Green Evolution: How Business Is Joining the Environmental Vanguard

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Sarah Light on the Green Evolution in Business

Time was that governments and nonprofits were the only ones pushing Earth-saving agendas. Today, more and more corporations have realized that environmental action and sustainability have to be part of their business plans.

Wharton legal studies and business ethics professor Sarah Light has done new research on what has changed and why. Her recently published paper, “Not the Only Game in Town: The Complimentary Roles of Public and Private Environmental Governance,” examines how private firms are using similar tools to those in the public sector to reduce their negative impacts on the planet. In this interview on the Knowledge@Wharton show on Wharton Business Radio on SiriusXM channel 111, Light talks about how mainstream businesses are advancing sustainability, where her research suggests we’re headed, and what the best tactics look to be for bringing private enterprise and national governments together to stave off a climate crisis. 

You can listen to the podcast at the top of this page. An edited transcript of the conversation appears below.

Knowledge@Wharton: Much of your study reflects what we’ve seen from President Obama and the federal government really trying to push forward on limiting carbon dioxide emissions, correct?

Sarah Light: Yes. Right now in the environment and sustainability universe, there’s almost a convergence between what’s happening at the government level and what’s happening at the level of private business firms. Obviously, the Obama administration is very concerned with reducing our greenhouse gas emissions. The President’s Climate Action Plan has these very bold goals to reduce the nationwide emissions by from 26% to 28% below 2015 levels by 2025. This was all part of the lead up to the Paris climate talks. What’s fascinating is that the business world is simultaneously acting to reduce its own environmental impacts, sometimes stimulated to do this by the law, sometimes independent of the law. My research focuses on the parallel ways in which private firms and government regulators use tools to reduce environmental impacts.

Knowledge@Wharton: The interesting thing is that these corporations are willingly making these changes. In a lot of cases, they’re not waiting for the government to say, “Hey, you need to do this now or you’re going to be paying a fine.”

Light: Absolutely. Businesses are doing these types of sustainability programs for a number of different reasons. In some cases, the concern is, “Well, maybe the government is going to regulate this soon; we need to get onboard, we need to be an early mover.” Or it could be, “We’re concerned that the government might want to regulate this, but if we do a good enough job ourselves with self-regulation, maybe that will stave off some kind of government regulation.” That’s often a concern. In some cases, what I think is really interesting is that firms are recognizing that doing sustainability internally can actually be good for the bottom line.

Some of them are able to reduce costs, and some of them are developing new business models that actually are driven by a sustainability mission. That kind of synergy, I think, is extremely interesting, and worth focusing on.

Right now in the environment and sustainability universe, there’s almost a convergence between what’s happening at the government level and what’s happening at the level of private business firms.”

Knowledge@Wharton: The interesting thing about that is not only does it benefit the bottom line, but also a lot of these companies are obviously reaping a PR benefit. And part of it may just reflect the shift we’re seeing with millennials taking over more of the day-to-day business of the family.

Light: Absolutely. I think your comment raises a really important point. At the level of research about what is driving corporate firms to act, the classic, traditional view is that corporations have a duty to maximize profits for their shareholders.

There are alternative views, and I think one of the most interesting ones is the stakeholder theory, which says that it’s not just about maximizing profits for shareholders, but there are also other stakeholders of corporate firms — like employees, like customers, like members of the public who are communicating their interests through what they’re choosing to purchase, through the boycott activity that they might engage in, through other kinds of public means — and that that is influencing corporate activity. To give you an example not from the environmental context, think about what happened in the state of Indiana, which tried at one point to pass something called the Religious Freedom Restoration Act.

That was going to have restrictions on gay, lesbian, transgender people in the state, and on what kinds of anti-discrimination measures were in place. It was Apple and Google and various other corporate firms that began speaking up against that practice. That kind of social responsibility is certainly being driven by millennials, it’s being driven by customers, it’s being driven by employees who are coming in with different norms and different ethics, and that is really shaping the way that these corporate actors are proceeding.

