A Sustainable Future: Kim Schumacher, Kyushu University, on Sustainable Finance's Dunning-Krueger Problem

 

Listen to Jason Mitchell discuss with Professor Kim Schumacher at Kyushu University, about what competence greenwashing represents; how to capacity plan and build around subject matter expertise in the natural sciences; and why we need to consider an ESG Skills Materiality framework towards this effort.

Recording date: 09 February 2023

Kim Schumacher

Professor Kim Schumacher is an Associate Professor in Sustainable Finance and ESG at Kyushu University in Japan. He’s also a Visiting Lecturer at the Tokyo Institute of Technology Japan and an Honorary Research Associate at the University of Oxford. His research focuses on ESG data and impact metrics, sustainability reporting, greenwashing, green bonds, natural capital, nature-based carbon offsets, biodiversity and ecosystem services, renewable energy project development, and TCFD/TNFD disclosures. He is also a Lead Author for the UN’s Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services, a member of the Technical Working Groups of the Climate Disclosure Standards Board, the Climate Bonds Initiative, and the Green Finance Network Japan.

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:

Hi, everyone. Welcome back to the podcast. And I hope everyone is staying well. By now we're all pretty familiar with greenwashing and its many variants like impact washing, rainbow washing, social washing, bluewashing and carbon washing. But what about competence greenwashing? What exactly is ESG expertise and who qualifies it?

These are, by themselves, innocuous questions, but if you've been listening to this discussion on social media platforms, you know that it's blown up in the Sustainable finance community, and it's also created a certain degree of insecurity around roles and titles. But I think that's a good thing, and I find this debate incredibly refreshing. Because the more time I spend in Sustainable finance and speak to specialists and academics, the more reluctant I am to call myself any kind of expert. I'm all for greater awareness and passion but they, combined with a 12-week course certificate aren't, frankly, substitutes for deep subject matter expertise.

Competence greenwashing, which was originally coined by Professor Kim Schumacher, is the practice of intentional or negligent misrepresentation of knowledge, skills, competence, or expertise relating to sustainability or ESG-related activities. I think of it as our version of the Dunning-Kruger effect. But that doesn't mean that experience counts for nothing, or that there isn't inherent tension between the academic focus on discreet research findings and the generalist approach of practitioners when it comes to sustainable investing. The question is, how to work with both to capacity-build around skills and expertise going forward.

All of this is to say it's great to have Professor Kim Schumacher on the podcast. We talk about what competence greenwashing represents, how to capacity plan and build around subject matter expertise in the natural sciences, and why we need to consider an ESG skills materiality framework towards this effort. Kim is an associate professor in Sustainable finance and ESG at Kyushu University in Japan. He's also a visiting lecturer at the Tokyo Institute of Technology in Japan, and an honorary research associate at the University of Oxford.

His research focuses on ESG data and impact metrics, sustainability reporting, greenwashing, green bonds, natural capital, nature-based carbon offsets, biodiversity and ecosystem services, renewable energy project development, and TCFD, TNFD disclosures. He's also a lead author for the UN's Intergovernmental Science Policy Platform on Biodiversity and Ecosystem Services, a member of the technical working group of the Climate Disclosure Standards Board, the Climate Bonds Initiative, and the Green Finance Network Japan.

Welcome to the podcast, Professor Kim Schumacher. It's great to have you here and thank you for taking the time today.

Kim Schumacher:

Thank you very much for that tremendous introduction, Jason. I'm actually very excited to be part of the podcast because I looked a bit, I browsed a bit, to your previous podcast and the people there, some of the people that I respect very much, like Professor Alex Edmans. I'm quite humbled to be able to be part in that podcast series.

Jason Mitchell:

Thank you so much. That means a lot to me. I mean this when I say it, it's truly my passion project. Kim, this is going to be a great conversation. I've been looking forward to this for a while, since I've seen your posts on LinkedIn and obviously your paper.

I'd like to start with that paper, the paper you published, titled, ESG Factors and Green Productivity, which introduces the notion of competence greenwashing and provides a framework for thinking about it. Can you lift the text off that paper to summarize your thesis for us?

