Bill Baue has been studying sustainability indicators for more than twenty years and is one of the most authoritative voices on the subject. And among the most critical. According to Baue, currently director of the NGO r3.0 (Redesign for Resilience & Regeneration), from the strong foundations of the early 2000s, the sustainability standards developed in the intervening years have failed to provide sufficient guidance on how to establish what is sustainable and what is not. This consideration prompts him to speak of a “lost decade” and to critique sustainability standard setters, as he did a year ago when he called the standards developed by the International Sustainability Standards Board (ISSB) “narcissistic” and the result of “sociopathic materiality”.
Tracking the evolution of sustainability standards over time is not easy: but it is very important. Without the ability to accurately measure the sustainability of a company or investment, it is very complicated, if not impossible, to detect greenwashing in the sea of sustainable finance or to calculate the real impact of an economic activity on the environment or society. Contacted by EconomiaCircolare.com in his office in the United States, Bill Baue reconstructs the long journey and explains where, in his opinion, the mechanism has jammed. And he envisions two scenarios.
LEGGI L’INTERVISTA IN ITALIANO
Mr. Baue, before we go into detail, can you help us trace the evolution of the sustainability standards debate?
It all started with the guidelines of the Global Reporting Initiative (GRI), an international NGO that was created precisely for the purpose of setting standards for reporting on the sustainable performance of organizations of all sizes and sectors. These guidelines have been supplemented and modified over time until the last catastrophic revision in 2021.
In the meantime, two new institutions focused on the development of sustainability standards had emerged by 2013: the Sustainability Accounting Standards Board (SASB) and the International Integrated Reporting Council (IIRC), which developed other sustainability standards. In 2021 they merged into the International Sustainability Standards Board (ISSB), which in 2023 developed the new indicators I criticized. In the same year, the European Union stepped in, presenting the final version of ESRS, the European Sustainability Reporting Standards.
Why is your major criticism of the ISSB standards?
The central reason I criticize the International Sustainability Standards Board’s standards is because of its use and misuse of the term “sustainability”, contravening the essence of its meaning. By defining sustainability only within the context of financial information, the standard narrows the scope of the definition in such a way as to eliminate the vital aspects of sustainability, namely its focus on internal and external environmental, social and economic impacts.
This approach inappropriately (and dangerously) confuses sustainability with ESG (Environment, Social, Governance). ESG criteria are concerned only with external impacts on the company’s financial prospect (outside-in: the impact of environmental, social, and governance issues on the company’s economic activities), and not with the company’s impacts on the health of its external operating environment in terms of environmental, social, economic, and governance elements (inside-out: the impact of the company’s activities on the external operating environment). For these reasons, it is clear that the ISSB is not using the term “sustainability” in good faith at all.
It is a sociopathic approach to sustainability by definition: it promotes a self-centered worldview that excludes the welfare of others and advocates self-centered behavior with no regard for others. All this is done with typical narcissist behavior: the ISSB shifts the focus from the primary negative impact that the company has caused (ie the inside-out impacts) to the victim, to the secondary impacts that the external operating environment caused to the company (ie outside-in environmental, social, and governance impacts).
Why is ESG not suitable for indicating the sustainability of an investment or enterprise?
I’ll paraphrase GRI Co-Founder Allen White from my 2013 interview with him: ESG indicators do not inherently carry the sustainability gene. A company may score very well on ESG, but only because it has performed well in relation to competing companies or because it improves year by year in some internal goals, such as water use, energy conservation, wages, and occupational health and safety. This is the so-called incremental approach, which creates a lot of confusion in the market because it says nothing about sustainability in absolute terms, but only from a relative point of view.
Claiming that a company has excellent sustainability performance, however, is another thing. True sustainability is not an incremental concept but a normative one: we need to establish what is sustainable and what is not. And to do that, it is essential to have mechanisms in place that can actually measure and ultimately achieve sustainability. It means that the company is positioned to thrive over the long term and in a way that meets externally defined limits, thresholds, and norms, not simply by comparison with other companies or by goals within the company itself. Sustainability requires contextualization within thresholds – that’s what sustainability is all about.
Do you think planetary boundaries might be the right way to measure these indicators?
