The future of pollution

Arne Hessenbruch
Sep 5, 2018 · 4 min read
Self-interest vs. governmental regulation

One of the most difficult things to do when thinking about the future is to determine what is relevant and what is not. For example, if we think about the future of communication, we would likely think of the cell phones as central. However, in the heyday of railroads, they would also have been thought central to the future of transportation. Things just change in surprising ways.

And so, one would probably imagine that regulation will remain central to the future of pollution. I would like to suggest otherwise.

I was prompted by an article outlining the history of biomonitoring for environmental health and regulation. The article covers the sweep of measuring techniques over the last century — which is quite an achievement in itself. But here I want to focus on my disagreement with the author, because she anticipates that nothing other than regulation can deliver the goods. Green consumerism, shopping one’s way to safety, and privatizing biomonitoring are all mentioned somewhat dismissively. (Angela Creager, Professor of History at Princeton (Studies in History and Philosophy of Science 70 (2018), 70–81)

Maybe so. But let me sketch some reasons why the action may be shifting away from regulation.

First of all, regulation has lost its teeth. Richard Lazarus of Harvard Law School has described how opposition to regulation has built over decades, involving think-tanks setting the agenda, strong lobbying, and political appointments of staff friendly to industrial polluters. His book, The Making of Environmental Law, covers 1970–2004, and it is easy to see the current sabotage of the EPA as an extension of that practice. For the EPA to regain its strength, the massed opposition to it would have to be overcome. In my crystal ball, this does not seem to be forthcoming.

So let’s look at where the action might be shifting to: companies’ self-interest in doing the right thing — because it pays.

In the 21st century, the value of companies consists less of tangible assets such as buildings and machinery and more of intangible assets such as intellectual property, data and reputation. Intangible assets are hard to define with our current categories, but their growth has been undeniable. One merchant bank reckons that in 1975 17% of S&P 500 companies’ value came from intangibles. In 2015 it was 84%. (“Insuring intangible risks — In search of a jelly mould”, The Economist, August 25th 2018, pp61–62)

With this growth has also come a growth in intangible risks, such as reputational harm. Currently, the categories used by insurance companies do not lend themselves well to covering intangible risks. Underwriters are beginning to come up with suitable policies. Maybe the most important aspect of intangible risks is companies’ beginning understanding of how to protect themselves. Insurance only treats the symptom of fire, whereas avoiding fire treats the cause. Similarly: “Instead of buying insurance against a damaged reputation, firms should be looking at preventing it in the first place,” says Richard Wergan of Edelman, a communications-marketing firm. (ibid.)

In other words, companies have a great incentive to manage their reputation. Much of this reputation can be subsumed under the rubric of ESG, Environmental, social, and corporate governance. According to research by Bank of America, progressive ESG practices improve company performance. It found that the top 20 percent of companies in terms of ESG ratings from 2005 to 2010 experienced the lowest (32%) volatility in earnings per share in the subsequent five-year period. By contrast, companies with the worst environmental, social and governance records averaged 92% volatility. (State of Green Business 2018, p.12)

Stock exchanges are playing an important role in mainstreaming ESG disclosure. Fifty-eight stock exchanges, representing over 70 percent of listed equity markets, have joined the Sustainable Stock Exchange Initiative. Twelve exchanges incorporate ESG reporting into their listing rules, and 15 provide formal guidance to issuers. A further 23 stock exchanges have committed to introducing new ESG reporting guidance. (ibid., pp12–13)

The bond market is also driving developments in the same direction: In a report to its clients in November 2017, Moody’s Investors Service explained how it incorporates climate change into its credit ratings for state and local bonds. The takeaway: if cities and states don’t deal with risks from surging seas or intense storms, the cost of borrowing will rise. (p.10) States have also found that so-called green bonds tend to be oversubscribed.

Am I arguing that we can lean back because companies are dealing with the problem themselves? No: KPMG’s survey of 4,900 companies worldwide in 2017 found that three-quarters fail to acknowledge the financial risks of climate change. So, it is not happening yet. New categories and standards need to be developed and the transparencies of risk need to work their way up to the level of more corporate decision makers. But the mechanisms for this are in place, and crucially: there is no vested interest that can obstruct in the way that is done in democratic politics.

Hence, the argument for one kind of future (a future of pollution based more on corporate self-interest and less on governmental regulation) amounts to an identification of vested interest.

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