Kim Schumacher:

Basically, competence greenwashing is... First of all, I want to contextualize a little bit what it is. It is the practice of intentional or negligent misrepresentation of knowledge, skills, competencies or expertise relating to sustainability or ESG-related activities. When I mentioned sustainability in ESG, it should already give you a notion that it pertains to the recent necessary prominence of sustainability-related issues and ESG investing across not only the financial sector but in society in general.

That is something where my paper goes into... We've seen this, really, momentum and rise around Sustainable finance, ESG, with regulators, with governments, with the United Nations at the most recent COP, really emphasizing the role of the financial sector in advancing sustainability goals. But with that increased attention, that also means that we need additional resources, additional capacities, to implement all of these plans and to make sure that we actually get a solid impact and also address the risks that come with environmental issues such as climate change, biodiversity loss. These capacities, often there's a gap in terms of how many of these practitioners we can recruit, from a human resources point of view, how many of them are recruitable.

That is where it also comes to capacity building. We need to have more of these experts. And in terms of building expertise, in terms of scaling skillsets around sustainability, around climate change, around nature, especially environmental issues, but also in the societal issues, in terms of to scale that, it requires time, it requires resources, it requires investing in human resources, in education as well. But on the other hand, a lot of companies, a lot of practitioners, for example in the financial sector and the business sectors, they feel also pressure from society, from governments, from institution investors to do more and do more faster. And sometimes they do not have the time.

What they then do is they might start to present themselves, inflate their sustainability-related capacities, their credentials, to look more green on the outside to show that they have what it takes, that they have the resources, that they have the capacities to implement all of these sustainability-related measures. But often that is only merely on paper because in reality what I say is that, these claims and these expectations that they are generated, they're not necessarily matched by the actual capacities and the actual resources by the actual credentials. And that mismatch is what I call competence greenwashing.

Jason Mitchell:

Thanks for that context around this expertise gap. I want to pull back for a second. What's really at stake here? I hear counter arguments saying that it's not about academic credentials, but genuine subject matter interest combined with intellectual curiosity and capacity. But you make a very compelling statement that, quote, "We should not equate awareness or passion with material subject matter expertise."

I'm being provocative when I say this, I realize that, but do you think the Sustainable finance industry suffers from the Dunning-Kruger effect?

Kim Schumacher:

My short response would be, currently, yes. The finance industry, for a long time, had one main financial metric, one main metric or key performance indicator, which was financial returns. That was in a context where we did not necessarily need to worry much about, for example, natural resources, exhaustion or just sustainability issues in general. Where it was really in previous decades, especially in the '70s and the '80s, where slowly there was an awareness around sustainability, especially with the introduction of the 1970 Environmental Impact Assessment procedure in United States, which then rolled out or basically became prominent in a lot of countries or, for example, with the 1987 conference on sustainable development. That is where it basically became aware.

But the thing is, if we've previously just looked at financial returns or financial materiality, if you will, then it is also difficult for an industry so crucial to society and so large and with so many different aspects to it that it has to consider, to also then make a major shift. Its own transition over into suddenly starting to consider what we previously called non-financial metrics, or what is currently either titled extra financial or sustainability metrics. That is extremely difficult to do because it is not only a change in skills, but it's also a change in mentality.

And then there's always this reaction. We already [inaudible 00:09:39] the sense, how difficult can it be? Do I really need to change everything, or is it really that fundamentally different from what I did previously? Often there's an underestimation of how difficult or how complex all these sustainability issues are. If you then see, we can just have access to ESG ratings that tell us about the sustainability performance of a company, then can I not just use that plus get a basic knowledge around sustainability issues and then I'm good to go?

That is where, I think, there's a over-simplification of how complex all these issues actually are. Because reducing carbon emissions is not just reducing fossil fuel usage, but it's everything that is around it, the supply chains, all those elements, that's built on the usage of fossil fuels. You cannot just say, just switch over to another more sustainable fuel. There's an entire chain of things that need to be changed, and even that has even secondary impacts or tertiary impacts.

