Beyond ESG and Risk: A Regenerative Approach to Business and Investment Modelling

After having journeyed across business lifecycle stages throughout the past two decades, the two things I have learned which are most critical to business success, irrespective of which stage of the lifecycle I’ve been in are: can I identify and then challenge my underlying assumptions? Secondly, can I identify the complexities of my current situation and hold opposing ideas in my mind at the same time with equal validity, until something entirely new emerges? It is in the spirit of these learnings, that this chapter explores some of the complexities and uncertainties of our present and our most probable future. It acknowledges how we have arrived here in the now, and some of the limitations of our attempt to tackle these challenges with ESG indices and frameworks. I also posit an alternative approach, which is regenerative in nature and applicable as a new lens through which to view uncertainty and risk. This paradigm, which is not new as it reflects the order of nature but is new in its application to business and investment modeling, provides us with an opportunity to shift from the perspective of “doing less bad” to “value-adding”. The approach opens the discussion for how we can assess our performance as business leaders and as businesses differently and drive us towards the net-zero and 1.5-degree targets, we seek. It also accommodates for those of us more inclined to think along the lines of our own survival, how we safeguard our businesses better in the future.

 

Let us start with the here and now. Where is here? Here is where we, as a global business and investment community face unpresented risk, uncertainty and change. The threats posed by climate change are at an unparalleled high, whereby, according to the UNDRR report – produced with Belgium’s Centre for Research on the Epidemiology of Disasters at UCLouvain[1] – there were 7,348 recorded disaster events worldwide, during the last two decades. The statistics are startling with approximately 1.23 million people having died – approximately 60,000 per year – with more than four billion affected in in total, many of those affected more than once. These two decades of disaster have caused $2.97 trillion in losses to the global economy, with data also indicating that poorer nations experienced deaths rates more than four times higher than richer nations. By comparison, the previous 20-year period (1980 to 1999) saw 4,212 reported disasters from natural hazards, with 1.19 million deaths, more than three billion people affected and economic losses totaling $ 1.63 trillion. We have close to double in numbers and costs since the previous two decades and the predictive climate science says more is to come. The Intergovernmental Panel in Climate Change urges us to strive towards a global warming target of 1.5 degrees increase, yet we are hurtling towards 3.2 degrees, which will result in the loss of much of our oceanic ecosystems, which provides 50-80% of the worlds oxygen. Already, the ocean has absorbed about 30% of the anthropogenic carbon dioxide, resulting in ocean acidification and changes to carbonate chemistry that are unprecedented for at least the last 65 million years, resulting in the loss of many species[2]. Now, despite the science, there are still many climate deniers out there who says the changes are not due to the hand of humans and change would have happened anyway, and to a degree, they are right, change really is the only constant.

 

However, what scientists refer to as The Great Acceleration[3] is undeniable given the evidence. Since 1945, the advent of globalization in its current form and post war international, industrial collaboration, we have seen unprecedented increases in carbon emissions, decline in land quality, increases in species extinction and oceanic warming and expanding social inequalities. Perhaps now, one may finally question the economic models which worked well for us pre-globalization but have not worked so much in our favor with respect to ecosystem impact. The accelerated impacts have led us to this point of crisis which leaves us all now scratching our heads and wondering what to do to fix it?

 

What has been our response to all of the urgency, warnings and evidence of devastation thus far? Primarily, it has been to adapt and ready our business-as-usual to better prepare for impending threats and risk, which is akin to battening down the hatches when a storm approaches, planning to ride it out.  We hear the word resilience a lot. We work to create indices and measures for our impact on the environment and societies and strive to bring an “impact consciousness” to our governance. This is small step in the right direction, however the underlying assumption, or question if you will, underpinning many of the ESG frameworks and indices is, “how to we do less bad?” The problem we face is net zero targets cannot be achieved by business as usual. This paradigm of thinking is in line with Western Cartesian view of breaking wholes down into existent parts, so we can control, manage and mitigate. This is the same mechanistic thinking that got us into trouble in the first place. Within the mechanistic view there is a disconnect between the natural living systems principles[4] within which the environment naturally operates and oversimplified and reductionistic views we often take to solving problems.