Yes, planetary boundaries are an example because they identify limits, or thresholds beyond which there is no sustainability. Ecological and social systems operate in an optimal, equilibrium space. When you stray too far from equilibrium – the technical term is carrying capacity – if you exceed the carrying capacity, the system begins to collapse. Therefore, for real sustainability accounting, a company should measure its impact on the planet’s vital resources, such as biodiversity loss, resource consumption, climate regulation system, and the ability of a reservoir to supply water, through a threshold approach.
These thresholds apply not only to ecological systems, but also to social systems, so planetary boundaries are not enough, as economist Kate Raworth has shown with the doughnut theory: the ceiling of ecological boundaries not to be breached is complemented by social foundations, represented by minimum levels of social cohesion and stability, and thus impacts on social welfare: whether the firm provides a living wage, wage equity, gender equity, etc.
Authentic sustainability is a definition introduced in November 2022 by the United Nations Research Institute for Social Development (UNRISD) in its manual for the new Sustainable Development Performance Indicators (SDPIs), entitled “Authentic Sustainability Assessment. A User Manual for the Sustainable Development Performance Indicators”, where a comprehensive set of indicators are developed for the first time to assess corporate performance considering planetary sustainability thresholds and the transformations needed to achieve the UN Sustainable Development Goals (SDGs) by 2030. This title explicitly distinguishes between authentic sustainability assessment, which applies ecological and social sustainability thresholds, and inauthentic sustainability assessment, which does not, adopting incrementalist approaches instead.
You spoke of a lost decade: what has been the evolution of sustainability standards and why do you think it has stalled?
Just when the world most needs to move forward rapidly on the issue of sustainability, 2023 proved to be the most catastrophic year for sustainability standards, sabotaging all the efforts made so far and turning back the hands of time by more than twenty years. Two decades ago, in 2002, GRI had introduced the Sustainability Context Principle in the second generation of the Sustainability Reporting Guidelines (G2). This principle stated that sustainability reporting is inextricably linked to economic, social, and environmental thresholds and thus represented the first ever articulation of a solid definition of authentic sustainability in the still emerging field of sustainability standards.
In 2006, the third generation of the Sustainability Reporting Guidelines (G3) introduced the concept of materiality, including not only traditional materiality thresholds taken from financial reporting, but also sustainability thresholds drawn from the physical and social sciences, as well as ethical imperatives. Yet, in 2021, GRI itself struck at the heart of sustainability reporting, removing the performance assessment requirement from the Sustainability Context Principle in the new revised standards, despite protests from sustainability experts. In short, GRI for seemingly nonsensical reasons has disavowed performance assessment altogether, turning the Sustainability Context Principle into an empty exercise in incrementalist relativism, forsaking its function.
What do you think about the indicators the European Union is working on?
From 2014 to 2021, the European Union entered the sustainability standards debate with the Non-Financial Reporting Directive (NFRD), which evolved into the Corporate Sustainability Reporting Directive (CSRD) in 2021. Both directives provided the platform for the development of a set of European Sustainability Reporting Standards (ESRS). This development went hand in hand with the work done in the area of sustainable finance with the development of the Taxonomy, whose path unfortunately ended with a politicized rather than scientific definition of sustainability thresholds.
Also in 2023, the European Union published the final version of the ESRS standards, incorporating sustainability thresholds in almost all environmental standards, but not in general standards nor in social and governance standards. It is promising that the EU frames the ESRS as a performance standard and has not repudiated this concept as GRI did with the Sustainability Context.
However, the limited and ad hoc approach does not make them such that they are a landmark in sustainability standards, and the delegated act that formalized the standards, yielding to political pressure, diluting them by making them from mandatory to voluntary. All of these shortcomings are easily corrected if there is sufficient courage and political will. In any case, the ESRS standards represent a tentative “advance” toward a genuine sustainability standard.
What should we expect in the next decade?
In the last decade we have lost valuable time. We cannot afford another decade of the same. I foresee two scenarios: the first, more likely, is one in which standards continue to sabotage sustainability. There would be a second scenario, which I see as the vaguest of possibilities, in which there is an abrupt change of course in the sustainability standards: they are supplemented with thresholds that really define sustainability and we arrive at a genuine and coherent reporting system. The question is, are we able to learn from the mistakes of the past and turn the next decade into an opportunity?
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