benefits for a few and the externalization of cost. Or do we? In fact what we may be seeing is what is described as ‘Incorporation of Critique’² along the lines of a continued business as usual approach.

ESG and Circular Economy — The Emperors New Clothes

The corporation under the ESG scenario engages in dual responsibilities to shareholder wealth accumulation, as well as corporate environmentalism and sustainability. It promotes both a business as usual model and proposes that in order to address existential threats such as climate change we need to continue on the same consumption and growth model which created it.

These models being ultimately conflicted on the basis that they promote yet more consumption and are yet still, highly dependent on the continued exploitation and consumption of nature, limited by the fundamental needs of continued economic growth. This picture of the corporation continues to propagate the myth that managing the environment and climate change, can be done as externalities around quantitative risk models, then somehow reduced to a manageable number on a spreadsheet. That a price can be placed on natural processes, which are complex and frankly priceless and then efficient markets will sort out the rest.

If remedy is required then a regulatory handbrake can be applied, such as a price on carbon, or a sustainability tax, resolving the conundrum of continued economic growth and environmental responsibility. That we can simply comply with the new regulation and get back to business.

The other no less complex solution involves corporations actively participating in the Circular Economy, where economic growth, consumption and re-use can exist within the same cycle. At face value this definitely has merit, however not so easy to conceptualize how in an advanced manufacturing society the end product can be deconstructed back to inputs into the system³. In this case, the pursuit of profit starts to look very much in doubt and only revolutionary changes in the manufacturing cycle at all levels could possibly achieve such a result.

As a purely thematic concept, it makes some logical sense and is certainly inspiring to any designer, however on a practical route, actively choosing this route over linear manufacturing would forego profit margin for re-usability and also places considerable responsibility on the consumer to participate, without really discussing why they would do that and how that would be accomplished commercially.

Crisis in Capitalism

The general theme then of this new corporate social responsibility is that we can help to even the balance sheet on the capitalist model, to provide a more sustainable result and equitable playing field for all of the world’s inhabitants. This is in spite of the facts that based upon measures such as GDP, lifespan and wealth, life has never been better for the earth’s human inhabitants.

On those measures, capitalism has undoubtedly been a success, even though without doubt it has led to a degradation of the environment and we could probably use a few speed bumps to the efficiency and corrections in how those finite resources are accounted for.

When reviewing the arguments put forward about the creative self-destruction of the corporation and capitalist system, compared to the overall benefits the system itself has provided⁴, I find myself swayed against the feeling of pessimism about the capitalist model itself and more towards the potential.

If as suggested by Paul Collier⁴, we can renew our social contracts with each other and create a pragmatic environment to solve the issues with mutual regard, then I can see how a society envisaged by Eric Sanderson, Joseph Walston and John Robinson⁵ could possibly come about. A society that is concentrated around urban environments, with no extreme poverty, access to education and a desire to preserve the natural environment. With the outcome being a resurgence in biodiversity and nature. What a wonderful and refreshing vision.

That is to answer by own question to begin with, the corporate and capitalist model can be reconciled and is actually the best way to pool resources and navigate a path through the bottleneck⁵. Some tough but pragmatic choices would be required, but could lead to an environment where nature is allowed to flourish and bad actors and practices can be kept in check.

The Role of the Consumer

Out of all of these myriad of initiatives, to reinvent corporations and the capitalist system, the one thing that I find is consistently missing is the focus on the consumer. There is seldom talk about how to incentivize and inform them, but usually to talk about their wastefulness and poor choices⁶. The consumer representing significant wallet and purchasing power and yet is usually the recipient of poor quality choices and information on where to direct their resources.

Unlike investors who have access to rich and improving metrics around sustainable investing, the consumer has little to guide them to making sensible decisions on where and how to direct their resources. Even simple decisions like ‘Would you like a plastic bag with that?’, are ludicrous in that once again we see an externalization of cost aspect that places the consumer into the awkward position of being responsible for a poor outcome.

This is something that needs addressing. When making point of purchase decision, consumers should have a clear, holistic view, that allows an instant eyeball on what they are doing exactly in making this purchase. Whilst this may seem a daunting task, it is by no means unachievable given today’s technology. We could in fact, index, analyze and model the environmental weight of every retail and consumable product.

Perhaps even, we could make this a universal standard, along the lines of a ‘green tick’, only more thorough and informed. Consumers should be able to ‘decloak’ the company and make their intentions known. I would even go further as to say the veil of corporate secrecy needs to be thoroughly dismantled.

Decloaking the bad actors and highlighting the good, will be an important contribution to the other end of the product life cycle. Then consumers can be put into the driving seat and actually responsible for their choices, rather than bearing all the responsibility currently but having none of the information or control.

When we put all of these things together there’s cause for optimism on our capability to rework our economic and social infrastructure. In re-quoting the eminently quotable Winston Churchill: “ In casting up this dread balance-sheet, contemplating our dangers with a disillusioned eye, I see great reason for intense vigilance and exertion, but none whatsoever for panic or despair.”