Bet on innovation, not ESG metrics, to lead the net zero transition

Unofficial AI-generated summary based on the public title and abstract. Not an official translation.

🔬研究者:Examines critiques of GHG Protocol and proposes E-liability as an alternative, useful for carbon accounting research.

🏢実務担当者:Encourages boards to adopt systems thinking and focus on innovation rather than solely optimizing ESG scores.

🏛政策担当者:Highlights the need for regulatory frameworks that incentivize innovation and address flaws in current disclosure standards.

In 1987, the United Nations defined sustainable development as meeting the needs of present generations without compromising the needs of future generations. Today, the top priority for sustainability is the transition to Net Zero—that is, net zero greenhouse gas (GHG) emissions. Carbon dioxide, a GHG, is a major contributor to global warming. In the pages that follow, I provide three different perspectives on how companies are most likely to help get us to Net Zero. The first is the widespread, conventional perspective that Environmental, Social, and Governance (ESG) metrics will lead the way to a successful transition to Net Zero. The second uses systems thinking to better describe the complexity of navigating a path to Net Zero and highlights the critical role of innovation. The third promotes systems thinking for corporate boards with the aim of improving decision-making and accelerating innovation and adaptation in a fast-changing Net Zero world. Facing pressure from institutional asset managers, companies today must begin navigating a path to Net Zero.1 As metrics keyed to the “E” of ESG and specifically related to GHG emissions proliferate, investors are increasingly using ESG scorecards as part of their decision-making. At the beginning of 2022, the capital devoted to exchange-traded, ESG-focused funds exceeded $2.7 trillion. Moreover, regulatory bodies continue to make this kind of data mandatory in corporate reports. As a consequence, managements and boards of directors are motivated to take actions that can make their companies look good at least in terms of ESG metrics. But the objective of such companies ought, of course, to be to reduce their GHG emissions. The current default reporting methodology is the GHG Protocol, in accord with which Scope 1 emissions are those directly produced by a firm's operations—for example, from driving owned and leased vehicles. Scope 2 missions are those produced by facilities that generate electricity bought and consumed by the company. Scope 3 emissions originate from upstream operations in a company's supply chain and from downstream use by both its “wholesale” and end-use consumers. The GHG Protocol methodology has been criticized as lacking accuracy and verifiability (primarily in terms of Scope 3), in significant part for requiring that the same emissions reported multiple times by different companies. To address this and other limitations of the Protocol, Robert Kaplan and Karthik Ramanna have proposed an innovative solution that recognizes the integrated nature of pollution activities across the economy. A company's existing accounting system and cost-accounting infrastructure would record the GHG units emitted during operations as an E-liability.2 All along the supply chain, companies would transfer the E-liability associated with goods delivered and record their end-of-period E-liability. This method eliminates multiple counting of emissions in the conceptually flawed Stage 3 method while also limiting opportunities for greenwashing gamesmanship. The conventional perspective with its emphasis on ESG metrics represents linear cause-and-effect thinking. That is, a logically tight path is assumed to exist from implementing ESG metrics to “incentivizing” companies to take actions to improve their ESG scores, eventually leading to a successful Net Zero transition. Interestingly, those who embrace this perspective invariably do appreciate the complexity and messiness of the climate change problem reflected in the interrelatedness that brings together political, economic, ecological, and social issues with multiple causes generating multiple effects often separated in time and space.3 Linear cause-and-effect thinking frequently leads to the promotion of overly simplistic means to achieve goals. Why? Mainly because written and verbal communications are perceived as persuasive when key points are presented in a logically tight linear manner. Today's leaders frequently prefer confident conclusions to the tentativeness and epistemological humility exhibited by systems thinkers. Why not put systems thinking front and center since it facilitates the use of alternative ways of seeing the world that can overcome more narrow perceptual processes often driven by rigid and ossified assumptions?4 To embrace systems thinking is to continually question key assumptions, to organize feedback (especially from experimentation), and to appreciate, and actively seek, diverse points of view; along with a sustained curiosity about mapping the intricacies of interrelationships in a complex system.5 Such alternative perspectives can reveal faulty assumptions and lead to expedited learning that helps identify key constraints and leverage points in order