Gil Friend’s Blog

Sent to the CalPERS Board, with regard to the 3/18/19 meeting discussion of: Sustainable investment & CalPERS Divestment Overview. If you want to send your own, the address is [email protected]
 
Dear CalPERS Board,
 
I am a CalPERS member, based on my service in the Governors Office and as Chief Sustainability Officer for the City of Palo Alto.
 
I question the Wilshire conclusion that fossil fuel divestment would be economically disadvantageous to portfolio performance. Many other analyses have reached different conclusions, including:
– https://www.sciencedirect.com/science/article/pii/S0921800917310303
– https://impactalpha.com/how-divestment-from-fossil-fuels-can-benefit-your-investment-portfolio-9421f3e44c13/
– http://ieefa.org/research-finds-fossil-fuel-divestment-not-a-drag-on-investment-returns/
– https://www.ussif.org/climatereinvestment
 
to name a few.
 
I’m concerned that maintaining a significant investment in fossil fuels exposes our retirement asses to unwarranted risk—notably the rising monetization of the cost of carbon emissions, the growing impact of “climate chaos,” and the concomitant risk of stranded fossil fuel assets (whether for economic, regulatory or political reasons, or all three).
 
I urge you to broaden your consideration of fossil fuel divestment to substantively address the concerns. I suggest that it is your fiduciary duty to do so.
 
Thank you,
Gil Friend

Now that I’ve wrapped up my five year “secondment” as the first Chief Sustainability Officer for the City of Palo Alto, I’m back in the saddle at Natural Logic (with a little side gig as Expert in Residence at Presidio Graduate School), and ready to resume a regular communications rhythm with you. And we have some exciting new things underway. There’ll be a websiite update soon—with new offers for companies, cities, leaders and investors—but let me give you an early preview first!

(Before I do, check out my new keynote speaker “sizzle reel”!)

Natural Logic helps companies and communities prosper—building economic and strategic advantage, reducing risk, and enhancing their capacity to navigate the uncertain landscapes of this strange and challenging century. As you probably know, most of the companies that come to us are already well down the road—far enough to realize that something substantial is missing—and come to us for re-set.

(This year, we’re choosing to focus on deeper work with fewer clients, and we’re setting a higher bar. You can expect us to challenge you on lost value, hidden risk, fiduciary duty, and your organization’s capacity to deal with contingent futures it faces—and a new opportunity for your CFO.)

Our typical individual client is a business, political or sustainability leader (or emerging leader) ready to significantly increase their effectiveness, impact and well-being.

We’re building on the Palo Alto work to help smart and sustainable cities—which are on the front lines of the climate crisis. (As a reminder, here’s where I started with Palo Alto, and here’s where we wound up—with a carbon neutral utility, an advanced “new mobility” strategy, and perhaps the toughest green building code—and most aggressive climate goals—in the country.)

And now, after decades of advising some of the world’s best companies, we’re opening a new channel of activity focused on impact investors. (I don’t particularly like the term, since all investment has impact—it’s just a matter or what kind of impact!—but it does seem to be the term of art these days.)

So: Companies. Cities. Leaders. Investors. (And some surprises still to come.) Watch for more details in upcoming mailings—or call or contact me to share your journey and concerns, and to explore how we might help you deliver more value with less stuff.

Coming up:

  • My new Conversations at the Edge of Now series kicks off with the remarkable Nora Bateson at the Commonwealth Club of San Francisco April 2.
  • Hear me speak at the Environmental Leader and Sustainable Brands conferences (with others to come), and book me to shake things up at your next conference or corporate retreat.
  • Follow me on LinkedIn and Twitter for previews of my latest thinking and my comments on breaking events.
  • And join me to celebrate my 70th birthday (!)—and nearly a half century at the front lines of sustainability, regeneration and value discovery—in Berkeley, CA March 13!

I’m grateful we’re connected, and for all you do, and I’ll send you off to your day with the quote of the week: “I am always doing things I can’t do—that’s how I get to do them.” —Pablo Picasso.