 

Let us start by addressing the complexity a little by bringing our attention to some of the limitations of ESG models[5]. Firstly, sector neutrality can lead to counter-intuitive results. Most ESG scoring methodologies include a kind of sector neutrality. This means that every sector includes the full range of ESG scores and can lead to a skewing of results for sectors that clearly are more emissions intensive such as oil and gas. Next, correlation is low between ESG rating agencies. The correlation between ESG scores from different data providers is often limited. Research from CSRHub[6] shows that the correlation between ESG scores from different rating agencies can be as low as 0.3, indicating a clear lack of consistency. Thirdly, ratings become stale over time. A company’s ESG score today is often comparable to its score from three years ago. This can be in part, due to the result of infrequent review cycles and the fact that specific ESG data points do not tend to change much, which is in stark contrast to the evolving nature and needs of the environment and societies within which we operate. Fourthly, reporting standards are still mostly absent. Collecting high-quality, comprehensive data remains a challenge. A key reason for this is that companies are not required to report on most types of ESG data, it is voluntary and therefore very subjective, typically reliant upon self-reporting. Lastly, and what I think is most important, is size bias. ESG ratings often display a size bias that gives larger firms better ESG scores on average. This does not necessarily mean that larger companies take better care of the environment or society and there is not yet any clear indication that any high score on ESG ratings correlate to any measurable improvement in operational practices that contribute positively to the needs of our ecosystems.

 

With the challenges we face, driven both by our propensity towards linear and reductionistic thinking and the pressing time-based urgency looming upon us to act in a way that will bring our social and environmental ecosystems back into balance, I propose a new way to think. A kind of “thinking technology”, which will enable us to shift the lens towards a regenerative design, development and action paradigm. This is a way of modeling our businesses, which will not require us to “Kill the Business to Save the Business” as I have heard some speaker’s tout. The only thing we have to kill is our desire for comfort in linearity and simplification. We are humans, our very make-up is complex, and we are participants in a complex web of interactions with our non-human environment, so let’s start by considering that complexity is a natural and honest starting point. Let us explore how we can work with complexity to innovate business and investment models that connect to the essence of how things really work.

 

The word “regenerative” is now bandied about as the new and improved “sustainability”. Be careful! The term is being used in industry by those who do not understand its meaning. I have seen “regenerative funds” come to the market, which are still funding monoculture practices, which are inherently not regenerative. Regenerative thinking and practice is a practical framework based on living systems processes and is specifically designed to enable people to think about the underlying dynamics and energies, taking a co-evolutionary approach to design. These frameworks can be used diagnostically, to understand existing phenomena, or creatively, to enable systems to shift towards a manifestation of potential[7]. They enable us to manage flux and change as natural aspects of the world, without the need to create silos of thought or over-simplify. When challenges are viewed through the lens of a regenerative framework, we access a profound insight into potential that is present but not yet born. Bringing this potential into the world is a defining characteristic of regenerative work. You may be asking what this has to do with business and investment modeling? Business is not linear, and nor is much else in life if we are honest about the complex nature of living systems. One of the social impacts we see as a result of this disconnection is rising inequalities, an example being a recent analysis by Pitchbook[8] who revealed statistics that show that despite high growth in venture capital funding globally, Q3 of 2020 saw venture funding for female founders hit its lowest quarterly total in three years. In line with Pitchbook’s findings, the World Economic Forum published a follow up article providing an analysis of the statistics which pointed clearly to a problem in investor bias[9]. Despite increasing numbers of women in investment decision making roles, even within accelerators, men attain equity funding 2.6 times more than women. Well-meaning accelerators may unintentionally be contributing to increasing the gender equity gap. Our resistance towards being genuinely inclusive at both a leadership level and within the broader spectrum of stakeholder engagement, results in a myopic view of the world, and despite our good intentions only serves to increase inequality and negative impacts across the broader ecosystem.

 

In contrast to our linear biases, however, businesses are actually living systems made up of complex pressures and demands, communities of people, and different interest groups. Andrew Ward writes about the evolving organization and our need to evolve as leaders alongside the evolution of our businesses[10]. He distinguishes five types of leaders for the different evolutionary stages of business. He identifies the entrepreneurial Creator at the earliest life stage, bringing vision to the organization and focusing on speed to market. Next is the Accelerator, who once the organization hits fast growth, needs to focus on structure to facilitate controlled growth. Next is the Sustainer, whose job it is to focus on sustained growth over time and increasing market share. The fourth kind of leader is needed when the organization hits crisis in its lifecycle, and she is the Transformer. Her job is to cut loose the broken systems and to revision and refocus the organization. Lastly, when an organization can no longer stand on its own and other options are needed the Terminator’s job is to restore and realize value for the organization. If we look from a macro- perspective, we are all at in need of more Transformers and Terminators as we face down the barrel of predictive data that shows the number of climate emergencies are set to increase beyond the latest UNDRR findings of the last two decades. We also need more Creators who are able to think beyond existing paradigms of economics, business and investment and innovate through a new and regenerative lens so that our businesses and investments become value – adding – in an evolutionary sense. Lastly, we need investors to be brave enough to get behind the new thinker and provide funding, and support to new ways of seeing and solving problems.

