ESG, sustainability, technocracy and just transition (I/II)

This article is part one of a two-part series on sustainability policy. You can find part two here.

Introduction

In March this year, farmers in the Netherlands won a shock provincial election victory protesting against significant changes to national climate policy. The policy required farmers to slash carbon and nitrogen emissions by 50% by 2030 and to cull 30% of livestock to achieve this. If the farmers failed to achieve these targets then the result would be mandatory buyouts, the closure of farms, loss of ownership and an inability to farm elsewhere in the European Union. From the perspective of the Dutch farmers, these policies put their long-term security and livelihoods at risk. Moreover, economic critics of the policy claimed that it risked causing supply chain shocks and price rises when businesses from across the globe suddenly received far less from the world’s second-biggest agricultural exporter. Yet the environmental case for the policy was held to justify these risks. The protests, which started as a grassroots movement, quickly evolved into a political party, which in only a few years, won in provincial elections.

The case is important because it illustrates some of the limits of an approach to sustainability policy-making that is focused almost entirely on top-down solutions which are state-led, target driven and which fail to properly engage with those who are being told to change. The Dutch farmer case represents a grassroots democratic backlash against sustainability programmes that institute change too rapidly and in a way that is disruptive to livelihoods, even though it is aimed at achieving important goals. There are important lessons for temperance in policy making, and ensuring that the sustainable transition respects regional demographics, traditions, grassroots advocacy and the importance of participatory democracy. In this two-part series, we want to draw out some lessons from the Dutch case, and make the case for a more democratic, bottom-up approach to sustainability policy.

Just transition and the limits of top-down sustainability policy-making

In corporate and policy circles, there is a lot of talk about a ‘just transition’. A just transition is one that achieves the transition to a low-carbon, Net Zero economy in a way that factors in other valuable goals, such as the rights and interests of various parties who are impacted by the large-scale environmental change that lies ahead. That is, a just transition is one that achieves sustainable change while at the same time respecting values such as democracy, respect for individual rights, lives and livelihoods, affording a platform to those most impacted and aiming to achieve a certain level of economic stability in the process.

The Dutch farmer's case carries important lessons for how we understand just transition because it illustrates the importance of participatory democracy as a core element of what ‘justice’ means in the context of ‘Just Transition’. Individuals whose livelihoods are to be fundamentally uprooted and altered forever must be consulted, given a voice, bargained with and provided feasible alternatives if sustainable change is to avoid the sort of political backlash that the Dutch farmers case shows can take place.

The case also points to a more fundamental value conflict between democracy (understood here as ‘the will of the people’, or at least a large subset of the people) and an approach to top-down policy making that is target-driven, top-down and which fails to be consultative of the wider populace (sometimes captured under the concept of ‘Technocracy’). ‘Technocracy’ is an approach to governance that is based on policymaking by experts and government officials who are often distanced from the work and the reality of those who are most impacted by this policy making. At root, this form of governance is premised on faith that society is best governed through achieving the ends of science and technology, and thus through logical and rational procedures to approach and gain control over something external, such as the environment, biodiversity or climate change. Technocratic solutions are commonly achieved through means such as policy targets, central planning, the gathering of data and the development and imposition of global or national standards and metrics.

Too much technocratic policymaking causes at least four challenges, many of which we are seeing in the approach to sustainability policy at national and supranational level across the globe at present:

1. Powerful minority - It tends to place power in the hands of a narrow cohort of people, such as policy-makers, finance heads, experts or government departments, whilst not placing enough emphasis on the voices of individual citizens and interested stakeholders who are most impacted by policy making. Often the only consultations with the public are through legally required ‘public consultations’ which often arrive late in the day and only afford a brief forum for discussion.
2. Limited role for grassroots - There is little room for local solutions or local responsibility to local problems, only adherence to policy and standards set from a distant political centre. Being quite literally closer to the land than urban bureaucrats, the Dutch farmers understood what was required to make the land productive, sustainable and in harmony with the landscape. Their world, and worldview, is quite different from the world of corporate offices or government buildings, it is more entwined with nature and the local community and less focused on designing rational, logical solutions to bring an object of focus under control.
3. Centralised policy making - Policy, standards, metrics and targets are often too blunt an instrument because they cannot take into account the particularities that exist within a geography, its landscape, people demographics and its culture(s) and tradition(s). The problem with top-down policy is it attempts to drive change for diverse stakeholders, with diverse priorities and interests, in a way that is monolithic, unidirectional and fails to account for regional differences and nuances.
4. Homogeneity - Technocratic governance imposes concepts and accepted language upon those expected to adhere, shaping our perception of and relation to the world. The term ‘natural capital’, for example, approaches the non-human world as inert matter to be used in the human economy, whilst setting global standards for its management of such capital gives bureaucrats, a small proportion of humanity, a disproportionate amount of influence and power.

