A Sustainable Future: Prof. Ioannis Ioannou, London Business School, on ESG and the Culture Wars

 

Is the criticism of ESG well-founded or political posturing? Listen to Jason Mitchell discuss with Professor Ioannis Ioannou, London Business School, about what is at stake in the backlash to ESG, how to think about the factors driving its politicisation, and why we need to work harder towards finding ways to turn down the heat in this increasingly partisan debate.

Recording date: 15 September 2022

Prof. Ioannis Ioannou

Ioannis Ioannou is a professor at London Business School, and strategy scholar whose research focuses on Sustainability and Corporate Social Responsibility. He consults on and researches how environmental, social and corporate governance (ESG) strategies are adopted, embedded and successfully implemented by organizations globally. His work has been published in top academic journals, including the Strategic Management Journal, Organization Science and the Journal of International Business Studies. He is the co-Chair of the Sustainability Advisory Panel of Merck KGaA and a member of the ESG Advisory Board of the DWS Group. Ioannis also recently served on the Stakeholder Working Group of the UK Treasury's Asset Management Taskforce.

Episode Transcript

Note: This transcription was generated using a combination of speech recognition software and human transcribers and may contain errors. As a part of this process, this transcript has also been edited for clarity.

Jason Mitchell:

Welcome to the podcast, Professor Ioannis Ioannou. It's great to have you and thank you for taking the time.

Ioannis Ioannou:

Thank you very much for inviting me, Jason. It's a pleasure and a privilege to be here with you today, and I very much look forward to the conversation.

Jason Mitchell:

Absolutely. It couldn't be more timely, the discussion that we're about to have. So, there's definitely a lot to chew on today, but I'd like to start off on something that caught my attention. Your letter in The Financial Times was titled Anti-woke Rhetoric on ESG Will Harm Society. Since that was published on August the 1st, it feels like the debate has only intensified. You wrote in that letter that the anti-woke anti-ESG movement is popular sport. I guess my first question is, do you think it's just sports? Is it simply political posturing, or are we watching it transform into something much more partisan and ideological? The rhetoric and tweets and sort of noise now seem to be growing into a much more organized political movement.

Ioannis Ioannou:

That's a fantastic question, Jason, and my prediction is that we are going to see ESG going at the center or rather being pushed at the center of the famous US culture wars, woke, anti-woke, capitalism, and so on and so forth. I think that fundamentally is partisan and it is ideological, and it is the latest manifestation of a broader issue that typically the political right has had against this issues. For instance, think about climate change denial, for example. Think about all the funding of the Koch brothers that essentially convinced senators and congressmen and women to kill climate bills in the '90s, and the 2000s in the US. Think about all the senators and congressmen and women that were bought out or funded by the fossil fuel industry in order to cast doubt on climate science, and again, block the climate action agenda. I think what we are witnessing right now is a manifestation of that ideology that essentially is based on protecting some of these vested interests.

Clearly, the oil and gas lobby for instance is one of the most, if not the most powerful lobby in Washington, and essentially, there's a lot of money on the table, especially as we engage in the green transition in a lot of this vested interest and money comes under threat. So, I think this war that we're watching is going to sadly continue, and my grave concern is that it might delay us and probably it will delay us from addressing all of these challenges, and we are already late. I'm not sure if you've seen this week, the Bill & Melinda Gates Foundation on their annual update on the sustainable development goals, for instance, they told us that, "Well, we are on track towards achieving none of them." So, if you add delay on top of that, then that really makes me worried if we will ever meet our environmental and social targets.

Jason Mitchell:

Yeah, basically, we're talking about two camps here. There's that anti-ESG view, and that view believes that ESG puts additional constraints on investments that will harm returns and create legal issues for fund boards and investment staffs. And then there's the second camp, the ESG view with states like California, Illinois. In fact, I think there was a coalition that was sort of put together yesterday by 14 different states and cities, and that view is ESG risks are real, they need to be accounted for an investment analysis, and limiting participants in a marketplace in that context only reduces competition and potentially leads to higher prices which we'll talk about later.