 

We can place ESG and regenerative practices on the scale between degenerating and regenerating. We can see that Green and Sustainability practices sit on the degenerating scale. This is because the focus is to “do less bad”. Doing less bad on the Green and Sustainable position in the scale is still good but is not enough to be transformative at this time of crisis. Restorative and regenerative practices are focused on value adding.

 

 

Figure 1: Trajectory of Ecological Design: © Bill Reed Regenesis

 

Value – adding is different to what many of us know as Michael Porter’s “value-added”. Porter in his work on Value Chain described the following:

The value that’s created and captured by a company is the profit margin: Value Created and Captured – Cost of Creating that Value = Margin[11]

 

This transactional view assesses value created in a fixed moment in time or for a fixed unit of production and the value itself is of a finite nature. Whereas the “value-adding” of a regenerative model exists in a relational context and is continuous nature as the participants in enterprise, or the organization or the ecosystems are co-evolving, continuously identifying potential in the risks, and seeing threats and restraints as opportunities to create.

 

Thankfully, we are witnessing the emergence of new businesses and expertise specializing in regenerative practices, due to the pressing need to think beyond the degenerative spectrum, or the “do less bad” mindset. These organizations specializing in restorative and regenerative technologies are guiding companies to recognize their own potential. Jade Eli Technologies (JET)[12], are specialists in regenerative innovation consulting and work with some of the largest brands in Central Europe and Africa to help them find competitive advantage from a living systems approach, rather than a problem-solving approach. They have coined the phrase digital evolution whereby digital strategies or technologies, enable the innovation rather than confusing the technology as the innovation. JET understands that innovation is a mind-set and if the contextual lens is regenerative through which we view innovation, then innovation and digitalization becomes evolutionary in nature, as does the ability to engage your entire ecosystem in co-creation. Competitive advantage becomes a natural expression of the essence or potential inherent in your unique ecosystem, rather than something that has to be devised. The result is business models become fundamentally value-adding to the ecosystem within which they participate, and financial performance is a natural example of that.

 

As case study example of how regenerative value-adding approaches become financially rewarding, I draw from the work of US based Regenesis. When approached to work on the Lions Gate Secondary Wastewater Treatment Plant[13], Metro Vancouver faced tight timelines and a requirement to meet ambitious environmental and sustainability goals. The project was complex as it involved 20 different organizations which made up the project team, plus opposition from community and lobbyists who were rallying against the developers and the prospect of increased utility prices. The project had identified 320 distinct deliverables to be achieved in 18 months prior to Regenesis stepping in. Despite the urgency to act in order to meet the timelines, the Regenesis facilitators decided to rally the stakeholders together and slow the process down, spending 4 of their precious 18 months to do a deep exploration of the project’s potential. The team identified nine core themes. Without the scope or space to document the entire process in this chapter, it is important to note the results from a seemingly counter-intuitive move by Regenesis to slow things down. They managed to significantly reduce the expected deliverables, by about 50%. They reduced community conflict significantly such that building, and community approvals were achieved 18 months ahead of schedule but not only that it was an extremely rare unanimous approval in community support. The public was willing to pay the higher rates as they “valued the values”, there was a 98% reduction in change requests and the phase completion came in under time and under budget. According to Ben Haggard, Regenesis founder and Carol Sanford “A regenerative economy is a developmental economy. It grows, thrives, and evolves to the extent that all of its participants are becoming increasingly intelligent about how to work within and contribute to the well‐being of living systems”[14]. The case of Lions Gate demonstrates that the approach pays in dividends.

 

Lastly, we are seeing new and innovate ventures, such as Transcendent Media Capital[15], a venture studio, who designs businesses for investors, from the ground up, deeply framed in regenerative design. They specialize in designing alternative, yet profitable business models tackling all manner of social and environmental challenges, providing new solutions to traditional notions of scaling that are degenerative. I must also mention SHEEO[16], a radical new funding model, which engages an expansive network of women and non-binary people building a $1 billion perpetual fund which is actively supporting women to tackle some of the world’s most important topics through innovative business models. In doing so, SHEEO is challenging the need for entrepreneurs to adhere to the venture capital playbook. The companies mentioned here, and others equally as innovative, often sit outside of mainstream ideas and thought, yet they are paving the way for a shift towards a regenerative mindset, where communities, businesses, investors and entrepreneurs alike can transform into a value-adding paradigm. They serve to bring the agility needed to safely navigate the risks and uncertainties of the future.

