Bet on innovation, not Environmental, Social and Governance metrics, to lead the Net Zero transition

Abstract

The conventional Net Zero perspective with its emphasis on Environmental, Social and Governance (ESG) metrics represents linear cause-and-effect thinking. That is, implementation of the metrics will then change company behaviour with the eventual effect of a successful Net Zero transition. Different perspectives are presented, rooted in systems thinking. Numerous company examples explain why innovation, not ESG metrics, will be the prime mover in achieving Net Zero. The crux of the argument for systems thinking is that a company like Honeywell, currently given an ‘F’ ESG score, is delivering stellar innovations that will enable its customers to significantly reduce their greenhouse gas emissions. As to behaviour, boards of directors should demand new information from management with particular attention to returns on capital versus the cost of capital under scenarios that include a price (tax) on carbon. The integration of corporate finance principles with systems thinking will improve decision-making and facilitate an efficient Net Zero transition.