So yes, a Dunning-Kruger effect right now.

Jason Mitchell:

To what degree has the past several years of Sustainable finance regulation catalyzed? I guess, pardoned to your thinking around this topic, is there an argument to say that if regulation and standards convergence are the real underpinning drivers, then we're still relatively early in the development of specialized ESG capacity building? How much of this discussion has to do with the natural evolution of norms in the context of ESG knowledge and deployment?

I guess what I'm saying is, I go back to the work of an international relations academic that I like very much, Martha Finnemore, who writes about the norm life cycle and its stages, from emergence to adherence and ultimately to institutionalization. Where do you think we are in this cycle of capacity building, considering the competence greenwashing attention, not just from yourself, but also we're obviously seeing from regulators and even central banks.

Kim Schumacher:

I think we're actually very far ahead. Like this norm life cycle, first you have the initial stages where a topic first needs to grow in the public conscience, and then it needs to be. First needs to grow in the public conscience and that it needs to be sort of like contextualized and there's conceptualized, contextualized, and then usually it needs to be transformed via a public consensus into norms. And the thing is, I think we're pretty far in that because as you mentioned, regulators and central banks, they have become quite aware around the topic of skills and expertise, and how important it is in terms of not only managing climate-related or environmental risks, but also making sure to properly measure, report and verify sustainability related impacts. And that is where I'm quite hopeful because even the large regulators such as the FCA in the UK in their strategy for positive change, they have, I think from 2021, where they basically outline their ESG priorities, they have mentioned that among teams, in terms of strategic skills that they need to have, they need to guard against competence greenwashing. It's literally they use the word like that in their strategy.

And then another thing is the European Central Bank in 2020, they published the guide on climate-related and environmental risks, where they also say that literally those who advise, for example, boards of financial institutions on ESG risks, need to have proper expertise and skills in, for example, ESG-related issues and ESG-related subject matter to advise, for example, boards on those matters. And that is extremely important because it shows already that regulators are moving in that at the most important step, I think, from an acknowledgement is where they literally utilize the word, is a recent call for evidence by the European supervisory authorities to a better understand greenwashing, the issue of greenwashing. And in that very call, they first also outlined the issue try to provide, and they say that the gaps in skills and expertise or ESG and sustainability-related expertise and the lack of ESG expertise and skills of market participants are identified as key greenwashing risks.

So that is where I see that there's a large awareness around the topic. And I think it will also eventually feed into actual regulation. And the first example that we have for that is the EU's Corporate Sustainability Reporting Directive, which basically creates a need for assurance. So assures there needs to be an external verification of corporate sustainability reports. And in that, they basically say that those carrying out these assurances need to have the adequate skills in sustainability to perform their duties in an adequate way. And they even prescribe a training that those who do not already have certain skills need to undergo. And it says a minimum eight-month training, so that is the first time it literally says explicitly around non-financial skills about the sustainability skills that those who previously were primarily auditing or assuring, for example, financial accounts or financial reports, they now need to also have that for sustainability reports. And that I think is where we see that we are already at the norm stage.

Jason Mitchell:

How do you see academics, with real subject matter expertise, functionally fitting into, let's say, financial institutions? Academic research, at least in my mind, tends to focus on discreet research findings, think a certain phenomena within an asset class or region, a sector, controlling for as many variables as possible. Practitioners, on the other hand, tend to search for generalist approaches and applications across markets, those regions, sectors, themes, et cetera. And so in one sense, I see a real compliment. On the other hand, I kind of feel like those approaches are in conflict.

Kim Schumacher:

It's a very good question. And so what you're describing is absolutely true, and I think one of the most interesting parts that I see also with a lot of ESG research, or sustainability research, is that it focus also again on just certain aspects without questioning enough the underlying shortcomings. And it sometimes even makes the explanatory value or the added value of some research in a sustainability context rather limited. So what do I mean by that? It's, for example, a lot of research that uses ESG ratings because as you say, a generalist approach would be how can we measure something and we reduce it down to a number, which is very easy to configure, to integrate it, for example, into indexes or benchmarks. It's quite easy to configure. However, it's brings us to the problem that the data, in and of itself, of these ratings and the underlying data and the methodologies often are not in the open. That is one of the problems that I see.