Ioannis Ioannou:

Jason, just to be clear, I personally do not think that there's equivalency of the two camps as you described them. I don't think those for instance are, let's say, the two extremes on a continuum. I think that's a false perception, but in fact that is the perception that the anti-ESG lobby or crowd wants you to have. The ESG investing is fundamentally based on principles of good finance and good business. What do I mean by that? Good business because integration of ESG into business models is nothing more and nothing less than adaptation to a rapidly shifting competitive landscape. Think about it. You're a business. What your customers want is changing. What the government is regulating is changing. What civil society is demanding is changing. What your employees want of you in terms of purpose, values, and impact is changing. So, integration of ESG at the business level is nothing more and nothing less than a necessary adaptation exercise in order for the business to survive and thrive.

Now, at the finance level, in other words, at the fund of the portfolio level, it's good practice because as regulation is increasing, as climate impacts are becoming more pronounced, as the biodiversity impacts are becoming more pronounced, as the deforestation impacts are becoming more real, and so on and so forth, all of those risks are real risks, and therefore integrating ESG in finance, it's about good risk management which is entirely consistent with fiduciary duty. So, that is the basis of the so-called ESG camp, good business and good finance. It's so difficult to find something robust as the foundation of the anti-ESG camp, except for the protection of vested interest and ideology. We already have studies that show that those states that kicked out banks and are attacking asset managers and so on, they're already facing higher costs. How could that possibly be a good business or good finance for that matter?

It's actually going against fiduciary duty because they're preventing some of these banks and asset managers to take into account of the necessary risks, and at the end of the day, for the production of ideology-invested interest, you are harming obviously the states because they're suffering higher costs, and in the long run, you're penalizing the pensioners because you're not adequately managing their funds and you're exposing them to more risk. So, you see, I do not see these two camps as being equivalent or at the same continuum, but rather one has a basis in fact and good practice, the other one doesn't.

Jason Mitchell:

Got it. I want to come back to a few of those points, but this is actually a helpful framing that you just did. Is this debate fundamentally a time horizons problem? What I mean to say is that politicians by nature play the electoral cycle. It might be two years, four years, maybe even eight years out, and this compares to pension funds which are compelled to look out decades on behalf of their beneficiaries. Is this debate just a fundamental misalignment in political and financial risk management objectives?

Ioannis Ioannou:

Partially but not fully, and let me explain what I mean by that. You're absolutely right to say that asset owners like pension funds and so on by definition need to be more long-term oriented, and therefore, a lot of these ESG risks do have an important long-term component. Although for some of them, if you take climate change, for instance, it's not a long-term issue anymore. The negative impacts, the disruption in the supply chains, the droughts, and the wildfires are here. That's not a horizon problem. Now, when we talk about politics, that's a very complex, and you're right to point out, increasingly very short-term oriented institution. However, we need to be clear that it's not all politicians. The Democrats need to be reelected as well, right? It's not just the Republicans that need to be reelected, but Democrats are not attacking ESG, right? Especially if you think about governors and controllers around the US, they're actually defending it. So, it's not purely just any politician. It's politicians from the right that are against ESG.

So, yes, you're right, the political cycle and short-termism typically has had negative implications on ESG and sustainability more broadly, but we need to point the finger exactly where blame lies, and in this case, it is politicians from the right, even moderate ones. Look what happened with the Inflation Reduction Act and how much it had to be boiled down, reduced and compromised in order to pass because one Senator from West Virginia that wanted to protect coal interests carried a lot of weight in the negotiations. You see, it's the proverbial follow the money and you'll understand why we have had so much friction and why we've been in some ways ineffective.

Jason Mitchell:

It's worth doing some self-reflection around some of these issues as well. I guess, to what degree in your mind is ESG responsible in some way for inviting this criticism? I know what your answer's going to be, but what I'd say is all the current suspicion think the paranoia around greenwashing would seem to support the concern that broadly speaking ESG may have gone out over its skis even a little bit.

