The Private Sector Push for Environmental Sustainability
Having started my professional career in the U.S. EPA, I have always assumed the assurance of environmental protection, like national security, to be a function of government. I considered the concept of corporate social responsibility to be an oxymoron. I suppose I still do. The goals of private corporations are to generate profit, return on equity, and market share. These are important goals, and encouraging them along with private initiative has helped generate wealth and well-being for billions of people. Corporations are not designed to be instruments of altruism. Government’s role is to ensure that private sector goals are achieved legally and without harming employees, the planet, or the public. How then do we explain the clear and obvious private sector push for environmental sustainability? The answer is simple. The private sector has at long last figured out that profitability, return on equity, and increasing market share requires that corporations pay attention to the risks posed by the natural environment, their impact on environmental quality, and their parsimonious use of increasingly scarce finite resources. The private sector is not pushing environmental sustainability due to altruism or ideology but because there is money to be made.
Conservative analysts believe that the SEC’s proposed rule on climate disclosure is some type of woke, politically correct fever dream. Nonsense. Look at the state of Florida today, and you see the financial impact of climate-accelerated extreme weather. Extreme weather creates incredible destruction and therefore poses a financial risk, but reconstruction also provides economic opportunity. Any investor looking at a company’s risk profile would want to know the company’s carbon footprint and exposure to the impact of climate change. Investors need carbon disclosure because it is obvious to any sane analyst that decarbonization is the wave of the future. A company that wastes energy or is not analyzing the regulatory environment stimulated by climate change is, by definition, poorly managed. Moreover, renewable energy is already less expensive than fossil fuels, and soon it will be more reliable and convenient as well. A company that is not working to reduce its use of fossil fuels is not serious about cost containment or efficiency. The pressure for climate disclosure is coming from the same people who want transparent and audited financial disclosure: careful investors.
Well-managed, forward-looking companies and communities don’t need government rules and incentives to convince them to work for environmental sustainability, but then not all companies are well-managed or forward-looking. Neither are states and communities. That is why we need rules, regulations, and public policy—to push along those that need pushing and punish those who violate the law. But still, it is remarkable how many companies are reading the handwriting on the wall and know that we are heading to a fossil fuel-free future. The best example of this is in the motor vehicle industry. This past summer, California announced it would ban the sale of the internal combustion engine in 2035. General Motors also announced it would only sell electric vehicles starting in 2035. It’s surprising, but not a coincidence.
Electric vehicles are far from perfect in environmental terms, but they are a big improvement over fossil-fuel-based vehicles. In an interview with GM’s sustainability chief Kristen Siemen, Wall Street Journal reporter Dieter Holger observed that:
“Electric vehicles hold the promise of driving down greenhouse-gas emissions in transportation, which the United Nations says accounts for around a quarter of energy-related emissions. A 2022 study from the University of Michigan said that for sedans, SUVs and pickup trucks, battery-electric vehicles have about 64% lower greenhouse-gas emissions over their life cycle than internal-combustion-engine vehicles on average across the U.S. People may also end up healthier because of fewer tailpipe emissions. In the U.S., transitioning to 100% sales of zero-emission vehicles and 100% noncombustion electricity generation over the next 30 years could create more than $1.2 trillion in health benefits, according to the American Lung Association. Still, electric cars are no silver bullet. Nearly 10% of the world’s cars were electric in 2021, according to the International Energy Agency, and the number is expected to keep going up. The rise of EVs demands more mining of critical metals that might harm the environment and electricity that is still largely dependent on fossil fuels.”
What is most striking about the interview with Siemen is how thoroughly and substantively GM understands and is working to reduce the environmental impact of its electric vehicles. GM’s interest in environmental sustainability is not limited to EVs. In response to a question about the company’s sustainability initiatives not directly related to EVs, Siemen responded:
“Some of the other things we work on are energy-efficiency projects, water efficiency, waste reduction—all of those things are not just good for the environment but they are good for the business. Any time you use less, it’s a positive. We have been working in that space for a long time. Those were some of the earliest sustainability goals that we had set as a company around water, energy, efficiency, the renewable-energy goal, our waste goals—those are almost to the point where we need to put some new ones out there because we’ve done so much great work in those spaces.”
Competent corporate management requires effective environmental sustainability management. Pollution is waste, and waste costs money. Moreover, in an increasingly crowded planet, waste disposal has become expensive, and disposing of your waste in a way that harms your neighbor could end up costing a polluting company billions of dollars. There are scores of examples of companies that have learned the hard way: from the billion dollars that General Electric paid to clean up PCBs in the Hudson River to the many billions BP paid after their disastrous spill in the Gulf of Mexico to VW’s painful lesson when they lied about emissions from their vehicles, losing billions in penalties, lower sales, and lost equity.
It’s true that companies hoping to attract brainpower need to be able to defend their impact on the planet when recruiting talent. Many people working in private corporations like to breathe healthy air and hope their children will inherit a planet that is habitable. They are attracted to a well-managed, environmentally-conscious company. Similarly, companies that are hospitable to a diverse workforce will have a larger and, therefore, more talented labor pool to draw on, and companies that have good relations with their neighbors will have a greater probability of generating community support should they wish to expand.
But one could argue that these longer-term considerations sometimes take a back seat to the immediate need for profit, return on equity, and market share. That is unquestionably true, and that is why government must create a regulatory floor below which corporations cannot sink. I would never argue against maintaining and enforcing environmental standards, but I am impressed these days by the number of private, nonprofit, and governmental organizations promoting environmental sustainability.
Over 90% of Standard and Poor’s top 500 companies now produce annual sustainability reports. According to the Governance and Accountability Institute, an ESG (environmental, social, and governance) consulting firm, whose:
“… annual research series began nine years ago with the analysis of sustainability reporting activities for publication year 2011, when we found just about 20% of the S&P 500 companies were publishing a sustainability report. G&A has found the volume of reporting has steadily increased each year since 2011 and the contents of the reports dramatically expanded over time. By 2012, more than half (53%) of the companies were publishing reports. That percentage grew to 75% by 2014 and to 86% by 2018.”
Some of this reporting is clearly greenwashing, but it is an indication of a growing trend in private-sector management. When the SEC finalizes its climate disclosure requirements, every publicly traded corporation will be reporting its climate risk and carbon footprint, and these disclosures will help steer capital toward more environmentally sound companies.
Building the organizational capacity to measure, analyze, and report a company’s environmental impact is a necessary but not sufficient condition to reduce that impact. The next step is to build the capacity to reduce impact through changes in work processes and/or technologies. General Motors, along with many other manufacturers and service organizations, are building these capacities. These operational changes will make it possible for us to grow our economy while reducing our impact on the planet that sustains us. This is how environmental sustainability will move from talk to operational reality: from words to deeds.