But since we do a lot of the research, acknowledges that the ratings have problems, but still it takes it more or less at face value and then tries to make predictions around, for example, future financial performance or, for example, how markets react to when a company has bad ESG ratings, still not questioning enough the issue in and of itself. So it shows that the same thing also applies to parts of academia. It always depends on the discipline. So what I would say is, even within academia, it's not a unified body where everyone has the same approaches, the same methodologies, and some of the methodologies are probably closer to what we can find in an industry context, in a business context, so much more applied. And some of it is very theoretical and very removed from a natural business context.

Academia also needs to move closer to the industry and sometimes see it also from their perspective, that maybe not everything can be out in the open because at the end you're still a business, but it also means that you see it from a way that is much more practical and applied, and therefore you might adjust or investigate, explore areas that you might have not considered before because you were very much in your disciplinary box. And I think that is extremely important to know, in terms of academia, to sometimes break up these boxes or intellectual boxes where we sometimes find ourselves and that is both for business but also for academia. And I think that should be the case in the future so that we move closer towards one another.

Jason Mitchell:

I'd like to jump back to your paper. Can you walk us through the ESG skill materiality matrix that you produced, and how do you see a version 2 of that matrix evolving given a lot of the feedback that you've gotten so far? What are your recommendations for how to reduce competence greenwashing over time?

Kim Schumacher:

Probably, that is the big one because the skill materiality matrix is the one that literally caused the most controversy because everyone tried to find themselves in that matrix. And I categorized the materiality between very high, high, low, and very low, and those who ended up in the low brackets were, of course, not very happy because everyone wants to see themselves like they are kind of relevant, especially because sustainability is a common issue that affects all of us. However, I just want to be very clear, and I want to give some examples always because I think it's very important, because in my paper I say that all knowledge has value, but not all expertise is material depending on the context.

So I always give the example of the plane, I always say that if someone faints on a plane, a passenger and the flight attendants ask, "Is there a doctor on the plane?" And someone raises their hands and says, "I have a PhD in history." That is technically true, but it is also not very relevant maybe in that specific context. So if someone is a medical doctor, that might be much more relevant in that specific scenario. The same is, for example, even if we go to professions that are very similar. So example, if I have a brain condition and I go to the hospital and they tell me that their neurosurgeon is currently on vacation, but the heart surgeon can take care of me, then I would be okay. If that is the only option that I have, then I would say, "Okay, that is better than nothing. But if I do have the chance that maybe the neurosurgeon comes back tomorrow, I would be happy to go back tomorrow and then be examined by the neurosurgeon."

Because even though they have a largely identical training, it still differs very much in terms of the skills that they developed over time, and like the expertise that they have gotten through their experiences and through their training, through their education. So it is very important to always know that even though, for example, certain educational backgrounds and even professional backgrounds or volunteering backgrounds, they still matter, but it's always, is it the best usage to address a certain context, to address a certain situation, and especially to manage certain risks or see certain opportunities and move more resolutely towards sustainability, toward towards a sustainable society? And it's an all-hands-on-deck situation. But again, some hands, if we imagine ourselves to be on the Titanic, some hands might be stronger to carry certain thing and others might be more useful in another place. So it is always like, "Do we utilize the skills in the best way possible and are they material to a certain context?" And that is probably what I would do for version 2. Already, just explaining it now requires a lot of time.

So the version 2 would probably be a version that increases the granularity because, for example, just because you have a PhD in engineering, it does not automatically make you suited to deal with climate change. Someone with a social science background might be more suitable to do that. And since, in my matrix, I put, for example, STEM, so science, technology, environment and math, or science degrees for that matter, very high, for example, for environmental issues such as biodiversity or climate change, that has also gotten a lot of feedback. Those who are in those fields, they said, "Yes," those who are not in those fields said, "Yeah, but what about me?" And that I think is the most difficult area. They said those who are in that, for example, environmental practitioners with scientific education, they said, "Yeah, that is definitely what I'm observing." But then others were saying, "That is not my reality, I do not have a background in that."