Ioannis Ioannou:

You're absolutely right to point out that ESG has a massive amount of problems. We know about data quality, comparability, and so on and so forth. We know of lack of sufficient definitions. There's no international comparisons and so on and so forth. That's why so many regulators around the world are working on disclosure practices, and also we know that some companies and some funds are exploiting that gray zone in order to greenwashing. Every single one of those criticisms against ESG is valid, needs to be addressed, and many people are working really hard to address them, including regulators that want to come up with disclosure regulations in order to eliminate greenwashing, but also a lot of investments in AI technologies, big data technologies, natural language processing technologies that will help us understand these vast amounts of structured and unstructured data in order to really understand which companies are doing the right thing and which ones are cheating their way, and we're not going to make sufficient progress until we resolve those challenges.

All of those criticisms are valid, and I think we should address them. However, the backlash against ESG, if you listen to it closely, it's not uniform. So, for instance, people like Tariq Fancy and others, they raise, rightly so, some of these criticisms in an attempt, I think, to improve the space, in a sense bring ESG to be as effective as possible. However, the political right is mounting an attack from a whole different angle. They're telling us that ESG is the way of these lefty elites to impose values that they couldn't impose through the ballot box, for instance. That is not a valid criticism of ESG, right? They're telling us that this is a way through which lefties are taking over corporate America in order to impose their own agenda. That is not a valid criticism against ESG. It has no basis in fact, especially if you agree with my definition that ESG is investing, at its core, it's about understanding and managing the risks that arise from environmental and social issues.

On this point, Jason, I just want to highlight that this is part of a broader agenda. It's not just in the finance industry, right? Look at the extremist supreme court in the US that has reversed reproduction rights for women. Look at extremist senators like Ted Cruz and so on already talking about counseling or reversing supreme court decisions about gay marriage. So, you see the ideological drive and you see where it's coming from. It is not fundamentally coming from the valid criticisms, I guess, ESG, but it goes back to that fundamental regressive in my view, ideology that they want to impose on the world and in the US more specifically.

Jason Mitchell:

How much do labels matter in this space? And specifically, I want to go back to my question around ESG. Should the label ESG be retired? And if it should be, what do you think the replacement is?

Ioannis Ioannou:

I don't think the ESG as a label is the problem. In general, we need laws and regulations, both for product and services and financial products and services that what it says in the tin is what's inside. That applies to everything by the way, not just ESG. It applies to everything because there is mega funds these days, right? Make America Great Again funds, someone needs to hold them accountable if the values that the fund is supposed to promote are actually reflected in their investments. Now, the term ESG as I understand it and as I define it is essentially a term that does not entail value judgment. It's simply a dataset, right? ESG is nothing more and nothing less than a dataset of environmental, social, and governance factors or screens or ratings that we are using in order to understand integration of environmental and social issues by a business.

Now, if you're an ESG investor, there's many ways you can use that, right? Because if you're an impact investor, you can overweigh environmental and social issues. If you are an investor that cares about returns, you're going to treat those factors as risk. So, I don't think that the label in and of itself implies a particular investment strategy. So, I am fine with that term. I disagree with those that say that, oh, we are aggregating up all of these issues and that's why we're not making progress. That's not true. I think that we're not making progress because these are complex, multifaceted issues, and progress is slow because sometimes it's based on science and sometimes it's based on social processes. For instance, as we understand more about climate change and carbon emissions, the metrics within the E are improving. For example, that's why we're now focusing on biodiversity, and we have the task force for nature-related disclosures, right? So, as long as the underlying science in this case is improving and is helping us, those metrics are going to be improving.

The S is not improving, not because it's part of ESG, but rather because it's capturing complex, underlying, sometimes sociological processes, things like diversity, gender pay equality, and so on and so forth. Things that as a society, if you think about it, let's say 10, 15 years ago, wrongly, we did not care enough about gender pay equality, for instance. Now, we do. So, there's a very dynamic nature to the social issues, and by the way, that's why the European Union essentially abandoned its efforts to come up with metrics for the S. It didn't abandon the efforts because it says, "Oh, as part of ESG, that's the problem." The problem is the underlying practices. So, I don't agree with the idea of ascribing so much power to delay, if you like, or power to confuse in a label. I think we need to go deeper than that and understand we're trying to label metrics, but what are those metrics trying to capture, and those metrics are trying to capture either complex environmental issues or even more complex social challenges that sometimes even on the level of society we haven't yet resolved.