[[This article was first posted at GreenBiz.com May 22, 2018.]

First in a two-part series on business risk and strategic duty.

My sustainability work over the past several decades has focused on value — discovering, generating and capturing the often-hidden value that can be revealed by looking at your business through the lens of 3.8 billion years of open source R&D (and not only the lens of a 500-year-old accounting scheme).

But there’s also risk. And just as most businesses are flying blind with regard to value, nearly all are flying blind with regard to risk.

The currently obvious (and perhaps least understood) one is climate — the impacts of rising temperatures and seas, increasingly destructive storms and increasingly unstable weather on everything from flooding and infrastructure functionality to human health and migration, from supply chain stability to the viability of agriculture and even outdoor work (think construction) in many regions.

And those are just the uncertain risks. There are also the certain risks — what Salesforce senior vice president (and co-founder of scenario planning at Shell Oil) Peter Schwartz once called “inevitable surprises” — and unmonetized externalities.

Odds are none of this shows up in your financial statements, little in your 10-K and even less in your management reports and incentive systems.

In fact, as sustainability data expert Trucost has noted, few companies would be profitable if these costs had to be booked. As they don’t have to be booked — neither under GAAP (the Generally Accepted Accounting Principles) or IFRS (the International Financial Reporting Standards) — most companies choose to ignore them and merely pay them lip service. Some, however (such as Puma and Unilever) choose to use this “second set of books” as an early warning system, a strategic guide that helps continuously identify where value and risk might appear, and continually develop flexible, adaptive strategies to prevent them — and, yes, profit from them.

But you know all that. Unfortunately, it’s worse.

As my colleagues and I wrote in The Wall Street Journal 14 years ago (“Wishing Won’t Make It So”): “The ‘train wreck’ [with regard to 40 percent of companies self-described as unready for WEEE] owing to many companies’ failure to keep up with increasing global requirements for environmental performance — was completely avoidable. It raises concerns about the level of fiduciary duty exercised by business leaders who should have done a better job of seeing it coming, and of preventing it.… The challenge to senior executives and boards is to steer away from the collision course with a set of global trends that many have evaluated incorrectly.”

That same year, Mark Van Clieaf and Janet Langford Kelly expanded this notion of fiduciary duty in “The New DNA of Corporate Governance (PDF),” highlighting the “‘strategic duty’ of directors for minimal process for good governance, and the all too common lack of robust, good faith, meaningful process for CEO selection, compensation and other issues.”

The following year, Delaware Chief Justice Leo E. Strine Jr. concluded that the ultimate role of the corporation is to create “durable, long-term wealth,” which he further characterizes as “societal wealth” and finally refines to “sustainable wealth.”

And this year, BlackRock CEO Larry Fink surprised markets when he wrote: “Today’s culture of quarterly earnings hysteria is totally contrary to the long-term approach we need. … We are asking every CEO to lay out for shareholders each year a strategic framework for long-term value creation.”

Van Clieaf and Kelly take Strine’s and Fink’s challenges further, asserting: “Compliance and oversight constitute only a portion of a director’s duty … The ultimate goal of corporations is to continue to create wealth as a viable and growing entity for the long term; directors have a proactive responsibility to ensure that the corporation they serve has those processes and metrics in place — including strategic and financial plans — that they believe will accomplish this end. In other words, they have a ‘strategic duty,’ not just a compliance duty.”

They observed more recently, “If you extrapolate from these documents and case law and the COP21 agreement, then some 90 percent of the world’s business models must be transformed to net-zero GHG business models by 2050.”

This major transformation for the planet also requires major transformation in the ways we do business. The demands going beyond compliance, beyond business as usual, beyond scenario planning, to rethinking fundamental business models and developing “transformation strategies” and plans, innovation roadmaps, R&D and capital investment plans, succession plans, long-term incentive design and more, to get to 95-plus percent “clean” — for power, mobility, food and fiber systems, buildings and cities — to both thrive and be agile in the carbon-constrained world that is likely to be upon us this century. And it demands to do so in face of unprecedented uncertainty in global technology, policy and financial landscapes.

