by Deb Gallagher, Professor of the Practice of Resource and Environmental Policy
We live in a time when many of us look to business leaders, especially those in the investment community, for leadership on confronting climate change.
Recently we’ve seen the Business Roundtable call for companies to invest in strategies to promote sustainability. Investment industry icons such as Larry Fink, CEO of Blackrock, and Cyrus Taraporavela, CEO of State Street Advisors, have put companies on notice that only firms committed to managing environmental social governance (ESG) and mitigating climate risk will likely be provided access to capital. The UN’s Principles of Responsible Investment Coalition now requires members to disclose climate-related financial risk to maintain their program accreditation.
While this is unquestionably good news, we should view these “Johnny come lately” actions with equal dollops of optimism and skepticism, because the path to getting here has been one characterized by reluctance and a modicum of enlightened self-interest by the business community.
Fifty years ago, as rivers were burning, respiratory illnesses were rising, and barrels of hazardous waste were being tossed over cliffs, the U.S. Environmental Protection Agency and similar institutions across the globe were created to implement laws governing water and air pollution and responsible waste disposal.
Businesses at first decried these actions and warned about economic impacts. Over time, they grudgingly stepped up and created mechanisms to comply after recognizing the competitive benefits of doing so. In the years that followed, however, enthusiasm for creating new compliance-based legal structures waned, and many challenges, (like climate change) remained unaddressed. To make progress, governmental institutions like the EPA were reinvented in the 1990s with a new focus on voluntary partnerships and market-based solutions. Businesses hailed these changes, but participation in voluntary environmental programs remained low.
That’s changed since the turn of the millennium. As Congress remains gridlocked on climate change, corporate engagement in environmental public policy has risen and new climate policy leaders have emerged in Europe and at the regional level in the U.S.
In 2005, the European Union adopted its market-based Emissions Trading Scheme, and in 2009, ten U.S. states – Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont – similarly implemented the Regional Greenhouse Gas Initiative. Concurrently, businesses focused on adopting triple bottom-line principles of equally addressing social, economic and environmental goals to obtain sustained competitive advantage. In actualizing those principles, corporations increasingly turned to advocacy, lobbying for a price on carbon at the 2015 Paris Conference of the Parties and working with NGOs to set science-based targets for reducing greenhouse gas emissions.
Today, we face an ever-increasing rate of climate change, and it’s clear that social, economic and environmental risks are far too great to be solely addressed by voluntarism and activism. Should we be quieted by actions of investors demanding ESG performance and vowing to use the full force of capital markets to combat climate change? Or should we look to new legislative solutions like a carbon tax and mandatory ESG progress reporting? Corporate and government leaders know the answer: We need it all.