Jason Mitchell:

Do you think that impact investing in some way is the midpoint between these two extremes within this debate? In other words, can you create positive socio-environmental impacts without that being politicized in the way that ESG is?

Ioannis Ioannou:

It's difficult because, in a sense, we are a position in which already some of these issues are politicized, right? Think about the LGBTQ rights in the US, it's a political issue. Think about reproduction rights, it's a deeply political issue. Think about Black Lives Matter, it's a deeply political issue. Race in general is a deeply political issue. Doesn't apply only in the US, right, especially on this race and discrimination issue and so on. These are global issues and they're political issues, and I don't think we've got to a point where we have a universal understanding, for instance, that gay rights are human rights, for example, or that reproductive rights are a woman's rights and they should be stayed out of religious conversations. So, it's not because these issues became part of ESG that they're politicized. They've always been politicized and that's what complicates ESG. So, in a sense, the direction of causality in my view runs the other way, right? It is because of all of this underlying confusion and evolution, if you like. So. ESG's trying to capture a moving target. So, the politicization is the underlying cause, not the effect of ESG.

Jason Mitchell:

Let me go back to a point you made earlier in this conversation which is around fiduciary duty. How do you think about fiduciary duty in the context of ESG? I mean, to set that up, over the last five years, or even longer than that, there's been a significant expansion in the term by the industry, chiefly led by the UN PRI's fiduciary duty in the 21st century. In fact, that definition states that fiduciary duty, quote, "requires investors to incorporate all value drivers, including ESG factors in investment decision-making." Critics often counter that fiduciary duty, as well as some would point out in the US the sole interest rule which are both established legal principles, require investors to prioritize maximizing risk-adjusted financial returns. How do you see investors distinguishing between as the US would term it pecuniary and non-pecuniary factors in a legal context?

Ioannis Ioannou:

Yeah, that's a fantastic question. So, let me challenge a little bit the premise of that question though. I do not think that anyone has expanded the definition of fiduciary duty. I think what we have seen in recent years is a updated interpretation of fiduciary duty in a world that is literally on fire. That's what we mean by interpreting fiduciary duty because let's think about it, traditionally and since the Industrial Revolution, a lot of the issues that we're facing today were practically swept under the rug, whether we're talking about pollution, whether we're talking about deforestation, whether we are talking about carbon emissions. So, as I often say to my students as well, half of the ESG or half of the sustainability story, it's a global cost correction. In other words, it's time to pay the bill. It's time to pay the bill for the negative impacts we have had on the environment for causing another mass extinction in terms of biodiversity, for already warming the planet at 1.2 degrees, and so on and so forth.

So, I think that this interpretation of the fiduciary duty simply tells you that, look, the conditions are changing. It is time to pay the bill, and therefore, it is your responsibility to generate returns by taking into account that if you don't pay the bill, in other words, if you do not account for these risks and this internalization of the negative externalities, then you're breeching your duties. In my view, that's exactly the right interpretation in a world in which we now care about these issues, because if you don't care about these issues and you don't price them into the market mechanism, then of course your fiduciary duty doesn't touch on those issues because they're not risks. Nobody's pricing them in. Now, it is because they're priced in that fiduciary duty needs to be interpreted as understanding those risks.

Now, there's also a nuance here that we need to keep in mind because when we talk about risk, we typically talk about material risk on the business. In other words, the impact that all of these environmental and social challenges are going to have on the business, but that's not enough. I'm actually sympathetic to the idea of double materiality. In other words, understanding the impact of the business on the world because the two are not independent. If the impact of the business on the world and especially in environmental and social challenges is negative and unhinged or uncontrolled, then the business itself is facing even bigger risk, right, on all of the topics that I mentioned earlier, both environmental and social issues. That's why I said at the beginning of my response, I need to kind of challenge a bit the premise of this question because I do not think that these are non-pecuniary factors in any way. These are fundamentally risk factors, and I don't think it's an expansion of the fiduciary duty. I think it's an updated interpretation in a world in which the institutional context has dramatically shifted in recent years.