Technocracy has been a defining feature of sustainability policy over the last few years and as an approach to policy and economic-decision making it has limits. There is historic precedent that shows that forceful, top-down approaches to big economic change are unpopular, leading to backlash and leaving individuals and communities floundering in the wake of rapid changes to their ways of life and livelihoods. Two, cruelly ironic, examples in British history illustrate this point. Firstly, the Enclosure Acts began in the 1600s, which benefitted individual farmers and soon-to-be landowners but forced many unable to afford new higher rents to move to large towns and cities to work in mills and plants under initially excruciatingly poor conditions. Second, the deindustrialisation strategy of the UK’s Conservative government in the 1980s. Lives, cultures and the health of communities changed rapidly, people were told they cannot make a living in mining or industry in a way that they had for years. Job and livelihood security was removed with the workers told to reskill and find jobs that are new and unfamiliar. It is precisely consequences similar to these that the Dutch farmers were fighting to avoid.

Technocracy in the corporate sphere - the limits of ESG

Technocracy has been common in the corporate and financial spheres as well, with the archetype of the technocratic approach to sustainable change being ‘ESG’. In its advent, ESG promised the world - sustainable business change that would create impact whilst not compromising financial returns. But as the dust settles and the hype dies down, many are realising that merely setting targets and measuring companies against vague and ill-defined ‘environmental, social and governance goals is not the most effective way of directing business towards more sustainable and ethical practices. Indeed, one of the reasons that ESG has failed to achieve the great heights that it set itself is that that to date it has been driven by finance and banking professionals, funds and large institutional investors, who are distanced from the operational reality of what it takes to effectively decarbonise an individual business (or make it more circular, or better protect biodiversity, or mitigate and repair ecological harm).

The drawbacks of an overly top-down approach to ESG and sustainability in the business sphere can be seen in two key features of the contemporary ESG movement - a) ESG ratings and b) an obsession with gathering data.

• ESG ratings - as set out by providers such as MSCI, S&P and Sustainalytics seek to capture data on companies and rate them based on how effective they are at meeting a series of ‘environmental, social and governance goals’. These goals are set by large financial institutions and are often based on tick box criteria (Is there an environmental policy? Does the company measure Scope 1 & 2 emissions? Do they gather data on human rights?) Importantly, when you dig a little deeper it becomes clear that these top-down criteria are too often detached from measuring tangible impact, and these ratings do not line up well with achieving more ethical, sustainable or planet-friendly business at all.

To illustrate the point take the recent case of an Italian chemical company that was awarded the highest ranking of ‘AAA’ by the ESG ratings agency MSCI for its environmental credentials, despite dumping large amounts of lime ash on a Tuscan beach. This caused a wide range of environmental changes and was later found to be causing acute ecological damage and health problems to the local population through the illegal dumping of mercury (Bloomberg, 2020). While the company was rated highly in ESG terms, the approach to ratings meant that real, adverse impacts from the business were able to slip through the net of the ratings system. Current ESG rating methodologies still enable firms like these to be included in a sustainable investment portfolio. 

• Over-emphasis on ESG data - the second issue with the emphasis on top-down technocratic ESG targets is an over-obsession with data. By collecting more data on carbon, biodiversity, human rights, social impact, diversity and so on (the argument goes) we will get better at protecting these things - ‘what is measured gets managed’, as the saying goes. Yet data is not a panacea and is in many ways more of a distraction. You can parse any element of our world into a thousand constituent parts and yet still not see how it links to the whole nor whether aiming at reducing or increasing a quotient of a metric will result in a better world, one more ecologically sound and respectful of local particularities. What matters is not getting more data, but getting better at decision making, being honest about the challenges of sustainable change and being bold when it comes to the deep systemic changes in business that are required.

In ways that are reminiscent of the plight of the Dutch farmers, we are asking for too many of the resources available to companies in the real economy to respond to top down ESG guidelines, placing them under severe pressure in difficult economic times, whilst simultaneously asking investors and corporates to expand bureaucratic roles that are myopically focused on data gathering and narrative creation for public reporting and disclosures. Now the regulatory horse has bolted it won’t go back to its pen and will likely run much further and faster in proliferating reporting requirements. But reporting is not the same as tangible change. Indeed, the emerging academic literature shows that the evidence that increased ESG reporting leads to more sustainable and ethical business is inconclusive, or ‘complicated’ at best.

What, then, could an augmented approach look like to more effectively secure a sustainable change in a way that minimises democratic backlash or an overreliance on data collection? We explore this further in our second article.