The Need for Corporate Transformation in an Era of System Change
By Bill Baue & Ralph Thurm, r3.0
The below text is r3.0’s response to the Great Transition Initiative’s November 2019 theme ‘Corporations in the Crosshairs’, asking for an evolution from CSR to corporate transformation in an era of needed system change.
“How do you go bankrupt? Two ways. Gradually, then suddenly.”
(Ernest Hemingway, 1926)
“It takes courage and clarity to challenge an established system. But it can be done.”
(Donella Meadows, Jørgen Randers, Dennis Meadows, 2004)
“The part can never be well unless the whole is well.”
(Plato, 380 BCE)
We welcome Dr. Allen White’s timely call for corporate redesign as a transformative cultural evolution beyond the grossly insufficient incrementalism of the current Corporate Social Responsibility (CSR) movement, offered as a provocation for this Great Transition Initiative dialogue. We would like to complement Dr. White’s proposition, and his response to Great Transition Initiative dialogue commenters, with a few additions that we believe will help fill in a more detailed picture:
- Corporate change + systems change to steer the Anthropocene
- Dual paradigm shifts
- Transform model of business models
- Thresholds & allocations as instigators for systems-based reporting & investing
Corporate change + systems change to steer the Anthropocene
First, given that corporations are nested in a broader economic system, we believe that corporate redesign must go hand-in-hand with economic system redesign, as many others have already commented. What we would like to add is an analysis of our current predicament that provides a sliver of hope.
Earth’s self-regulating system  created a temperate “Goldilocks” period over the past ten thousand years of the Holocene, during which human civilizations developed. Given that humanity is part of earth, we clearly played a role (however large or small) in that self-regulation.
The characteristic aspect of the emerging epoch of the Anthropocene is that humanity now exerts geologic-scale influence — collectively, we are literally a “force of nature.” And we are currently exerting that influence unconsciously, in ways that throw planetary self-regulation off kilter (as evidenced by the Planetary Boundaries research stream, for example.) But if humanity has the power to monkey-wrench planetary self-regulation, so too do we have the power to align with planetary self-regulation. All that’s needed is the will of the collective conscious.
We believe that transformation at systemic levels (ie economic and societal, and ecological as a result), spurred by transformation at sub-system levels (in this instance, the corporate and investment levels, along with others), can exert the paradigm shifts necessary to implement the capacity for conscious, beneficial self-regulation in the Anthropocene.
Dual paradigm shifts
One of the priests of the cult of neoliberalism, Alan Greenspan, actually handed us the keys to unlock the door trapping us within this ultimately dysfunctional system: “irrational exuberance.” We simply need to expand its application, from Greenspan’s isolated application to the 1990s tech bubble and the 2000s subprime meltdown as anomalies in the neoliberal paradigm, to recognize irrational exuberance as baked into the neoliberal DNA. Ironically, William Catton had done so in his 1980 masterwork Overshoot, in which he analyzed the core systems error as the Age of Exuberance, when human ambition consistently overshot natural carrying capacities:
Human population, organized into industrial societies and blind to the temporariness of carrying capacity supplements based on exhaustible resource dependence, responded by increasing more exuberantly than ever, even though this meant overshooting the number our planet could permanently support. Something akin to bankruptcy was the inevitable sequel.
How do you change such a system, which is ultimately self-destructive? This is where a secondary paradigm enters the picture, though it has been less evident. Problems accrue gradually, so it stands to reason (many believe) that solutions can take the same form of gradualism. However, Ugo Bardi’s work on the Seneca Effect (encapsulated in the Hemingway epigraph) recognizes the existence of tipping points where systems phase-shift, pointing to the insufficiency of gradualism.
We propose that the current reform movements in the corporate world (CSR) and investment world (ESG, or “environment, social & governance”) represent precisely this kind of gradualism (or “incrementalism”). As Dr. White himself said (in a 2013 interview with us), “ESG does not, by nature, carry a true sustainability gene… Sustainability requires contextualization within thresholds. That’s what sustainability is all about.”
Understanding of this distinction is rare within the CSR and ESG movements, in our experience. CSR and ESG advocates are increasingly waving the flag of systems change, but they seem structurally blind to the ways in which their own actions inhibit such systemic change. CSR and ESG could be characterized as “predatory delay,” to employ Alex Steffen’s term for “the blocking or slowing of needed change, in order to make money off unsustainable, unjust systems in the meantime.”
This structural blindness is understandable, as the CSR and ESG movements are predicated on a self-definition of solutionism, so recognizing insufficiencies would require calling one’s self-definition into question. (Jem Bendell analyzes this dynamic brilliantly in his Deep Adaptation paper, where he generalizes from his experience with WWF.) However, “understandable” does not mean “acceptable.” As Brendan Leblanc of EY says, “the only thing more dangerous than no progress is the illusion of progress.”
Accordingly, we believe that a paradigm shift at the economic system level needs to be accompanied by a paradigm shift amongst us change agents. We needn’t demonize or pathologize incrementalism, as it does indeed play a relevant role (one could consider it a “Horizon Two” dynamic in Bill Sharpe’s Three Horizons framework, with deeper systemic transformation representing “Horizon Three.”) However, we do need to recognize its limitations, and augment incrementalism with a deeper layer of bona fide systemic transformation.
Transform model of business models
We believe that implementing Dr. White’s call for corporate transformation requires business model transformation. Or, to be more precise, it requires a transformation of the model of business models. This statement essentially summarizes the research we conducted for the New Business Models Blueprint that we released in 2018. Specifically, we conducted an extensive literature review of “new” (or “sustainable”) business models, and found that there was a gap between proposals around these business models, on the one hand, and the achievement of true sustainability, on the other hand.