 

The next big challenge for the ESG and investment community is to explore how to move beyond the confines and comfort of check boxes and indices based on voluntary reporting. The next stage of evolution is to expand our thinking beyond how less bad our companies are impacting their communities and planet. Can we shift towards an open discovery and discourse about how we can assess how value-adding organizations are becoming? First this will require that see our work and relationships as nested, or interdependent. The first and most important work is that which we do with ourselves[17]. Can we be rigorous and intelligent enough to ask ourselves the tough questions such as “what are my biases and how are my experiences shaping my world view?” “What other perspectives can I take and who can I bring into my decision-making circle that will help me to see things differently?” “If I feel something is risky, why? What is the perceived risk and how else might I see the issue?” The work we do with ourselves requires us to be honest, rigorous and persistent and the growing capability of self-awareness is always nested within growing the capabilities of our team and communities. These capabilities are in turn nested within improving the health and the value of the system within which we function. If we are able to see ourselves, our choices and our work as part of this deeply interconnected network, which reflects living systems, we can in turn design methodologies by which we can assess whether organizations are value-adding and whether the investments we are making are moving us into restorative or regenerative processes. If we have rigor and commitment enough to shift our lens and design according to living systems frameworks, we will start to participate in the restoration of our biodiversity, have an impact powerful enough, that as a collective we may be able to move towards not just net zero, but negative emissions and in turn we re-harmonize our place in nature.  We then stand a much better chance that in 10 to 20 years’ time our businesses will still exist, and our investment still deliver returns.

References:

[1] Anon, An overview of the last 20 years. The Human Cost of Disasters An overview of the last 20 years 2000-2019. Available at: https://www.undrr.org/sites/default/files/inline-files/Human%20Cost%20of%20Disasters%202000-2019%20FINAL.pdf.

[2] Anon, 2018. SPECIAL REPORTGlobal Warming of 1.5 ºC. Intergovernmental Panel on Climate Change. Available at: https://www.ipcc.ch/sr15/chapter/chapter-3/.

[3] Steffen, W., Crutzen, P.J. & McNeill, J.R., 2007. The Anthropocene: Are Humans Now Overwhelming the Great Forces of Nature. AMBIO: A Journal of the Human Environment, 36(8), pp.614–621.

[4] Miller J.G. (1985) General Living Systems Theory. In: Pichot P., Berner P., Wolf R., Thau K. (eds) Biological Psychiatry, Higher Nervous Activity. Springer, Boston, MA. https://doi.org/10.1007/978-1-4684-8329-1_100

[5] 2020, J.B.J., Bos, J. & 2020, 30 J., 2020. Investors must beware of pitfalls posed by ESG ratings. InternationalInvestment. Available at: https://www.internationalinvestment.net/opinion/4009801/investors-beware-pitfalls-posed-esg-ratings.

[6] LLC, C.S.R.H., The CSRHub Data Schema. Available at: https://esg.csrhub.com/csrhub-data-schema.

[7] Sanford, C. & Haggard, B., 2020. The Regenerative Economic Shaper: A Framework for Architecting The Next Economy. Regenesis Group. Available at: https://regenesisgroup.com/resources/.

[8] Mathur, P., 2020. Quarterly VC funding for female founders drops to three-year low. PitchBook. Available at: https://pitchbook.com/news/articles/vc-funding-female-founders-drops-low.

[9] Burns Allie Burns, A., 2021. Funding for female-led start-ups: are accelerators widening the gender gap? World Economic Forum. Available at: https://www.weforum.org/agenda/2021/01/gender-finance-gap-startups-accelerators-entrepreneurs.

[10] Ward, A., 2003. The leadership lifecycle: matching leaders to evolving organizations, New York: Palgrave Macmillan.

[11] Porter, M.E., 1985. The Competitive Advantage: Creating and Sustaining Superior Performance., New York City, NY: New York Free Press.

[12] https://jade-eli.com/

[13] Mang, P., Haggard, B. & Regenesis, 2016. Regenerative Development and Design: A Framework for Evolving Sustainability, New Jersey: Wiley and Sons.

[14] Sanford, C. & Haggard, B., 2020 et al

[15] https://www.transcendent-media.com

[16] https://sheeo.world

[17] Mang, P., Haggard, B. & Regenesis, 2016 et al

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