Coal mine in Jaintia Hills, Meghalaya, India.
Most press accounts on the outcomes of the November COP26 climate summit in Glasgow focused on pledges by governments to prevent the globe’s warming from exceeding 1.5 degrees Celsius compared with pre-Industrial Revolution temperatures.
They promised to undertake actions to foster mitigation of carbon dioxide, methane, and other greenhouse gas emissions, facilitate societies’ functional abilities to adapt to the harmful impacts from rising temperatures, and deploy financial assistance from the wealthiest countries to ameliorate the damages climate change engenders on the poorest states.
Most of the public sector’s commitments were largely in line with what was anticipated, with one important exception: the weakening of the talks’ closing text on the pledge to terminate the use of coal—from “phasing out” to “phasing down.”
But there was also significant attendance by businesses and other private sector entities from around the world at the summit. Although there was some news coverage of their presence, the media attention paid to the corporate commitments intended to abate warming of the planet was far more muted.
A number of these are far more concrete than the pledges made by governments. And if fulfilled, they could well be game changers in how certain businesses take more seriously the need to incorporate sustainability into their day-to-day operations.
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Two examples are illustrative: Eleven large automobile manufacturers pledged to halt sales of internal combustion vehicles in their largest markets by 2035, and on a global basis by 2040. And more than 450 financial firms spanning 45 countries committed to provide by 2030 $130 trillion for investments that entail net zero emissions.
Regulating Sustainability: Businesses’ Stakeholders and Governments
A cynical interpretation of such pledges is they simply reflect businesses’ eagerness to promote their “sustainability brand.” After all, these COP26 commitments are voluntary; they are not compelled by regulation, unlike, for example, a government’s follow-through of the COP26 commitment to restrict the burning of coal.
So why not get a freebie?
One, of course, should not rule out such motives.
But unlike the diffused, infrequent, and possibly sporadic process by which governments can be held accountable for implementation of their COP26 commitments—largely through the electoral process (at least for democracies)—companies, especially publicly held firms, may well face a raft of stakeholders that can serve a checks-and-balances function: think shareholders/potential investors; consumers; workers/unions; competitors; suppliers; distributors; and the press.
Today, when businesses take on specific, measurable high profile, public positions about the types of products they will make; the services they will provide; the nature and location of the production processes, inputs, and supply chains they will utilize; and the working conditions for their employees, the market for feedback can be both immediate and potent.
Both on the upside and the downside.
Bottom lines and career tenure of senior executives have become far less immune to changes in a business’ reputation and brand; its share price; the ability to attract high quality employees; and the strength of demand for its products and services.
While such impacts certainly differ across sectors, firm size, nationality, geographic spread, and corporate ownership form, the contemporary scorecard for business conduct bears little resemblance to your grandfather’s “naming and shaming”.
Of course, notwithstanding how businesses are affected by the extent of adherence to their public proclamations to operate sustainably, in most countries they are also subject to direct external environmental and economic regulation administered by governments.
Such regimes likely exact more intense discipline on businesses than does self-regulation.
However, whether such rules are effectively designed and administered by governments to achieve outcomes consistent with the overall sustainability objectives of society—encompassing businesses, workers, and consumers—is always an open question.
A public policy framework where joint public-private regulatory reviews of corporate sustainability practices are systematically carried out transparently and on a regular basis would help ensure such questions are fully addressed.
New Global Institutions and Market Mechanisms
To this end, two elements can play important roles: (i) the establishment of new, or the fortification of existing, institutions to engage in global oversight of businesses’ sustainability practices and (ii) leveraging market forces to ascribe monetary value to the cost of generating greenhouse gas emissions (or alternatively to the benefit of their reduction.)
Achievements were made on both fronts at COP26.
One was the announcement of the creation of an independent International Sustainability Standards Board (ISSB), an institution akin to what the International Accounting Standards Board (IASB) provides for the auditing profession across the globe to ensure investors have a meaningful, consistent basis on which to make their decisions.
Much like the IASB, the ISSB, drawing on the advice of a stable of independent global experts on corporate sustainability, is to develop a universal set of standards upon which businesses’ disclosures on sustainability would be required to adhere to.
This would provide investors with the ability to make well-informed judgments about their monetary decisions across companies or sectors on a consistent basis.
The establishment of the ISSB is important innovation. But how quickly it can become effective—and widely accepted—will be a challenge unless credible progress can be achieved in the near term.
In some countries, domestic markets for trading credits arising from greenhouse gas emissions abatement have matured over the past couple of decades; indeed, they have become quite sophisticated. But in most countries such markets are either nascent or nonexistent.
However, since the impacts of such emissions are necessarily transboundary, to have a fulsome effect on the globe’s environment, the market for greenhouse gas abatement credits is, by definition, not domestic in scope but cross-border. Agreement on the rules for a global greenhouse emissions market was confirmed at COP26.
This is a promising accomplishment, especially since emissions credit trading largely remains bilateral but veering towards a multilateral direction. Indeed, the calls by some governments to impose carbon-based trade tariffs are increasing in frequency and volume.
Will the world soon have its first carbon trade war? Put that on the agenda for COP27.