Knowledge@Wharton: If you think back a decade or so, it was a much different philosophy that a lot of these companies had, compared to where we are today. Am I right? Maybe it’s 15 years?

Light: I would say you’d probably have to go back a little bit further. I mean, there’s definitely a new momentum recently. But you can go back 10 and 15 years and still find firms that are taking action on the sustainability front. Think about a company like Patagonia, which was organized as the first B-corp, a benefit corporation, which in its corporate charter says it’s specifically not solely a profit-maximizing firm, but is required to take into account environmental sustainability principles.

In the article that I wrote this spring titled, “The New Insider Trading: Environmental Markets Within the Firm” — which inspired the Wharton Public Policy Initiative Brief “Not The Only Game in Town” — I looked at two case studies of firms that use internal market leveraging mechanisms and tradable permits to reduce greenhouse gas emissions. And one, British Petroleum, put in place its program right around the year 2000, which is going back 15 years. Now granted, that program only lasted a few years, but eventually, government regulation caught up with BP, so BP’s view was, “Well, we don’t need to have a private program if now we’re subject to government regulation to reduce our emissions.”

“I think economists would generally agree that carbon taxes are the first best solution. They’re the most efficient, as long as you are able to get the price right.”

Knowledge@Wharton: But there are a lot of companies that are doing it. You mentioned BP had an influence. What are some other companies that are trying to be at the forefront of this?

Light: There are a number of companies now that are really active in this space. You know, a lot of people would point to Walmart as having been a leader, particularly in the area of green supply-chain management. It was an early adopter of programs to encourage its suppliers to, say, reduce packaging or reduce their greenhouse gas emissions. Right now, there’s a lot of action in the lead up to the Paris climate talks because the White House has created this thing called the American Business Act on Climate Pledge, and more than 80 firms have signed on.

So there’s been a lot of the publicity around some of the things that firms are doing. Just to give you a few examples — it sort of depends on what industry the firm is in, right? A big services firm like Walmart, which has just hundreds of thousands of suppliers, is very active in green supply-chain management. Berkshire Hathaway has pledged to retire some of its coal-fired electricity generation capacity. Not many other firms can say, “Well, we own a coal-fired power plant and we’re going to shut that down.” So that’s something that’s really unique to Berkshire Hathaway.

Through Google Earth, Google has 40 years of satellite imagery that it is making available online for scientists to be able to do research on climate change, and track geographical changes to the surface of the Earth. That’s really interesting.

Some banks have pledged to increase their investments in renewable energy. Goldman Sachs is working on something called “Catastrophe Bonds” which are an alternative form of almost quasi-insurance for countries that are potentially subject to some kind of natural disaster. But the area I’ve mostly been focusing on has been what firms are themselves doing to reduce their own carbon footprints.

I mentioned that BP had this internal emissions trading system in the early 2000s. [And] Microsoft has for the past several years had in place basically a private carbon tax within the firm itself. This is absolutely fascinating to me. What they have done is decided, “We are going to become carbon neutral in certain areas of our business,” including their data centers and employee business travel.

Then, they asked themselves, “Well, what do we need to do to become carbon neutral?” Partly, that involves reducing their actual emissions. And partly, that involves buying offsets for what they can’t themselves reduce.

Then, they asked, “Well, how much is it going to cost to do all of those things?” And based upon what the total cost would be, they set a price, which they charged to individual business units for their emissions. So, if you speak to Rob Bernard, a Wharton alum who is the chief environmental strategist at Microsoft, and you invite him to fly somewhere to give a talk, he’ll have to check his carbon budget, to see whether if he’s able to make the flight or maybe he has to use some kind of teleconferencing software. It is absolutely fascinating.

Knowledge@Wharton: That changes the entire strategy of day-to-day operations of a company, just on a basic level, if somebody says, “Well, no, I can’t make it because I’ve used up my carbon tax.”