This is not just geeky sustainability scuttlebutt, but a window into substantive/material economic weakness and risk. Consider:

  • 85 percent of listed companies’ longest strategic planning horizon is less than five years.
  • 85 percent of listed companies in the S&P 1500 have Long-Term Incentive Plans with performance periods of less than three years.
  • More than 85 percent of the S&P 1500 have no disclosed “line of sight” process metrics aligned to future value, such as innovation and related drivers. 

  • Some 75 percent of companies have no balance sheet or capital efficiency metrics in their long-term incentive plan design.
  • On the positive side, the use of performance-based incentive vehicles in long-term incentive plan design has increased every year since 2009 — from 52 percent in 2009 to 76 percent in 2013.

So what? The short-term, myopic focus of “quarterly capitalism” fails. Its financial impacts are already visible — and are not small. Despite their narrow focus on generating total shareholder return (TSR):

  • Only 35 percent of S&P 1500 companies generated both five-year positive relative TSR and five-year (2008-2012) positive cumulative economic profit (ROIC exceeding cost of capital). 

  • 18 percent of companies over five years (2008-2012) had a negative relative TSR, while at the same time achieving a positive cumulative five-year economic profit (ROIC exceeding cost of capital). 

  • 17 percent of companies over five years (2008-2012) had a positive relative TSR, but a negative five-year cumulative economic profit (ROIC less than cost of capital). 

  • 30 percent of companies over five years (2008-2012) had negative relative TSR and negative five-year cumulative economic profit (ROIC less than cost of capital). 


Who cares about this? Well, your shareholders do. Or will. (Especially allegedly long-horizon shareholders such as pension funds and insurance companies.) Investment managers — starting with those responsible for the $15 trillion of assets under management (AUM) with an ESG focus — do, and more will. Your employees, your customers and your family do — as does your own heart and soul, if you dare to tell yourself the truth and dare to drop the pervasive myth that values and value need to be in conflict.

As do the recent — and thus far voluntary — recommendations from the Task Force on Climate-related Financial Disclosures (TCFD). “As of Dec. 12, an estimated 237 companies from 29 countries — with a combined market capitalization of more than $6.3 trillion (PDF) — publicly had committed to supporting the TCFD recommendations. Among them were 150 financial firms responsible for assets of $81.7 trillion, such as Bank of America, BlackRock and Citigroup.”

TCFD is a big step in the right direction, as is its call for 2 degrees Celsius scenario analyses. But as Preventable Surprises and Reporting 3.0 argue, the urgency of the climate crisis demands more decisive action, such as “transition plans” to new business models aimed at net zero GHG emissions by 2050.

AEP is one company that has built a Business Model Transition Plan Report. But as Preventable Surprises CEO David Murray summarized at a recent international dialog hosted by Reporting 3.0’s New Business Models Blueprint Working Group (of which I’m a member): “It’s possible that AEP’s transition plan will be held aloft as ‘best in class,’ but sadly it also seems that on some critical points — e.g. no commitment to net-zero emissions — ‘best in class’ [is not]…good enough to sufficiently tackle the systemic risks associated with the climate crisis.”

Here’s the bad news: The risks and uncertainties that will confuse and misdirect most companies will provide significant business, innovation and investment opportunities to those who understand and embrace them. As Chauncey Bell and I wrote nearly 10 years ago: “Your business is on a collision course with a set of global shifts that almost no one has adequately prepared for. These ‘inevitable surprises’ are coming fast. For those who are ready, these shifts will be platforms for change; for those who are not ready, they are traps.”

Van Clieaf and Kelly go further: “Lack of governance processes for most of this will be a ‘systemic breach’ of duty of loyalty, duty of care and the Strategic Duty of Directors. The Directors could be at risk of having to be personally be liable for any shareholder losses.”