But I did a lot of work for international organizations, for development agencies, and I have seen firsthand that, for example, it takes social skills to properly address climate change. And that is the true difficulty of the matrix. So refining the matrix and also, for example, making it much more contextual to the job description. So more contextual to the job description. So, example, a head of biodiversity should, in my opinion, already have solid knowledge around biodiversity issues, even from a scientific point of view, but in some of my discussions not everyone was agreeing with that. Some said, "A head of biodiversity is more like a manager. The person just needs to have the right skills to know where can I get the necessary resources to carry out my function?"

But as a final note, I would always argue, and that is where we will probably see that we need some common baseline of knowledge, is that a maestro of an orchestra still needs to have a very, very solid grasp of music, because otherwise, how would he or she know, or they know that the orchestra is playing the wrong notes or someone is making a mistake? You need to have a firm grasp on the subject matter to even identify if someone is making a mistake. So, that is extremely important. So, I want to adapt, adjust the version to those realities, to those complexities in and of itself, that skills and expertise related classifications always bring with themselves.

Jason Mitchell:

Yeah. I'm really interested in how we calibrate our expectations for expertise even outside of sustainability. So, I guess what I'm saying is, you've said in a past interview that, "We need finance professionals and science experts to be in the same room." Your focus has obviously been on sustainability expertise, but what about the other side of that statement? There are PhDs in quantitative finance, but we don't see that comparable subject matter expertise in finance, in the asset management and corporate finance industries and even among corporates. Experience is often seen as a compensating force in finance. Why isn't that the case for natural science-based ESG work?

Kim Schumacher:

The case for natural science-based ESG work, it always hearkens on, and it is something that I speak from personal experience talking to asset managers and also financial institutions, is that natural science-based ESG work sometimes is seen as a barrier to effective decision-making. Because the thing is, one reaction that I got when I was proposing more integration of scientists into financial institutions, as you say, to foster that collaboration, was those environmental science people, they will just tell us what to do and they will basically tell us that everything that we do is unsustainable, and that in the end, we cannot invest anywhere, anymore. And they will basically just limit our entire investment universe to the extent of us not being able to generate financial returns anymore.

And that is a very compelling argument against the integration of more conservative from a resource point of view or from a sustainability point of view, experts. Because often scientists, especially environmental scientists, they are usually a little bit more driven by trying to find equilibrium between financial returns and sustainability aspects. Some would even say, even more driven by sustainability aspects or by environmental aspects. And I think that is one of the reasons why it has been so hard to overcome those stereotypes against that academics or researchers. They are completely removed from how a business properly functions and that they are only very dogmatic about what kind of investments can be made.

Jason Mitchell:

Where does financial competence fall into your thinking for ESG practitioners themselves? Which are, frankly, a pretty broad group. Aside from ESG-focused investment teams, that group tends to represent distinct managerial, research, stewardship, policy, compliance, and regulatory oversight capabilities at a firm level. I'm tempted to call it the ESG industrial complex.

A criticism for these non-investment group parts of that ESG complex is that few actually have direct portfolio management experience. They speak to non-financial risk, but less so to the mechanics of managing actual financial risk. ESG ratings are a proxy for this, as you've talked about, this kind of quasi-competence that lies outside the financial modeling, but also remains open for criticism even by the ESG community. Does that make sense?

Kim Schumacher:

That makes sense. And I think it's this thinking of, what is financially material? And I think that is where there's a paradigm shift currently occurring, where it's either from the regulatory side or even from the institutional side, from the organizational side, is that climate change, biodiversity loss, all those things, they will have financial impacts. It is just one of the things that everyone tries to figure out is, how much and to what extent and what does it take to manage those risks?