Light: Absolutely. So Microsoft is doing this right now; the Disney Corporation also uses a private carbon fee. And actually, Yale University, just announced that it is adopting a pilot program that will impose a carbon tax on its departments, and obviously, it has to impose the tax on those departments or organizational units within the university that have independent budgeting authority.

So you can’t tax, you know, the Germanic Languages Department, any more than you could tax the eighth floor of Microsoft Headquarters, right? It has to be an organizational unit with independent budget authority.

But this is an absolutely fascinating development, and I think it’s not getting a lot of attention in legal scholarship. That’s one of my missions — to say, “Look, private actors are using the same tools as public government actors, and there should be more dialogue between them, because I think there’s a lot of learning that can take place.”

Knowledge@Wharton: Certainly being able to pass that information along would have value, because while one company’s operation would be set up a little bit differently from another’s, there are probably a lot of elements from one that other companies could use, and maybe tweak along the way to really fit their needs.

Light: Absolutely, absolutely. And again, there have been public governance debates about what’s the best instrument to address greenhouse gas emissions. I think economists would generally agree that carbon taxes are the first best solution. They’re the most efficient, as long as you are able to get the price right.

There are obviously a lot of political feasibility problems, particularly in the United States, with putting in place some kind of carbon tax. But it is fascinating to me that firms are doing this — private firms that would themselves potentially be subject to a carbon tax are actually choosing to do this to themselves.

And in the months leading up to the Paris climate talks, a number of publicly traded major firms, both energy firms and other private corporations, have written to the director of the United Nations Framework Convention on Climate Change, saying that we think in order to address global greenhouse gas emissions, market mechanisms like carbon taxes or emissions trading systems are the best and most efficient method, but this needs to be a global effort. So again, I think that there’s a lot of development in this area.

Knowledge@Wharton: It doesn’t seem like there’s much doubt that this is a very good thing a lot of these corporations are doing, but as you alluded to before, if they can stay ahead of the game and stay ahead of the regulations, they basically can say to the government, wherever they might be, “Look, this is what we’re doing. We are a leader. We’re not somebody to be seen as an agitator in this case.”

“You could look at a chart and say, ‘Electricity generation and transportation are responsible for the majority of greenhouse gas emissions.’ But who’s demanding the electricity and who is driving the cars? It’s all of us.”

Light: Absolutely. Although, to be totally fair, I think that that argument only goes so far, right? … I am by no means advocating purely private environmental governance. I think that there needs to be complementarity between private action and public regulation.

As we all know from being consumers of the news over the last month and a half, the Volkswagen emissions scandal is a really clear example of a case in which it was only the threat by the Environmental Protection Agency against Volkswagen that it was not going to certify the cars for sales in the United States that got an admission from VW that the company had actually been cheating on its emission tests.

Knowledge@Wharton: The VW case actually was something that I wanted to bring up, because there still are some companies out there that maybe are not willing to follow that line. They probably will be coming in line because seemingly, this is going to be a worldwide push in the next decade or two. Or else we have — as everybody seemingly now agrees — some serious consequences.

Light: Absolutely. If you look at the 80-plus companies that signed the President’s climate change pledge — which was not a government regulation, although I would say the firms have taken this pledge were inspired by the White House — one thing that’s notable are the businesses that are not on the list. Oil and coal companies that have built their businesses on fossil fuels are not part of that pledge — although, again, I did point out the example of British Petroleum.

There are other firms that are certainly taking some actions. But that is a heavily regulated industry and obviously, the EPA’s new Clean Power Plan is targeting the coal-fired power plant electricity generation industry, so there may be less need in that circumstance for private action when there’s such a focus on public action.

Knowledge@Wharton: But I was going to say, there still are obviously concerns in terms of power generation and transportation, about the change that needs to happen over the next 30, 40 years to eliminate some of the known problems with emissions.