to improve system performance. Easier said than done. The linear cause-and-effect choice appears sensible to many because promoting a pure systems-thinking approach means a journey full of surprises and the need to adapt and deal with unforeseen problems, while making mistakes along the way as a necessary part of learning about system complexity. But some may perceive this as a journey to climb a mountain that has no top—that is, an integrated, holistic understanding of the climate system with all the interrelatedness with other systems. Hence, the preference to minimize future surprises and to take the easier route laid out by ESG metrics. What help can decision-makers expect when tackling the “messes” and “wicked problems” that proliferate in this age of complexity? They are usually brought up on classical management theory that emphasizes the need to forecast, plan, organize, lead, and control. This approach relies on there being a predictable future environment in which it is possible to set goals that remain relevant into the foreseeable future; on enough stability to ensure that tasks arranged in a fixed hierarchy continue to deliver efficiency and effectiveness; on a passive and unified workforce; and on a capacity to take control action on the basis of clear measures of success. These assumptions do not hold in the modern world, and classical management theory provides the wrong prescriptions…managers are left to persevere with their favorite panacea…systems thinking [is] the only appropriate response to complexity.6 The interrelatedness of GHG emissions with geopolitical risk became readily apparent with Russia's invasion of Ukraine beginning in February 2022, coupled with the dependency of many European countries on imports of Russian oil, gas, and coal. European policy makers concerned with their energy security began reassessing their increased fossil fuel usage from non-Russian sources, including liquefied natural gas from the U.S. A related geopolitical risk is China's assertion of control over Taiwan. Under this scenario, those countries that actively oppose China could find their supply of Chinese rare earth minerals—those required for electrical vehicle batteries—suffering a long-term disruption. Take lithium, which is a critical component of batteries. One of the world's largest deposits of lithium has been discovered in Nevada's Thacker Pass. A mining permit was issued in February 2022 after a lengthy battle with U.S. environmentalists who, notwithstanding their support for green energy are adamantly opposed to such mining in the U.S. They have filed additional lawsuits to stop this mining operation. Keep in mind that batteries for electric vehicles contain a witches’ brew of metals—lithium, nickel, cobalt, copper, and rare earth metals such as neodymium and dysprosium. The current mining process results in substantial environmental degradation, which will only get worse thanks to accelerating demand. Nevertheless, U.S. mining of these metals—which means replacing a portion mined outside the U.S.—would entail highly regulated processes that, from a global system perspective, would yield a net environmental improvement and reduce the risk of supply disruptions for U.S. electric vehicle manufacturers. Solar panels, wind turbines, battery-powered electric vehicles, and the retirement of coal-burning power plants are the face of decarbonization for the general public. The problem, however, is that such initiatives fall well short of what will be needed to achieve Net Zero. Complexities abound. Solar and wind are intermittent sources of electricity, needing to be transported over an old and inefficient electric grid. Plus their intermittency requires carbon dioxide-emitting natural gas powerplants (assuming declining nuclear and retired coal plants) to even out supply and demand. In addition, intermittent renewables do not address hard-to-electrify sectors like steel, cement, and air travel. One ray of hope now comes from the growing global consensus that may be achieve Net countries have transition But in thinking about this by some key the kind of that a critical role in systems thinking. energy and a means for as a gas and in and can be with natural gas and delivered using many of existing natural gas is produced using natural But not all is and when carbon is emitted as part of this the is is produced when the carbon is and not into the green is produced from take in and electricity to gas as an One with has been by a U.S. system continually to as an energy to generate without fossil are energy that take in natural and electricity as an can expect declining for and fuel as In the of systems there would be a feedback As to vehicles, the the and the the the more electric battery-powered vehicles. A for could from using the now being in the U.S. by and could power that generate without carbon In are being as a possible for the for electricity by has the existing infrastructure could be to deliver the coal could transition to the of make a when that GHG emissions for including those from of panels, are times that of I that was to help us and wind in and get into and of the enough to power the world, and could us a way to t

• openalex https://doi.org/10.1111/jacf.12554first seen 2026-08-02 18:29:43