Jason Mitchell:

I want to actually stick on this point around fiduciary duty a little bit more. Your colleague at the London Business School, Tom Gosling warned in his blog which I would highly recommend that, quote, "the only fiduciary duty cover for net zero asset manager-aligned investment strategies seems to be extremely clear and informed client mandates that support investment aligned with a 1.5 degree scenario." He goes on to say that without those mandates, the segregated mandates by clients, net zero asset manager members are basically, quote, "on a collision course with their fiduciary duty to clients." and I think what he's saying is that as the pathway towards 1.5 degree looks wider and wider because of government inaction, how does the private sector particularly signatories to the net zero asset managers initiative, how do they sort of react in terms of allocating or potentially even misallocate capital, relative to their fiduciary duty and that net zero commitment?

Ioannis Ioannou:

Yeah, that is an interesting point of view. I honestly cannot see the basis for it, to be honest, because I understand the client mandate for net zero, but clearly, when you're an investment professional, you don't only take into account the client mandate, right? You take into account all the risks in order to manage your client's money, risks and opportunities, right, and therefore, when the world comes together and signs the Paris Agreement, when country after country are announcing and updating net zero commitments, when there are policies in place, when even places like Australia are passing laws and regulations to achieve net zero, you cannot, in my view, as an asset manager make the assumption of complete and blanket government in action. It might be slow. Sometimes it might be ineffective, sometimes it might be backtracking, and that's what you need to estimate and integrate as part of your risk management. And if you do that, you're fully consistent with your fiduciary duty. That's exactly what you're supposed to do.

Clearly, you're not there to predict the future, but you're also not there to make full and blanket assumptions about things like government inaction and therefore decide that, oh, we will never get to net zero, therefore I need to invest differently. That's a judgment. That's a value judgment, and it's not based on robust risk assessment, and when it is based on robust risk assessment, it is fully consistent with fiduciary duty. So, I don't really see how the argument can highlight a breeching of fiduciary duty or a conflict between net zero and fiduciary duty because think about it. I mean, we're talking about governments, right? Net zero is not the only thing that are ineffective. There's many things that they say and they don't do, and it is your job as an asset manager to do scenario planning, assess the risk and probability of government's effectiveness or ineffectiveness.

And by the way, just let's be honest, especially at the global level and even one of these really huge asset managers, you need to make assessments about different governments and different speeds at which they're going to transition to net zero, and therefore all of that calculation is essentially consistent with your fiduciary duty. So, I really don't understand why this could be contradictory to fiduciary duty. I just don't see it.

Jason Mitchell:

I understand. Where do you think this debate heads? You are pretty involved within the industry. In other words, not only you're an academic, but you're also on a number of investment committees at some very large asset managers. How do you expect to see investors managing this partisan divide? Do investors frankly need to pick a side? As investor, you either manage money for red states or for blue states, and to what degree do you think the different forms and somewhat complex forms of anti-ESG legal and regulatory developments start to complicate this? I mean, there are now anti-boycott bills versus no ESG investment bills.

Ioannis Ioannou:

I do not think that as an investment manager, you need to take any sides because again, that assumption embedded in the question is that there are two sides and there's equivalency between the two sides. It's the positive and the negative or the black and the white. That is not true. As I mentioned earlier, as I argued earlier, the two sides are not equivalent, and therefore, what asset managers should do instead of, as you said, picking sides is basically stick to what they know how to do best, manage their client money by considering all the risks. And therefore, I think asset managers should be crystal clear and transparent in terms of how they manage that risk, and I think if you look at some of the responses of the asset managers to this paranoia actually that's coming out from states like Texas and so on, it is very clear and essentially explains the role of an asset manager. So, there's nothing new that asset managers need to do beyond what they've always done, manage their clients money in the best way possible and considering all the risks.

Jason Mitchell:

How do you think we can turn down the heat in this debate? It's been argued that the rise of sustainable investing and ESG is the market's response to the lack of strong government regulation. That seems particularly relevant in the current energy crisis. Is the answer stronger regulation and enforcement? Can it solve this problem? Meaning, do you see it as capable of reconciling this divide?

