How the Bundesbank will save the planet – part 1

Fallibility is out of fashion. Instead, impossible infallibility is now the favoured metric against which institutions and individuals are measured. This slide from Popperian contingency towards medieval certainty is dangerous and unforgivable. The destination is a form of tyranny. But like most tyranny the trend sometimes reveals itself as absurdity. In this vein, I’m grateful to OMFIF Research for adding levity to this tendency with its laughable idea that ‘biodiversity and loss of nature will be top of the financial sector’s agenda in 2024’. A ‘live broadcast’ on 27th January will discuss how this will influence central bank strategy. Why would any institution permit such pernicious distractions? The only allure seems to be the substitution of responsible agency for the deceit of fake good intentions – with open-ended and possibly unfortunate consequences. So, ridiculous as they seem, those promoting these new directives may be shown to be up to no good at all.

source: creator.NightCafe.studio

For, despite the laughter, there is a case why these proposals could be considered a ‘top item for the financial sector’s agenda in 2024, and beyond. It is not benign. The overt vagueness of the proposals seem intent on bestowing authority without either responsibility or account across a swathe of economic activity. When this pernicious affect, however absurd and insignificant, seeps into central banking we need to be worried.

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Most of us instinctively understand why central banks may see the incorporation of feel-good notions like ‘biodiversity’ as be a good idea. Central banks have shown themselves to be unable to achieve their main identified objective of price stability. So, it makes sense to cast about for some other invented purpose to distract their deceived populations. The bio-diversity project (if it is worthy of such a description) has the outstanding benefit of being unquantifiable, either in its progress or its destination. When will biodiversity sufficiently be reached? How would we know? And therein lies potential danger.

An eminent (and eminently sensible) friend puts it thus: “organizations can only succeed by focusing on an identifiable objective, stating it clearly, constructing a way to measure their performance, and developing formal rules of behavior that make it possible to achieve the objective.” Yes, his spelling reveals him to be American.

In light of his prescription (he’s white and male, in case you’re wondering), how could we summarise the ‘top item for the financial sector’s agenda in 2024’?

Three aspects of the OMFIF event are worth considering; what does a commitment to biodiversity mean, why would central banks associate themselves with such an idea, what does such an alliance say about their institutional confidence?

This first post will consider the proposals and putative commitments, such as they are. A second post will look at which central banks have publicly associated themselves with this distraction (albeit sotto voce), and what motivations and weaknesses this may reveal about those institutions.

The event of the 27th January takes as its starting point ‘the publication of the Taskforce on Nature-related Financial Disclosures’(TNFD) reporting framework… and COP16 on the horizon’. What are the TNFD recommendations?

The TNFD website begins with a mostly content-free layer of generalities in pseudo-legal language to give the impression of formal validity. It takes as its starting point the Kunming-Montreal Global Biodiversity Framework agreed at COP15 in December 2022. This created a ‘target for the 196 signatory countries to encourage and enable businesses to “regularly monitor, assess, and transparently disclose their risks, dependencies and impacts on biodiversity”.’

How is such a monitoring to be done? The UN sensibly reports this will be challenging and ‘more clarity is needed on how to measure dependencies.’ No kidding.

However, not daunted by this acknowledgement of difficulty the UN proceed to outline a grab-bag of unquantifiable considerations. It is hard not to think of the Emperor’s undergarments when we read the following.

The guidance states measurements must be holistic – going beyond how a business may rely on particular ecosystem services, such as storm protection or pollination, to incorporate wider nature trends and the impacts and considerations of other businesses and local communities. Another important consideration is for financial institutions and businesses to appreciate the differences between dependencies on different types of ecosystem services and whether or not they involve consumption of an ecosystem asset. Measurements should also look ahead and consider when crucial ecosystem services may reach tipping points.

From storm protection to pollination and everything in between. So, quite an ambition. Every organisation in every sector is asked to understand and quantify its past, current and possible future relationship with the wider eco-sphere. On pain of what, exactly? A question that is left hanging ominously.

Not content with this laughably imprecise starting point, the TNFD builds four preposterous ‘pillar’s’ for its affiliate organisations under headings of ‘Governance’, ‘Strategy’, ‘Risk and Impact Management’ and ‘Metrics and Targets’. If the emperor’s underwear is content-free, his institutional pillars are equally insubstantial.

‘Governance’ asserts the importance of affiliate organisations to consider nature and ‘human rights’ in relation to Indigenous People, Local Communities affected and other stakeholders’ with respect to ‘nature-related dependencies, impacts, risks and opportunities’. So, absolutely nothing to do with ‘governance’ as normally construed and instead an assertion of potentially contradictory claims and grievances from those without any direct economic claim on the organisation – though they may be willing to extract some rent.

Strategy’ requires the organisation to describe its nature-based dependencies and how it intends to respond ‘different scenarios’. If the objective in ‘Governance’ is beyond the scope of an organisation (including a central bank) then any strategy is going to be, er, challenging. Nothing to see here.

Risk and Impact Management’ asks affiliate organisations to ‘describe the processes used by the organisation to identify, assess, prioritise and monitor nature-related dependencies, impacts, risks and opportunities.’ Everyone knows, or should know, that a sensible regulatory regime is based on rules of compliance agreed a priori based on known or imagined risks (see my friend’s outlined definition above). Regulations should not be based on unbounded possibilities. As there is no definition of ‘nature-based dependencies’, the ability to assess risks is impossible, or unlimited. Consequently, any assessment would permit the TNFD to promote those it favours and vindictively pursue those it disapproves of simply by choosing between its ill-defined criteria.

