A short post to salute an initiative of Vigeo Eiris (where I am a non-executive director), which I hope will have a big contribution to shifting the finance system by making ESG information the norm in investment decisions.
Last week I was at the annual Oxford Energy Day, which focused on Energy in Growing Economies. Here are ten things I learnt (any errors are mine!).
- ’Growing economies’: new name for ‘emerging economies’
- Bilions lack access to affordable energy, and that hurts their lives
- Decarbonised, Decentralised and Digitalised will make for Democratised energy systems – which we’re not ready for.
- Energy is not just electricity, and best to focus on final energy use, not primary production
- China assumes it will decouple economic growth from environmental impact
- India: a new emphasis on markets and clean energy
- Africa: big projects face challenges; distributed more viable; charcoal as quick win
- Energy access: from a development problem of basic services to an untapped market opportunity of commercial users
- Reaching the ‘under-serviced’ will be highly context specific, and that’s a two-way challenge.
- What to do: systemic view crafted for local action, aware of incumbency power.
Below is the current draft of a chapter for Fast Future’s ’50:50 – Scenarios for the Next 50 Years’. They’ve given me permission to test my thinking so far. I’d love your thoughts – positive or negative – and connections to other, better thinking.
It is an attempt to imagine the world in 2050 as if what we do now matters. The speculative vision below will be wrong, but hopefully it will be useful. It is one path I can imagine to a sustainable footing. I don’t like all of it, and I don’t necessarily think it’s the most likely future. There’s so much more I’d like to add (links to culture or knowledge production, for instance) – but I’m already twice the word count! It applies some of the analysis from my work on industrial strategy, which you can watch here or see a rough cut here.
Please do let me know what reactions, comments below or via email!
Here in 2050 we ask: given how uncertain the world looked in 2020, how is it that most people are thriving? How did we deliberately and rapidly reduce our impacts on the Earth so nature to thrive? (Gaffney and Steffen, 2017) And, how did that lead to us becoming a two-speed world?
The short answer: back in the 2020s one group of countries tried ‘good growth’ as an open and future-facing strategy – and were able to renew as crises happened. These countries are now the Primary World, where people are thriving in ways that work in synergy with nature. Another group wanted security by preserving the past – and, when the crises came, weren’t able to adapt. This Secondary World is not in sync with nature, but at a much reduced pace and scale that nature can cope with.
Now for the long answer.
- Late 2010s: Many eras ending
- Early 2020s: ‘Good Growth’ vs ‘Security For Us’
- Late 2020s: ‘Renew For Climate Safety’ vs ‘Protect What We Have’
- 2050: the thriving Primary World and the struggling Secondary World
Last week I was asked to part of a research conference advisory panel for the ICAEW, Europe’s largest accounting institute. To give feedback on their conference idea, I thought about accountants and what companies say they need to take the next step on sustainability. Here is my work-in-progress (aka ‘WIP’), which concludes we need to help the senior executives in leading companies be ambassadors with quantified evidence that reassures the next wave of adoptees.
It’s worth thinking in terms of two groups: the leaders who want to go further, and the potential next wave of companies who are realising they might need to act.
For the leaders the key challenge is how to deliver on their ambitions. Leading companies have set long-term goals (e.g. double financial revenue while not increasing environmental impact) plus have a high-level strategic case for action (e.g. “in order to grow in emerging markets, we must address constraints like access to water and poverty plus we need to signal to regulators and civil society that our success is good for their country”). This brings with it a host of execution problems that are pertinent to the finance function, like:
- how to make ambitious targets relevant to day-to-day decision-making in products and business units;
- how to nurture innovation of product, service and business models;
- how to monitor financial performance at micro-level (eg product, business unit);
- how to allocate financial capital between initiatives which have different financial returns and contribution to sustainability goals; and,
- how to measure progress towards sustainability targets (especially when those targets are societal outcomes like O2 UK’s “10 million people have easier, more sustainable lives”).
For the potential next wave the key challenge is why should they act. What is the strategic case for their company (not for society as a whole, or for a business in general)?
What they need is evidence from the leaders that sustainability pays. Currently there are anecdotal (often self-serving) stories but few credible numbers. They need assurance that they are not taking a big risk, that the costs of action are bounded and that the rewards are large enough to be worth trying.