Ioannis Ioannou:

On an optimistic day, I would want to say yes to that question, but on a realistic day, I think this is an extremely difficult challenge because as we discussed earlier, I do not think that this is only an ESG issue. It is the broader social polarization that we have seen, especially in the US because that's where we see the biggest divisions, and I don't think that even any American president has figured out how to solve that social polarization problem in the ESG space. More specifically, I do think that one way of getting at it is better data, more transparency on the investment process, better understanding on the investment implications of not integrating ESG, and I think that's the best we can do at this point in time.

I do think though that, and this is an important element here, that the let's call it the ESG side or the people that understand the underlying risks that ESG poses for companies and portfolios cannot remain silent, and although it might seem from the outside that they're sort of putting fuel on the fire, we need to understand that the anti-ESG, anti-woke sort of crowd is well-organized. It has always been well-organized, like climate change denial was always well-organized and it's already inflicting damage. For example, The New York Times has already revealed by reviewing 10,000-plus documents that the attorney generals and even the governors of some of these states like Texas, West Virginia, and so on and so forth, coordinated on these laws and regulations, and they were even celebrating over email when they were able to block some of President Biden's suggested appointee to some key positions, framing them as climate extremist.

So, they are organized, they are effective, and they're not going away anytime soon. So, if we want to protect ESG for the betterment of society and the efficiency of markets, I think we have to prepare for this conflict in some ways, but the side that's based only on facts and data, and we just have to live with that conflict going forward.

Jason Mitchell:

I'm going to try and stay optimistic, but is there any silver lining in this anti-ESG, anti-woke capitalism debate? Could it mean potentially that prevailing assumptions around non-financial considerations need to be kind of tightened, tested, made more rigorous?

Ioannis Ioannou:

Yes. The short answer is yes, but there's also the but. So, yes, absolutely, we need to look at the assumptions behind ESG. We have to look at the quality of the data. We need to look at how rigorous the analysis and the investment process is. We need to be able to provide clear definitions and even more robust labels about so that people know what they're investing in. We need to combat greenwashing as first priority. All of those are a big yes and a big urgency in my view, but that is not what anti-SG, anti-woke capitalism debate is bringing to the forefront. Those are not the guys that are making these arguments. A lot of these criticisms come within ESG.

Speak to any asset manager. We know these problems. Speak to any academic that does ESG. We know these problems, and we want to work with regulators and asset managers and ESG ratings providers and so on in order to fix those issues, but the anti-ESG, anti-woke crowd just simply wants to get rid of ESG together, right, because that is the only way of protecting self-interest, invested interest. Now, the one silver lining though that I see in my view, they self-identified. Now we know who is behind the movement. Now we know how they coordinate in order to sink ESG. Now we know the impacts of their decisions in terms of look at Texas, for instance, increasing the cost to the people in their state. So, I think this camp is not hidden, unknown money, but we know precisely. They revealed themselves, and that makes it much easier to identify their motives in attacking ESG. So, that for me is the silver lining. Now we know precisely who is behind this movement and we can deal with it more effectively.

Jason Mitchell:

You mentioned earlier about of sort of rising costs, the implications on some of these political movements. When are the unintended consequences of some of the biggest asset managers and banks pulling out of some of these states? At the very least, it appears anti-competitive with the potential of having real world implications on specifically the cost of capital. In fact, the Wharton School of Business at Penn issued a paper, Gas, Guns, and Governments: Financial Costs of Anti-ESG Policies that points to a 40 basis point increase in muni debt. They state that estimates imply Texas entities will pay an additional 303 to 532 million dollars in interest on the 32 billion in borrowing during the first eight months following the Texas laws.

Ioannis Ioannou:

Jason, I'm not sure I would call it pulling out versus being kicked out because to me it feels like they're being kicked out, not pulled out, and that's a very different thing because if they're pulling out, I can see the unintended consequences, but if it's being kicked out, that is a responsibility that lies with those that kicked them out. And therefore, when we talk about the role of media, the role of newspapers, outlets, and so on and so forth, it is precisely in my view to reveal the consequences of these decisions. You rightly pointed out the study from Wharton that shows the increased cost. I expect that we're going to see more of that, and I do believe that it is the role of media, and it also is the role of Democratic politicians to inform the voters in this states, and at the end of the day, Jason, there is a political responsibility in every single vote.