Here’s the good news: “Thar’s gold in them thar ‘ills.” McKinsey and Co recently estimated the financial impacts of short-term-ism. “From 2001 to 2014 the revenue of long-term oriented firms cumulatively grew on average 47 percent more than the revenue of other firms, and with less volatility. Similarly, on average, the earnings of the long-term firms grew 36 percent more over this period than those of other firms, and their economic profit was 81 percent higher by 2014.”

What then is to be done? How will you and your organization build these platforms and strategic leadership capacity for change and business model transformation, and then build and execute effective strategies on those platforms? How will you build the transition and transformation plans that will be required of your company and your industry? How will your leaders begin to understand their barely recognized strategy duty, their known but poorly understood fiduciary duty, as well as their familiar compliance duty?

I’ll address these questions, and offer specific suggestions for action, in the weeks and months to come.

[This article was first posted at GreenBiz.com February 8, 2018.]

It’s pitch dark. There’s no moon. You can’t find your map. The ground shifts beneath your feet. You grope tentatively to detect sure footing, or the edge of a precipice.

Welcome to the Anthropocene. Now that you’re here, how will you navigate a landscape with no maps and with endlessly shifting features? Climate weirding. Head-spinning business and technology disruption. Disorienting and disturbing political turmoil. Culture wars. And the most unstable geopolitical situation since the heart of the Cold War. Or, in other words, “There be dragons here!”

If you haven’t heard the term yet, you will. The Anthropocene, Wikipedia tells us, “is a proposed epoch dating from the commencement of significant human impact on the Earth’s geology and ecosystems, including, but not limited to, anthropogenic climate change.”

The term evokes the rising human impact of biodiversity, species extinction, the health of Earth’s ocean and, of course, the challenge of climate change — not just on human well-being, but also on the living systems that undergird the human economy and all we hold dear.

What characterizes the Anthropocene — in addition to foreboding, despair and denial — is the unparalleled uncertainty of the landscape we will traverse this century. How much change? How fast? Exactly when and where? Planners, executives and investors want answers, but while the trends and directions are increasingly clear, the specifics are not.

In the face of this uncertainty come deep challenges — to enterprises, governments and just plain folk — of making plans and moves when the normal maps and guideposts no longer work. Traditional modes of extrapolative planning, which depend on projecting past trends into the future, inevitably fail. Normative planning — reverse-engineering the future from aspirations (as NASA did in developing the Apollo mission) — becomes essential, even though most institutions have little experience and little comfort with it.

A dozen years ago I wrote with Chauncey Bell, a master of business design, that “business is on a collision course with a set of global shifts that almost no one has adequately prepared for. These inevitable surprises (in futurist Peter Schwartz’s words) are coming fast. For those who are ready, these shifts will be platforms for change. For those who are not ready, they are traps.”

Some address this challenge by trying to bring “futures thinking” and forecasting skills into business leadership and initiatives. Futures thinking is at the heart of invitation — the ability to tolerate and even embrace uncertainty, and discern pattern in it; to imagine, accept and drive discontinuous change; to formulate compelling and sometimes unreasonable visions and develop strategies that can fulfill them.

But a focus on “forecasting skills” can be a trap of another sort. While it’s essential to imagine and explore possible futures (through scenario-planning and other processes) and often useful to calibrate those possible futures (with projections and simulations), it can be a fool’s errand to think we can forecast the future, any more than to think we can time the market. The past 10 years, 10 months, 10 weeks and 10 days should make that clear.

Yet it is possible to develop the appetite, ability and even serenity to navigate, anticipate and respond to — and perhaps even steer — the waves of change and tumult likely to characterize the rest of this century.

How? By cultivating new mindsets as a fundamental underpinning to deploying new tools. By developing a shared, principle-based understanding of the 3.8 billion years of open-source R&D that nature has gifted to us, and by learning to use the orienting compass it provides. By nurturing conversations that open possibility, forge commitment, ensure accountability and replace resignation with resolve. By providing a clear line of sight that connects purpose, goals, actions and impacts for every member of your organization, value chain and communities of interest, so everyone can see the impacts of their actions — including your CFO.