And we always talk about materiality and there's now these discussion around, "What do we actually need to look at?" And so, there's more of a Continental European approach around double materiality. So, basically looking at not only the risks to the companies, but also how do the companies impact, for example, or exacerbate the risks themselves, through their activities? And the same with financial institutions. So, how does climate change or biodiversity loss represent risks to the portfolio? But also on the other hand, how do portfolio holdings make the situation worse through the impacts that they have on the environment or on climate?

And basically the second category, what is usually called impact materiality or environmental and social materiality, is basically just medium-term and long-term financial materiality. Because if you make a situation worse through your own actions, then ultimately it will become the very short-term risk that you previously tried to also assess via, for example, your financial risk analysis. So, it is just a little bit longer term, because it will come back like a boomerang. It will ultimately come back to become a very concrete financial risk.

ESG practitioners need to have a solid grasp on finance if they work in the sector, but then what my competence greenwashing was, we need much more of that also among the finance practitioners, acknowledging that maybe some of the expertise cannot be scaled up easily in-house or via a short-term training.

Jason Mitchell:

I want to go back to your point around partnerships a little bit earlier. What are your thoughts, what are the pros and the cons about partnerships with academic institutions? What do you see as the most efficient and impactful way that climate and ESG academics can work with financial institutions?

I think there's a case to be made that there are huge inefficiencies in the transition of climate change to a financial audience. After all, academics have been ringing the bell on climate for decades, but financial institutions have frankly only been reacting over the past five or even 10 years. What can we do so that we avoid future lost in translation moments between the world of academics and the world of finance?

Kim Schumacher:

It goes actually back to the previous point. Yeah, we need finance experts and scientists in the same room. And I think that is really what the future of partnerships should look like. That can take different forms depending on where in an organization the partnership would take place, is it inside of asset management? Is it inside of the insurance department? Or, is it even sometimes in retail banking? It really depends on where and what area you want to cover.

However, I think one of the most efficient ones, and that is a small self plug, is, yeah, I do some work with financial institutions. And one of the measures that we did, some other financial institutions are also now moving to creating that. And we were not the first ones, but the thing is to create, for example, scientific advisory boards. It also means creating scientific advisory boards which have an actual impact on the decision-making inside of a financial institution. Because what it does is it brings much needed expertise into the organization for areas that were previously not necessarily at the forefront of their analysis or in their decision-making, in their governance, in their risk management, or in their strategies. So, it informs that already.

What it also does, it is also a knowledge exchange platform because for example, by interacting with all levels inside of an institution or organization, these scientific inputs can also, for example, create a knowledge transfer and upskilling and raising awareness and therefore, also providing the scientific experts with further insights, what are the actual challenges that financial institutions face? But it also needs to always be in the way that it cannot be just a toothless token scientific advisory board.

It needs to have proper tasks and proper purpose inside of a collaboration. And I think that is probably the most important word, there needs to be a purpose for doing it, and there needs to be a mutual value that is being created in mutual exchanges. And that can be in many forms. I know examples where, for example, joint publications where working papers or white papers or opinion pieces were written or co-authored, or for example, that can be via seminars, via conferences.

But I think probably the most efficient and probably the most long-lasting ones would be the ones where they are actively integrated into the creation of, for example, sustainable finance products and services, where they have actual direct input. And where that doesn't necessarily mean that they will decide everything, but where especially the science-related components or the sustainability-related components, there's some sort of peer review process. Because you can, of course, always say, "We did an audit or we got assurance." But as we saw, sometimes the auditors themselves do not necessarily have all the capacities to properly carry out these non-financial audits, sustainability audits, because they are also scaling their capacities at the moment.

Therefore, going to those who deal with, for example, biodiversity data every single day in their research or teach it to hundreds of students every year, that is, I think, one of the drastic changes. And what it can also be, it can be a springboard for internal capacity building. So, scientists will not necessarily become employees of the financial institutions, but what it can do is they can also inform internal training programs or advise on the quality of external training programs and say, "Hey, this is a good program." Or, "This is a bad program." Or, "This is a great program, but I would complement it with these elements because it has still some gaps." So, I do think that is probably the most sensible way of establishing a partnership. And industry academia collaborations, I think will be the future.

