Systems thinking ESG….Bartley J Madden (a key thinker behind HOLT's CFROI and valuation process) proposes systems thinking, innovation, and purpose, ahead of linear ESG metrics to solve for NetZero:
"The conventional Net Zero perspective with its emphasis on ESG metrics represents linear cause-and-effect thinking. That is, implementation of the metrics will then change company behavior with the eventual effect of a successful Net Zero transition. Different perspectives are presented rooted in systems thinking. Numerous company examples explain why innovation, not ESG metrics, will be the prime mover in achieving Net Zero. The crux of the argument for systems thinking is that a company like Honeywell, currently given an "F" ESG score, is delivering stellar innovations that will enable its customers to significantly reduce their greenhouse gas emissions. As to behavior, boards of directors should demand new information from management with particular attention to returns-on-capital versus the cost of capital under scenarios that include a price (tax) on carbon."
Madden emphasises importance of intangibles (cf. Stian Westlake*, Jonathan Haskel).
argues,
"the real action in the Net Zero transition takes place with innovation that can easily be missed (especially in the early stage) by ESG
metrics. Game-changing innovation at the firm level is how society truly benefits from freemarket capitalism."
advises Boards,
"The Net Zero transition puts a premium on boards motivating, compensating, and monitoring management consistent with long-term value creation, including sustaining a pro-innovation
culture with potential to gain competitive advantage. Surely, innovative ways will be developed to reduce emissions from firms’ internal processes."
He is very anti-FDA regulation (which is libertarian leaning) but is quite supportive of corporate purpose (which is typically progressive leaning), so he’s interesting from that perspective. I would suggest “systems thinking” is what unites the ideas.
He writes:
An application of systems thinking is the Pragmatic Theory of the Firm. It asserts that maximizing shareholder value is the result of a firm successfully achieving its four-part purpose. The components to the firm’s purpose include:
Communicating a vision that can inspire and motivate employees to work for a firm that is committed to behaving ethically and making the world a better place.
Surviving and prospering through continual gains in efficiency and sustained innovation, which depend on a firm’s knowledge-building proficiency. Importantly, nothing works long term if a firm fails to earn at least the cost of capital.
Working continuously to sustain win-win relationships with all of the firm’s stakeholders.
Taking care of future generations. Management and the board need a genuine commitment to the sustainability of the environment, with particular attention to the design of products and manufacturing processes to minimize waste and pollution, which again depends on a firm’s knowledge-building proficiency.
The theory concludes that a firm’s knowledge-building proficiency is the key determinant of innovation that drives long-term performance and connects a firm’s performance to its market valuation via a life-cycle framework. An advantage of the four-part purpose is its emphasis on four oars in the water that need to work in unison in order to effectively generate progress.
Worth pondering… Pdf here.
Intangibles: Stian Westlake podcast.