Light: Absolutely. That is completely right. If you look at the sector-by-sector, economy-wide major sources of greenhouse gas emissions in the United States, number one is the electricity generation sector. Number two is transportation. So as part of the President’s Climate Action Plan, the EPA has focused under the Clean Air Act and the Energy Policy and Conservation Act on setting higher fuel-economy and lower emissions standards for cars and trucks. And it’s actually going after heavy trucks as well, not just passenger cars and SUVs.

And obviously, the Clean Power Plan is trying to go after the electricity-generation sector. A number of scholars in my field, in the environmental law and policy field, have said we also need to think about individuals as a source of greenhouse gas emissions. Part of this is about how you frame the problem.

So you could look at a chart and say, “Electricity generation and transportation, those sectors are responsible for the majority of greenhouse gas emissions.” But who’s demanding the electricity and who is driving the cars? It’s all of us.

So — as one of my colleagues, Michael Vandenbergh at Vanderbilt Law School, pointed out — you could re-draw that chart and attribute many of those emissions to individuals. And obviously, in the United States, we’re not big fans of telling individuals what to do.

Knowledge@Wharton: Nor are the people willing to accept being told what to do, either.

Light: Right, exactly. I mean, we’re not going to be walking around wearing individual emissions counters any time soon. But there’s a role for behavioral change, and there’s also a role for structural changes like better investment in public transportation and things like that.

Knowledge@Wharton: But obviously, you’re talking about the world that we live in. Here in the United States, how many millions of people own cars? Realistically, that’s not going to change anytime soon. True, a lot of millennials living in cities may not be buying cars. But still, this year, we’re going to see 17.7 million vehicles sold. So it’s not necessarily the vehicles, it’s what you do around the vehicles that will really make changes for good.

“The United States government couldn’t tell a supplier in China that it needs to disclose its greenhouse gas emissions, but the threat of losing a contract with Walmart could be a real motivator.”

Light: Absolutely. Again, all of the decisions that we make as consumers of electricity, as consumers of cars and fossil fuels as individuals, are very much shaped by the environment and structures that we live in. One has to think — whether you’re a government regulator or a private firm trying to come up with some new business model — where the business model itself is trying to drive sustainability, right? There are a lot of issues that are potentially ways to address some of these bigger, structural problems.

Knowledge@Wharton: Going forward then, given the number of U.S. companies that fall into the category of multinational, how much pressure could they potentially put on other countries? Apple, Google and the like are obviously doing lots of production in other parts of the world. So how much pressure can they put on other governments to say, “Listen, you need to address this, or we all move our operations someplace else?”

Light: I think your question is really hitting the nail on the head. Green supply chain management has major global potential to have really big impact. If you think about a company like Walmart or Apple, those companies — many of their suppliers are located abroad, many of them are located in China.

So the statement by Walmart that all of its suppliers need to disclose their greenhouse gas emissions — that is a way for a private actor to influence governance abroad, right? The United States government couldn’t tell a supplier in China that it needs to disclose its greenhouse gas emissions, but the threat of losing a contract with Walmart could be a real motivator in that regard.

And, we can only manage what we measure. So even information disclosure by suppliers is very important. And the statement by Walmart that its suppliers need to reduce their packaging — that has a tremendous environmental impact, as well, abroad. So I think the private environmental governance form of supply-chain management is a really important tool to think about how to reach into other countries.

Knowledge@Wharton: What do you see as the potential timetable to really make this shift? I mean, obviously, with the conference coming up in a couple of weeks in Paris, that’s going to draw a lot of attention to this topic going forward. We’re still, though, talking about something that is in the infancy stage. We’re still a long way from being where we need to be to be able to change the world.

Light: Absolutely. If you look at the models, they suggest that we’re even a little bit late right now.

Knowledge@Wharton: Yes, 2050 is still the target year, right?

Light: Yes. But I think an economist would tell you that if we don’t spend the money now, we’re going to have to spend a lot more money in the future.

And it’s not just about money, right? That money represents a whole host of costs that are actually quite intangible costs, in terms of public health and national security and other issues that are going to be compromised if we let the climate change problem run away. So the time for action is now.

 

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