Jason Mitchell:

What's the utility of professional ESG certification programs and courses? It's clearly misguided to think these foundational survey courses provide post-grad level research and skills. At the same time, there seems to be a compelling purpose for generally upscaling the baseline understanding and cultivating even a greater awareness and buy-in of ESG within a firm. What are your thoughts?

Kim Schumacher:

I do think, and that's where we get to the how do you represent skills that you acquire. So, I think there's certain certificate courses around ESG or sustainability leadership, either online or over the course of a weekend or the course of over a few weekends. The thing is, all these courses I do think have value. They have sometimes even tremendous value in terms of providing solid introductions to a group of practitioners who have historically and also even currently still not been like, yeah, very exposed to, yeah, for example, sustainability issues, climate change, biodiversity, even social issues. So that can be very, very useful to familiarize them with these terms, and that is very useful. And it is also needed at every level, at every governance level inside of an institution. Be it from the board of directors to even the retail employee. The thing is though, it is always how you represent these skills to the public and whether or not it amounts to subject matter expertise.

And I think that is where I currently see the main problem. Because often these courses, be it by institutions but also by the practitioners themselves are used or are like, yeah, then presented as we now acquired solid material skills in terms of sustainability and we are now more or less equipped to manage a lot of these sustainability related situations. And even for example, for sustainability related investments, that is sufficient more or less. So all you need is one of those introductory certificates and access to ESG ratings and you're good to go. And I think that is where the misconception lies.

And some of these certificates also very actively create this illusion of, at least accept the confusion because they call their certificates, for example, certified expert or ESG expert or say that you will be a master in ESG afterwards. And that is where you create expectations that the skills acquired through these certificates might not necessarily convey. So yes to those courses for upscaling and for creating a common baseline, a common knowledge baseline. But even if sometimes the terminology is used around these certificates, no one is an expert after completing them. Because again, we have a societal expectation when we hear the word expert. And I do not think that these certificates fulfill that criteria.

Jason Mitchell:

Yeah, absolutely. And I find even people with sort of the deepest academic background are probably the most loath to call themselves experts. I mean, as an example, my mom has this PhD, she's a linguist, she's been teaching for 30, 40 years, has books out around 16th, 17th century grammar theory. Frankly, never heard her call herself an expert. I don't think she would ever profess to that, but I get your point and agree with it.

Kim Schumacher:

To just quickly follow up on that. And that is why always my argument is not to shame anyone to do not like skills shaming or to exclude anyone from the sustainability profession. The thing is how you present and what you claim to be able to do. And I do think it does matter.

Jason Mitchell:

So what do we do about this regulatory enforcement around greenwashing? In particular, the cases the SEC has announced has had a profound effect on the finance industry. Regulatory action is currently focused on disclosure, labels and obviously misselling. So how do you see competence greenwashing playing into greater regulatory scrutiny? And if regulators won't weigh in, is the idea to drive a market LED baseline for competencies? I guess that is the manifestation of your matrix.

Kim Schumacher:

Yeah, so I do think there's room for both. So for example, one good example that I do, for example, market driven or for example, industry driven would be by the International Auditing and Assurance Standards Board, which recently created a guidance on sustainability reporting, wherein they have the first chapter is applying appropriate competence and capabilities. And in that they actually do outline that appropriate competence and capabilities actually does also mean relying on the broadest level of expertise and often outside expertise or also acknowledging where your expertise ends, and then working with external experts or so. So it is actually required. So that is the first step also in terms of regulating it via industry standards or industry guidelines. And then we also have ISO, which has, for example, in terms of upholding certain standards, ISO 1721 is the requirements for bodies providing audit and certification of management systems.

