The study of undetected risk constitutes a fundamentally reductionist enterprise. It necessarily reduces the object of its inquiry (e.g., risk, uncertainty, etc.) in roughly the same sense that a cartographer reduces a territory to a map. No representation can fully capture the reality it represents. No scientific or theoretical breakthrough can provide the final answer, the unshakable truth that requires no further modification or elucidation.
Every discovery of new wrinkles of risk opens up the next vista, the next wilderness not yet tamed by language, ideology or wishful thought. All revolutions merely punctuate a process, a ceaseless search for improvements in the human condition. Yet, we continue to maintain the illusion that the sustainability revolution constitutes an event, a fait accompli that the society should simply metabolize and move on. This view now figures as the most glaring symptom of the exhaustion of the progressive imagination.
The weakened will of the sustainability movement has greatly slowed the study of extra-financial risk. Having produced abundant food for constructive thought since its inception, sustainability has entered the regurgitative phase of its development. Today, efforts to improve systemic sustainability rely largely on pre-formulated constructs that identify and characterize domains of human activity in which the erosion of institutional integrity can elevate systemic risk. Instead of developing these constructs further, we are now turning them into bumper stickers and checklists.
The reduction of sustainability to a checklist arguably started with the formal postulation of the three grand pillars of the discipline: environmental, social and governance risk, also known as ESG. Under each of these master-categories of extra-financial risk, researchers have developed formal taxonomies of quantitative or binary risk metrics. The taxonomies are essentially lists of sins, of which a particular company may be guilty or innocent (e.g., dual-class shares, combined CEO/Chair positions, “overboarded” directors, and executive compensation disconnected from measures of corporate performance, to name just a few examples.)
No doubt, these metrics provide valuable insights into corporate character. The weakness of these taxonomies lies not in what they cover but in the broad domains material risk they overlook. For example, most ESG models do not incorporate the risk of misleading or fraudulent corporate accounting. Even as the SEC has received credit for its recently renewed focus on accounting fraud, we seldom pause to ask whether even the most meticulous compliance with current laws and rules would give investors a full and fair assessment of the value of underlying assets.
In fact, it’s an open secret in the accounting profession and among corporate CFOs that compliance with current GAAP and FASB rules would still produce a materially distorted estimate of asset values. In this way, we are reducing accounting risk about as much as the table manners of passengers on the Titanic reduced the risk of drowning.
Also, consider an example from the governance area. Corporate practices such as combined CEO/Chair positions and dual-class shares often dominate public discourse. But governance experts have long pointed out that the token separation of CEO/Chair positions would only produce a negligible impact on corporate governance under the current regime, which still provides perfectly legal mechanisms for the disenfranchisement of minority shareholders.
Many other risks with indisputably broad systemic repercussions remain conspicuously absent from the narrative of the sustainability movement, even as it habitually congratulates itself for its more holistic and healthy approach to shared risks and desired rewards. For example, ESG models tell us nothing about risks stemming from the “technological singularity”. This concept has become most closely associated with the work of Ray Kurzweil. It refers to the inevitable moment of truth at which the rising wave of steepening growth rates across our technology-fueled societies will bring the human civilization to an “event horizon” that renders our best forecasting methods utterly impotent.
Sincere participants in the sustainability movement should acknowledge that the social injustices that sparked the meme of sustainability have mostly deepened, and they continue to deepen. Likewise, the sustainability movement needs to deepen and reinforce its convictions. It needs to raise its voice and sharpen its political acumen. Otherwise, sustainability will become another poignant addition to the long list of noble ideas co-opted by their detractors and betrayed by their creators.