Why? To enable diverse teams to work with that magical balance of what cyberneticist Allenna Leonard has called “autonomy in a coherent whole.” And to include not just the “rear-view mirror” metrics of CSR and ESG reporting, but also the “radar” metrics that could disclose potential disruption and could identify disruptions to your metrics. (Blockchain, anyone?)

My wife and thought partner cautions that this may read as just some guy’s opinions. In fact, they are observations grounded in 45 years of observation, and in the unforgiving laboratory of close work with some of the most world’s most successful and innovative companies.

I’ll end this opening foray with a provocation, an invitation and a promise.

The provocation: Since the biggest competitive advantage this century will belong to those able to see through the fog, and to see the reefs and clear channels that the fog obscures for their competitors, how will you nurture your organization’s capacity to navigate the Anthropocene?

The invitation: Join me over the coming months for a grounded, pragmatic conversation together to explore this landscape.

The promise: Together we will discern the landmarks and milestones, find the ways of wayfaring, sketch the maps that you currently lack and chart a course for you to put these insights to work in support of purpose-driven impact.

[This article was first posted at SustainableBrands.com Dec 17, 2017.]

We’ve come a long way since the first New Metrics conference seven years ago.

Back then, much of our focus was stuff — resource efficiency and the physical “metabolism” of our organizations; now, we focus more and more on value. Back then, we were very concerned with reporting; now, we’re increasingly concerned with how reporting contributes to strategic insight. Back then, we focused on the metrics of the tangible — the stocks and flows or both physical resources and traditional financial reports; now, we recognize the large and still rising value of the intangibles — from climate risks to human happiness. Back then, we were working to think about natural capital alongside financial capital; now, we’re working to bring five capitals into the management equation. Back then, we were focused on the numbers themselves; now, we’re beginning to understand the critical importance of context and the power of science-based goals. Back then, our conversation was on the fringes of the business world; now, it’s moved much closer to the heart of the mainstream.

But even the old is new again, as “traditional” metabolic metrics provide a foundation for value leakage discovery, which builds internal and external engagement, which fuels business and service model innovation. This has been a powerful center point of recent Natural Logic engagements — unlocking, in the words of one client, “massive” unseen business value that was literally invisible in standard management and financial reports. In other words, the new metrics disclosed value to which the old metrics were literally blind (see “10 Things You Need To Know About Your Value Stream”).

That’s not the only way we’re blind. Permit me to share a conversation that was eye-opening for me. About 15 years ago, I spoke with the CSO of a very large global manufacturing company, which had just released its first CSR report. The CSO was proud of this accomplishment, and was a little taken aback when I asked, “How will you use this report to help your people make better decisions, and manage the company better?”

“Well,” she responded, “we print several thousand copies” (uh-oh), “and distribute them to all our managers. They keep them on their desks (this is not going to end well, I thought), and when they get a relevant question, they can look up the answer in the CSR report.”

“Yikes,” I thought. “That’s not management at all, and certainly not better decision-making” (as I contemplated shorting their stock). And it certainly misses the opportunities that appropriate metrics, appropriately deployed, can open.

So, let me ask you the same question: How do you use your sustainability metrics and reports — as a rearview mirror displaying past performance, or as a radar system illuminating the path ahead? As a box you need to check, or as a tool to help your people and partners be smarter?

JM Juran (who, along with W Edwards Demming, was one of the founders of Total Quality Management) approached this question with great lucidity nearly 70 years ago, when he observed that “To be in a state of self-control, a person should be provided with knowledge about what he [sic]… is supposed to do, what he is actually doing, and what choices he has to improve results wherever necessary. … If any of these three conditions [is] not met, a person cannot be held responsible.”