And then also ISO 1724, which is also general requirements for bodies operating certification of persons. So that can be for universities, that can be for anyone who provides certification of someone needs to have the capacity themselves to provide that certification. I do think market led initiatives or industry led initiatives can help, and we see that with those certificates that we previously discussed. However, they alone are not enough. And I do think, and that is a very controversial opinion of mine, is that I think it needs to become a regulated profession to some extent. So similar to what we now see for sustainable funds or ESG funds around, yeah, regulations around the naming of funds. So when does a fund, when can it use terms like ESG or sustainability or climate or so, and what kind of characteristics does it need to adhere by to be able to use those terminology. I think in the future there should be a similar system for practitioners who call themselves ESG expert or even head of sustainability, chief sustainability officer, head of biodiversity, because those terms create expectations.

Jason Mitchell:

What do you make of the rise of the C-suite titles like Chief Sustainability Officer for generally corporates and Chief Responsible Investment Officer on the asset management side? What kind of knowledge and expertise would you expect to see from these roles, balancing experience with academic credentials?

Kim Schumacher:

It feeds in a little bit to my previous response about minimum skills that should be required, and that I do think there should be everyone who calls themselves or has a title that implies for example, or a sustainability related, which again implies Chief Sustainability Officer. When I hear that title, it creates expectations from me as a client or as a customer, as an external person, that that is a person that has already a very solid knowledge around sustainability. And that is where I do not agree with some people. In response to my competence greenwashing article said, that is something that you can learn on the go. That is learning by doing. And, not everyone has that. And I see a lot of institutions appointing Chief Sustainability Officers from the marketing remit or from the communications remit or from HR remit. So that is not to say that that is not important for sustainability, but we already have people who are managing these roles and they are already there.

Some even have a chief marketing officer or a chief communications officer. So, there's already roles that have that. So I would even go as far that, in my opinion, from a personal standpoint, a lot of chief sustainability officer positions have, at least from the outside, look to me like Chief Greenwashing Officer positions. Because the thing is that they often need to make modest progress look like a success. And it becomes really marketing or PR, and Chief Sustainability Officer, a Chief Responsible Investment Officer should be doing or should be in charge of exactly that. It should be a position that assures that sustainability performance is adequately measured, adequately reported, and adequately verified.

Jason Mitchell:

Let's finish it off with a question about board level competencies. What ESG specialization should a board of directors have? In a previous episode of a sustainable future, with the author, Dambisa Moyo, she admitted that she didn't know what an ESG expert looks like. That boards should not have ESG specific competencies. She's more in favor of a baseline knowledge across all board members. Isn't this perspective at odds with your push for greater subject matter expertise?

Kim Schumacher:

So that is a very good question. I like that question a lot. So the thing is, it kind of aligns with both the views. So do I think that currently, and there was even a study by by NYU Stern School that I think Professor Tensie Whelan of NYU, which said that boards lack material ESG expertise. And even though there's a lot of room for improvement, I do generally agree with the conclusion that the paper came to.

The thing is we've seen that recently, and I saw some asset managers in their TCFD reporting just then saying that all of their board members, half of them overnight became sustainability experts. I'm not even kidding. So there's these examples, and the thing is that is definitely not the future. And they claim to have half of their board would be sustainability experts without providing any evidence or any information or any context of why they came to that conclusion. So that is, I think is definitely the wrong way. But I do agree with Dambisa Moyo in the sense that, as I said before, there should be a common baseline, but that common baseline of knowledge should also include sustainability and ESG issues.

Jason Mitchell:

Got it. Good way to end. So it's been fascinating to discuss what competence greenwashing represents, how to capacity plan and build around subject matter expertise, particularly in the natural sciences and why we need to consider an ESG skills materiality framework towards this effort. So I'd really like to thank you for your time and insights. I'm Jason Mitchell, head of Responsible Investment Research at Man Group, here today with Professor Kim Schumacher, Associate Professor in Sustainable Finance and ESG at Kyushu University. Many thanks for joining us on sustainable future, and I hope you'll join us on our next podcast episode. Thank you so much, Kim. This has been a great episode.

Kim Schumacher:

Thank you very much, Jason.

Jason Mitchell:

I'm Jason Mitchell, thanks for joining us. Special thanks to our guests and of course everyone that helped produce this show. To check out more episodes of this podcast, please visit us at man.com/ri-podcast.