Metrics and Targets’ is the final TNFD ‘pillar’ which asserts the patently absurd intention that organisations ‘disclose the metrics and targets used to assess and manage material nature-related dependencies, impacts, risks and opportunities’. So, the umbrella organisation leading the mission which can’t define the metrics needed to judge its success demands that affiliate organisations reveal just such definitions – on pain of some sanction, presumably. Well, outsourcing has become a large part of modern economy, but this outsourcing of metrics and targets seems an acknowledgement of the mission’s futility or open-endedness.

So, who has signed up to this nonsense? The TNFD blurb asserts, half-heartedly:

A global survey conducted by the TNFD in the summer of 2023 indicated that out of 239 organisations – headquartered in 36 countries and covering 11 sectors – 70% said they plan to start disclosing aligned with the TNFD Recommendations by their financial year 2025 or earlier.

This seems to be a version of ‘damned with faint praise’. Who are these 239 supporters? There are a far greater number of organisations in my local borough.

More encouraging (for supporters), at pixel time, the TNFD website claims 1555 member organisations have joined the ‘TNFD Community’, of which 1374 have also joined the ‘Forum’, a ‘global multi-disciplinary consultative group of institutions aligned with our mission and principles.’

Being a member of consultative group aligned with TNFD mission and principles is presumably like the old alignment with motherhood. Of course, agreeing with motherhood is now a contentious issue, for some, so we may have to revise the analogy. Whatever; bromides do not a difference make, whether they refer to motherhood or bio-diversity commitments (presumably provisional) in several years time. And perhaps that is precisely the point. For why would such a vague framework command support at all, except for PR purposes? Well, it may be repurposed, perhaps.

The inner sanctum of the TNFD seem to comprise those who believe in the mission so profoundly they have joined the ‘Community of Practice’. Currently, this body has just 13 members. It has yet to publish any reports or minutes of meetings. The website states: “further details of the activities offered will be announced around the time of UNFCCC COP 28 in November 2023.” Yet there are no further details in evidence.

And what a rum collection of companies they are.

source: https://tnfd.global/engage/tnfd-community/?_sfm_is_forum_member=1&_sfm_community_of_practice=1

What persuaded this disparate collection of companies to join the ‘inner sanctum’? This may give us some notion of how serious this ‘top item of the agenda for 2024’ currently is. Some conjecture, and suppression of laughter, is needed when we look at the 13 members.

3Keel: an Oxford-based firm of sustainability advisors specialised in working with food systems, supply chains and landscapes – i.e. a small NGO, not a market service provider.

BNY Mellon we all know, and some of us love. The BNY Mellon ESG Report 2022 lists their accession to TNFD as ‘recognizing growing investor interest in biodiversity and the urgency of action to preserve ecosystems’. So, a deflection tactic from possible disgruntled minor shareholders is the most likely explanation. Otherwise a mystery why they have joined this group.

boost technologies: a Japanese consultancy with a capital of JPY100 million (i.e. USD695,000). Not very big. Probably not very important. Cheap advertising?

Dillon Consulting Limited has a website that cannot be reached. Perhaps it is just the holiday effect.

EcoAct: an environmental advocacy group, working, among others, for the UN.

Export Development Canada: possibly joined because one of their executives thought it cheap and harmless. Possibly a serious member. Possibly an error.

Lombard Odier AM: a mystery member, motives possibly similar to BNY Mellon.

Mineral Council of Australia: plausibly motivated by last year’s failed Indigenous Voice referendum

PIIMA: no idea.

ShareAction: UK lobbying group whose raison d’etre seems be to acquire shares in companies to cause problems for their management – a bit like activist investors but with the unstated intention of making the company less profitable.

TC Energy: Canadian gas producer. No, me neither, though possibly corporate embarrassment may have been a factor, or possibly because the company thought the TNFD mission a harmless dud.

Vedanta Limited: ‘a global powerhouse of minerals, power & energy companies with nearly 100,000 employees across world-class assets in India and Africa’. Possibly embarrassed or just taking the piss.

Yarra Valley Water: no idea.

So, the item that OMFIF Research assure is is ‘top item for the financial sector’s agenda in 2024’ is led mostly by what appear to be a bunch of eco-grifters and the biggest custodian bank in the world. That’s it.

A less serious set of proposals would be hard to invent and the membership of the Community of Practice just confirms what a ill-conceived project this is. The proposals provide no concrete details for any metrics other than a series of vague hand-waving niceties. If this was satire it would not evoke much of a response because it would be deemed so irrelevant as to be unworthy of attention. C’mon guys, if you want to be serious at least get JP Morgan Chase on the list.

Yet there is a case that the TNFD proposals should be considered a ‘top item for the financial sector’s agenda in 2024, and beyond. The vagueness is a potential future threat, especially if it influences common measurements of acceptable behaviour. If members of the central banking community consider this a worthy addition to their required obvious focus on the price stability and economic performance then we should be very worried indeed. Very worried.

The next post will look at which central banks have indicated interest in this toxic melange of professed virtue and makes some conjectures about their motivations and institutional vulnerabilities.

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