What does this mean for accountants and change agents? Well, I can imagine a sort of conveyor belt, of experimentation becoming standard practice.
At one end the leading companies are coming up with novel techniques on capital allocation for sustainability and the other challenges. The pioneers might be copying a technique from somewhere else, or adjusting something that already exists. Eventually these techniques will be more tried-and-tested, and ready to pass on to the potential next wave.
But, right now what needs to be passed on to the next wave is what the leading companies were doing a few years ago: the strategic case for action. The difficulty here is the leaders were able to act based on qualitative evidence and prospective vision, while the next wave need quantitative evidence and historic performance. That’s one of the reasons the companies fall into these two camps. Put another way, I think that if a company was going to be convinced by a visionary argument they would have been convinced by now.
So, what the next wave need from the leading companies is not the original why. Instead, it is the subsequent performance – was it worth making the decision? So, it would be great to have senior executives from the leading companies going to their peers in other companies with the financial results of their sustainability activity.
But, for the most part, this is not happening. Why? I suspect that it’s because those leading companies haven’t been measuring the financial performance of sustainability very well. They didn’t need it to make the decision and they haven’t needed it to do the project management. Why should they bother to spend money doing financial analysis that is for others, potentially for competitors?
I can think of two business reasons to bother. First, to help the next wave adopt serious sustainability targets will help the leaders achieve theirs, by providing more potential collaborators and so on. Second, even the leaders will need to increase their level of investment going forward. Next time the big decision will so big they will probably need quantitative evidence and historic performance.
My conclusion? Let’s help the senior executives in leading companies to be ambassadors with the quantified evidence to reassure the next wave of adoptees.
It looks like the UK government will create a Green Investment Bank. But there are battles to come, as everyone wants it to deliver on their favoured area – at least, that is my take from last night’s Aldersgate Group event.
There are many financial barriers to the transition to a low-carbon economy. Most technological transitions happen because an old platform (eg steam trains) has diminishing returns which make exploring a new platform (cars) worthwhile. But we’re trying to do this ‘early’ when it comes to the move to a low-carbon economy: non-renewable energy would probably have decades to run if it wasn’t for this pesky problem of putting the prosperity of billions at risk. One mechanism is to invent a Green Investment Bank which can reduce the risk to investors, and so reduce the costs of the transition for us all.
Last night’s excellent Aldersgate Group event showed how much progress there has been in getting a Green Investment Bank to happen in the UK government. There is a consensus on the need from the private sector and the policy wonks. The government announced an intention to create one in the Comprehensive Spending Review (see here).
But battles remain. There are all sorts of rumours that the Treasury is fighting a rearguard action to make the bank into a fund – which would vastly reduce its ability to leverage in private capital or not an independent institution, which would expose it to the very political and regulatory uncertainties that a Green Investment Bank is supposed to overcome. Last night the Permanent Secretary from the Department for Business, Innovation and Skills (BIS) spoke as if all these battles had finished. Let’s hope so.
For me the event last night brought out two further battles: speed and focus. The CSR announcement commits the Coalition Government to having the £1bn in place by 2013/14 – which feels a long way away. The Perm Sec hinted that government asset sales might provide capital earlier. As I mentioned in an earlier post, The Met Office publication on Informing Choices last year said we need to have a peak of global emissions in 2020 and 5% reduction each year to stand a 50:50 chance of avoiding dangerous climate change. There was lots of expressed concern on speed in the hall.
My own concern was more about focus. At one point the Aldersgate Group chair said a public bank should have a public mission and so must also address – and I confess I couldn’t write them down fast enough, so I may have got the specifics wrong – rural development, the balance of the economy, competitiveness, high-tech manufacturing and more. Others with questions from the floor wanted the bank to focus on providing venture capital, corporate financing, community investment, infrastructure and more. Everyone wants the bank to deliver on their favoured area.
Any organisation that has 5+ foci does not have focus. There is a great risk of forcing the bank to solve all problems, and so solving none. Surely creating a lower risk, higher return path to a low-carbon economy is public mission enough.
The next battle is going to be defining a focus which gives bang for buck (for effectiveness) and quick wins (for credibility). The heavy implication last night was that the focus at first would be infrastructure. Lots of people are going to be disappointed.