In particular, the business models analysed lacked specification of the thresholds that divide sustainability from unsustainability, and therefore it was unclear how these business models could claim to achieve sustainability if they lack the primary indicator of sustainability. It warrants requoting from above: “Sustainability requires contextualization within thresholds. That’s what sustainability is all about.”
So, in order to actualize Dr. White’s call for corporate redesign, we need to transform the model of business models in ways that encompass the kinds of systemic changes necessary, such as operating within social and ecological sustainability thresholds. In addition to the New Business Models Blueprint, we would point to the Flourishing Business Model Canvas, and more broadly to the work of the emerging Flourishing Enterprise Institute, for further guidance.
Thresholds & allocations as instigators for systems-based reporting & investing
Knowing Dr. White for more than three decades collectively, we believe it’s safe to say that a defining characteristic of Dr. White’s work is humble understatement. Such is the case, we believe, with three of his assertions in this essay — namely:
- “the concepts of boundaries, limits, and norms”;
- “systems-based reporting”; and
- “systems-based strategies” for investors.
These three intertwining elements of Dr. White’s important essay warrant further fleshing out. Of course, Dr. White was instrumental in introducing the notion of “boundaries, limits, and norms” to the CSR space as the primary champion of the Sustainability Context Principle that first appeared in the second generation of Sustainability Reporting Guidelines from the Global Reporting Initiative in 2002. At its core, the Principle holds that sustainability reporting draws significant meaning from the larger context of how performance at the organisational level affects economic, environmental, and social capital formation and depletion at a local, regional, or global level… [R]eporting organisations should consider their individual performance in the … context of the limits and demands placed on economic, environmental, or social resources at a macro-level. [emphasis added]
In asserting this micro-macro link between organizational performance and systems level resources, the Sustainability Context Principle introduces normativity into the otherwise incrementalist regime of its Guidelines. In other words, the lion’s share of the GRI Guidelines call for simply documenting impact (and incremental improvements in the right direction), whereas SustyContext (as it’s nicknamed) calls for assessing if those impacts are, in fact sustainable.
It is perhaps unsurprising that the corporate world has overwhelmingly neglected to apply the SustyContext Principle(and GRI has quietly tolerated it, for reasons that are confounding to say the least.) A 2017 study of 40,000 CSR reports (from 2000–2013) found that only 5% even mention ecological limits, while a miniscule 0.258% apply these limits to product development and corporate strategy.
Implementing the Sustainability Context Principle in earnest would enact what Dr. White refers to as “systems-based reporting.” This practice holds significant promise, as it would reveal the need for significant transformation at the organizational and systemic level. At the same time, implementing such a regime would require a profound transformation of mindset and paradigm, from one that abides (and even celebrates) incrementalism, to one that both recognizes and enacts transformation to sustainable impact within sustainable ecological, social, and economic systems. As we at r3.0 say, there can be no sustainable companies in an unsustainable society and economy.
Likewise, “systems-based investing” would similarly apply sustainability thresholds to portfolios across all asset classes. In essence, such an approach would apply such thresholds on all holdings, and aggregate them to the portfolio level. This is a concept one of us introduced in 2013 (along with Mark McElroy and Cary Krosinsky) as “threshold investing,” which has begun to reemerge and pick up steam with recent mention in Keith Ambachtsheer’s prominent monthly letter. Threshold investing plays a significant role in the upcoming Sustainable Finance Blueprint that r3.0 is producing, in conjunction with a Working Group of about 40 experts globally, for release in Fall 2020.
Applying threshold investing would create what Future Fit Foundation CEO and Co-Founder Geoff Kendall calls “System Value.” “Paragraph 58” of Value Creation Background Paper that EY produced for the International Integrated Reporting Council in 2013 lays out how to achieve system value (without calling it System Value):
58 Ultimately value is to be interpreted by reference to thresholds and parameters established through stakeholder engagement and evidence about the carrying capacity and limits of resources on which stakeholders and companies rely for wellbeing and profit… Interconnections between corporate activity, society and the environment and the purpose of the corporation should therefore be understood in terms of what the corporation, society and the environment can tolerate and still survive — that will be the main determinant of value. The challenges will be to reach agreement at corporate, national and international levels on what those thresholds and limits are, how the resources within those limits should be allocated, and what action is needed to keep activity within those limits so that value can continue to be created over time. [emphasis added]
This last sentence lays the need for agreement and guidance on thresholds and allocations, a call that was underlined by two UN agencies. In 2015, UNEP included the following key recommendation in its Raising the Bar report on the shortcomings of sustainability reporting:
Multilateral organizations should collaborate to create a global governance body of scientists, academics, business practitioners, NGOs and other stakeholders to provide guidance on methodologies for determining ecological (and social) thresholds, as well as guidance on approaches to allocations, all of which are broadly applicable to the business level. [emphasis added]
In the absence of other organizations (such as GRI) answering this call for such a global governance body, r3.0 began incubating such a body in 2017, calling it the Global Thresholds & Allocations Council. We at r3.0 are in the midst of a Feasibility Study to set the stage for a formal launch in September 2020; we presented preliminary findings in a plenary keynote at the New Metrics Conference on 18 November, 2019.
We believe that such a body would be necessary to deliver on Dr. White’s three key elements of “boundaries, limits, and norms,” “systems-based reporting,” and “systems-based strategies” for investors — and thus key for corporate (and economic system) redesign.
Bill Baue & Ralph Thurm
 We believe that Lovelock and Margulis’ Gaia Theory is sufficiently well-founded to accept as an accurate model of planetary biophysical systems functioning, despite critiques from the scientific community.