Rand Corporation Senior Economist Harry Broadman says equal emphasis should be placed on sustainability disclosures and operational transformation, and CSOs should be empowered to drive change.
There are two of issues Harry Broadman is concerned about when it comes to sustainability: the tension between emission disclosure efforts and concurrent corporate operational change; and the attribution of ESG-related decision-making within a company.
A Senior Economist at global policy think tank Rand Corporation and Principal at business policy and strategy firm WestExec Advisors, Broadman has extensive experience on the intersection between economics, national security and the environment.
Having started his career as an economic security advisor at Rand in 1979, he also spent four years at think tank Resources for the Future (RFF) – a pioneer in the field of environmental and natural economics.
“The US was concerned about how the country stepped up in terms of natural resources for security issues and to ensure continual economic growth,” Broadman told ESG Investor. His first peer-reviewed article for a professional journal while at RFF tackled the social cost of imported oil consumption – which is the difference between market price and actual cost to society.
At that time, the focus was not on the environment, but on energy security in the aftermath of the 1973 oil embargo, which increased the price of the resource by 400% within a few days. The crisis highlighted that the cost of oil consumption at the pump was not fully reflective of the costs and risks outside production.
“The policy recommendation in the paper was to implement a tariff or tax on top of the market price, so that consumers would pay the real cost to society for each barrel,” said Broadman. “The product then becomes more expensive and, on average, the consumer buys less.”
The same methodology should be used in ESG, according to Broadman.
“The recent sustainability trend is a natural continuation of externalities I have been examining throughout my career, but many in the field aren’t considering whether we are pricing things in the right way,” he said. “The ESG process – including measurement, disclosure, operational change and review – should provide a window on the cost to society by seeing things in totality: commercial ends, plus social and environmental components.”
Disclosure is receiving disproportionate attention within the sustainability process, Broadman argued.
“Disclosure is a different animal than changing actual production methods, for example,” he said. “While disclosure is important, it’s a necessary, not a sufficient, condition. Companies need to change their mode of production – there has to be an operational impact.”
Similar to financial auditing, disclosure is an ex-post measurement to understand how a company performs on an annual basis. But measuring the externalities it contributes to the environment, for example, should be a simultaneous exercise.
“Understanding annual improvements is needed, but corporations’ C-suites and boardrooms are being consumed by this disclosure exercise, which leaves little energy for radically changing contemporaneous and prospective business processes,” Broadman said. “If the focus is a stock, rather than flow, exercise, then a company won’t understand the incentives on a continual basis.”
Empowering influence
The reason Broadman is concerned about where the responsibility for sustainable decision-making lies within a company is because it is indicative of how importantly the organisation views its ESG commitments.
According to the Boyden Global Executive Survey 2023, 17% of surveyed companies have a chief sustainability officer (CSO) in place, while 23% have a dedicated sustainability lead. Almost half of the organisations (46%) also have sustainability efforts led by a board or executive committee.
But it’s not enough to just put a CSO in place, Broadman explains. The person should have the authority to drive sustainability across the organisation.
“A company needs to have someone with their nose to the grindstone on a daily basis, thinking about how decisions [that are made] today which will affect the assembly line tomorrow – and frequently assessing progress,” he said.
Broadman recounted how he was recently approached by a large American airline to take on a role as CSO.
“It was clear from the job description that the person would be the sustainability cheerleader within the firm,” he said. “But what wasn’t clear, is whether the CSO would have the authority to start changing how the company operates.”
In his opinion, the role of CSO should equate to an “integrator-in-chief” for sustainability across the whole company – not an outpost or a specialised function. The person should sit among the company’s C-suite and be intimately involved in day-to-day operational decisions – including production, staffing and product distribution – as opposed to only being called upon to deliver a sustainability report once a year.
“A CSO’s success is all about how much authority and respect they have within the company,” he added. “If it’s a large company, they should be integral to all decisions and should evaluate their impact on a continuous basis.”
Greater oversight of sustainability at company board level should also be more frequent, according to Broadman.
“The debate du jour among company directors is whether sustainability should be taken up within the boardroom,” he said. “There are already many committees – finance, membership, cybersecurity, risk – so is there a need for a sustainability [one]?”
For Broadman, who in addition to his other functions is also a faculty member and keynote speaker at the National Association of Corporate Directors in the US, the aim shouldn’t be to have a board composed of multiple committees.
Instead, a company needs a person on the board who has sustainability expertise and understands all those issues – as well as how the firm works day to day, from the factory floor to the showroom. He said, “It’s very rare at this juncture to find someone who has that broad understanding, but I think it will come.”
At present, boards’ expertise in sustainability is minimal from an operational perspective. “Many have expertise in disclosure, because they are ex-financial auditors,” Broadman added. “But in order to make sustainability be taken seriously in an organisation, there needs to be someone in the C-suite, and someone on the board – or perhaps several people – who both understand sustainability and can work hand in glove.”
Integrated conversations around the board table should mirror discussions happening among the C-suite, and the responsibility should not be relegated to the chair of the sustainability committee alone, Broadman argued.
“It’s very early days in terms of building an integrated conversation and having broad oversight of sustainability, but that needs to happen to assess how the CSO is performing,” he said.
Election time
With the US presidential elections just four months away, there is much speculation as to whether the anti-ESG trend prevailing in the country will further strengthen if Donald Trump gets back into power.
Broadman’s long career also includes stints at the US Senate and the White House, which have given him a deep understanding of Washington’s political dynamics.
“The US is where that step change to sustainability is the shakiest – largely because of the Trump politics and his following,” he said. “But there are forces at play which, try as he might, Trump won’t be able to overturn. I’ve seen enough in other areas where regulations and policies that many thought were sacrosanct, turned out not to be.”
Conversely, there is nothing so secure – such as the Inflation Reduction Act, for example – that it can’t be changed if Trump is re-elected.
“Even if Biden became president, there are still forces that can undermine what [he] wants to do,” Broadman added. “But if Biden is back in the White House, then there might be enough inertia for the proponents of sustainability to have a good chance of keeping opponents at bay.”
Regardless of who the next US president is, thinking that enough progress has been made on sustainability that the country has turned a corner is naïve, the economist argued.
“That may be the case among a small set of investors,” he said. “But from a policy perspective, whether the executive or legislative branch or the courts – it’s not too far-fetched to think that someone will try to roll back the progress made so far.”
This is a perennial political problem in the US, Broadman explained: while the reasons for promoting sustainability are diverse, those interested in demolishing it have very focused interests.
“They typically have a specific goal to dismantle ‘x’ – such as the Securities and Exchange Commission’s (SEC) climate disclosure rules, for example” he said.
The SEC may have only just adopted these rules to enhance and standardise Scope 1 and 2 disclosures, but new commissioners could come in, or the Senate could pass a contrary law that would trump the regulation, Broadman warned.
“Things can change quite quickly, so we shouldn’t be complacent,” he added.
An recent example of a surprising reversal was the US Supreme Court’s overturning of a 40-year-old decision known as the ‘Chevron deference’, which essentially gave regulatory agencies judicial deference and leeway to interpret vague laws. The decision will also take away agencies’ ability to make old laws relevant through new rules, and puts recently passed rules at risk in court.
At this stage of the presidential campaign, and given mixed results from last week’s debate between Trump and Biden, everything remains possible.