Jason Mitchell:

I want to finish with one last question which is about an article you recently wrote called The Climate Crisis And The Need To Reimagine Global Institutions, which is about the need to develop a new post Bretton Woods institutional order. Where Bretton Woods focused on the neoliberal system of trade, you're calling on a sustainability-focused order that directly addresses health, environmental, and financial crises. How do we get there even on a grassroots basis when the world is looking more fragmented and as you know, more multipolar, which is testing already the effectiveness of existing UN organizations? I guess what I'm asking is aren't all multilateral institutions by default institutions of compromise?

Ioannis Ioannou:

Thank you for bringing up that article, Jason. I think that it is precisely because we do not have an answer to that question that I think we need to be discussing it. So, the point of that article was hopefully to open up a discussion about institutions and highlight their drawbacks and how ineffective they have been and open the discussion of what we can do. I do not know exactly where that discussion is going to take us. Institutions are not built in a day. I don't know in advance how they would look like, but here's some principles if you like. I think that we need institutions that at their core, they have science, and we have seen this in smaller scale. Think about, for instance, the validity and the gravitas that science-based targets carry in the corporate world, right? Because if you at the core you start with the climate scenario and you work backwards, what the targets should be for your business, then that's a much more robust way of setting targets.

So, my question is provocation, if you like, for more discussion is can we imagine the equivalent at the institutional level, and it's not that we are lacking frameworks, right? We do have the IPCC reports. We know exactly what the sciences is telling us. We do have frameworks like the planetary boundaries by the Stockholm Resilience Centre and Professor Johan Rockström and his team. It's not that we are not understanding scientifically speaking the system. I would dare say that the majority of the world at this point would agree on some scientific truths, right? So, I think that should be our starting point.

It seems to me that in a lot of the institutions that we currently have, science has a bit of an advisory role. In other words, for example, we are going to sit down as countries and we are going to find a path to net zero, and then we're going to call in the scientists to tell us how consistent or inconsistent this is with the science, right? Clearly, there's an ongoing and iterative dialogue that happens between the two, but I'm kind of proposing an overhaul of that where the starting point is the science.

I think that this idea of compromise, it's a bit problematic because look, if we are talking about a trade agreement, yes, we can compromise. If we're talking about in the past a peace deal after war, yes, we can compromise and find an agreement. But if on climate change we agree or disagree or compromise, it practically doesn't matter unless what we agree is fully consistent with science. Sometimes I say the example, we can debate gravity, but if you open the window, you're still going to fall down if you step out as simple as that. That simple principle for me, it seems to be lacking, whereas, and that's the reason why I mention grassroots and social movements, we actually see some of these more international social movements, for example, Extinction Rebellion, where one of their principles, if I recall is principle number one, is tell the truth, meaning our starting point is the truth about climate change, and by truth, they mean the scientific truth about climate change, and Extinction Rebellion chapters everywhere, right? They're increasingly more international.

So, what can we learn from, in a sense, science at the core sort of movement? What can we learn about improvements we've achieved at the micro level through things like science-based targets, and how can we elevate this to the institutional level? I think we need the world's best minds, especially when it comes to institutions, and we do have a lot, right? Think about Professor [inaudible 00:37:01], for instance, at MIT, professors like Rebecca Henderson at Harvard Business School, and many others are already thinking about institutions. It's a tough problem, but it is also a very important bottleneck at the global level that in my humble opinion is currently decelerating us and not allowing us to be where we need to be on these issues.

Jason Mitchell:

Well, it's a great way to finish. Look, so it's been fascinating to discuss what's at stake in the backlash to ESG, how to think about the factors driving its politicization, and why we need to work harder towards finding ways to turning down the heat in this increasingly partisan debate. So, I'd like to really thank you for your time and insights. I'm Jason Mitchell, head of Responsible Investment Research at Man Group here today with Professor Ioannis Ioannou from London Business School. Many thanks for joining us on A Sustainable Future, and I hope you'll join us on our next podcast episode. Thank you so much, Ioannis.

Ioannis Ioannou:

Thank you very much for having me, Jason. It's been a real pleasure discussing these very fascinating and exciting issues with you.

Jason Mitchell:

It has indeed. Thank you.