I’ve polled audiences on these questions at nearly every opportunity over the past two decades, and I’m dismayed at the responses. Typically, barely five percent of people say that their company has all three. How can you manage an organization effectively and hold your people accountable in an organization that fails to provide these fundamental conditions (it polled at 30 percent at New Metrics ‘17 — great progress but still woefully inadequate)?

New metrics — properly contexted, deployed and used — can provide an opening to this dilemma. They can help organizations use sustainability reporting not merely as historical records but as tools of discovery, to help people be, think and act smarter — to cut waste, operate more efficiently, see pattern and disclose value, share insights and unlock opportunity.

And they can serve as a modern-day council fire. Think about it: For as long as we’ve been human, we’ve commonly gathered together in a circle at the end of the day, often around a fire, and shared the stories of the day, the imagined or hoped-for stories of the next day, and the other stories that would arise as we’d watch the dancing flames. I’ve observed the same pattern, as teams gather around the cool fire of a computer screen, gaze into charts displaying trends, ratios and context, and discover stories — and value, and hidden opportunity — in the patterns of the data, and share those stories as a way to open new futures.

My mentor, Fernando Flores (former Chilean minister and senator, businessman, writer, provocateur), has observed that we humans are strange monkeys — ones that have conversations, declare concerns, invent futures. And ones that freak out, duck responsibility and slip into resignation. But something else is possible, if we can enter into a different sort of conversation together.

So, the challenges of New Metrics go beyond the metrics themselves. Here are several:

  • Consider context: Metrics not as numbers, but as numbers in relation to other numbers and other concerns. This gets to the heart of a human economy coupled with nature’s economy, tied together through reality-based accounting — what Jahn Ballard calls “G!d’s balance sheet.”
  • Include externalities: Our accounting systems are blind to these explicit impacts of our value chain on both the regenerative capacity of earth’s ecosystems to sustain our economy, and on us (Trucost has determined that most major companies would not be profitable if they had to bear the true costs of their activities. How exposed is your company?).
  • Stop (or at least see and shift) subsidies. Include the exposure of your business to explicit & implicit subsidies (explicit, as in tax credits and transfer payments; implicit, as in unpriced externalities.).
    Get the prices right. Markets may be a better way to allocate resources, but as Adam Smith once observed, perfect markets depend on perfect information. Markets can’t work well with the market-distorting lies of unpriced externalities.
  • Open everything. Resist the automatic temptation to play your cards — whether IP or performance data — close to the vest, since the value of shared learning can dwarf the value of control.
  • Include everyone. Since none of us is a smart as all of us.
  • Find pattern without resorting to the easy escape of mechanistic reductionism — obsessing on things rather than systems — in a complex, interconnected and emergent work.
  • Embrace and navigate uncertainty (which, if you haven’t noticed, will be a central feature of the rest of our lives), and nurture emergence.
  • Ground that uncertainty in the stable science that underlies all we value and do (we’ve found The Natural Step framework an unusually powerful tool for getting everyone in an organization aligned around consensus science, shared commitments, big goals and systematic action.).

For the sake of what? Why does this matter? In order to:

  • Nurture our capacity to “navigate the anthropocene.” The biggest competitive advantage this century will belong to those able to see through the fog, see the reefs and clear channels that the fog obscures for the competitor.
  • Provide a clear line of sight that connects purpose, goals, actions, impacts for every member of your organization, your value chain and your communities of interest, so everyone can see the impacts of their actions…including CFOs.
  • Enable the self-control that Juran identified 70 years ago.
  • Enable diverse teams to work with that magical balance of what Allenna Leonard has called “autonomy in a coherent whole.”
  • Include the metrics that could disclose disruption, and identify disruptions that could disrupt your metrics (Blockchain, anyone?).

There’s one more challenge — one that can’t be measured: Courage. Literally (or at least etymologically), “strength of heart” (I and other capable sustainability coaches and advisors can help you with many things; this is one you’ll have to bring forward on your own!).

Finally, let me leave you with this guidance from William Bruce Cameron, who challenges us to remember, when thinking about metrics, that “not everything that can be counted counts, and not everything that counts can be counted.”