Most climate advocates (including me) agree what we need most to accelerate climate progress is more ambitious public policy. Things like:
High and rising carbon taxes or cap and trade programs (with measures to address regressive impacts)
Mandates (like renewable portfolio standards)
Incentives (like tax breaks for home heating electrification or CCS), and
Border adjustment taxes (so that carbon-intensive business activity doesn't just shift to some less regulated jurisdiction).
Unfortunately, the near-term outlook for such policies is poor. (I hope I’m wrong. And of course let's all keep pushing hard for governments to provide the regulatory policy we need.)
But where are we in the meantime? Just waiting around for policymakers to finally get their act together?
Fortunately, no. First, business-led innovation for decarbonization continues at blazing speed. This is probably the most consequential climate activity now underway. Bring on the more affordable EVs, longer duration batteries, green hydrogen, direct air capture, more extensive transmission lines to facilitate clean energy, more energy efficient homes, low carbon fuels, plant-based food, widespread electrification, sustainable agriculture. . . you name it, they are working on it.
Furthermore — and my focus here — different players across society have come together in remarkable ways to launch a wide range of ambitious activities in the absence of strong regulations. This is also positive and will yield good outcomes. But I wonder if these voluntary initiatives also pose some problems, such as lulling the public into thinking such programs alone can get the job done.
Consider the initiatives noted below. These are a few examples of the many initiatives underway that seek to accomplish voluntarily what 20 years ago we would have expected to mostly have been accomplished by now through federal regulations.
B2B Customers Demand Decarbonization
Some of the world’s biggest global companies like Apple (the most valuable), Walmart (the biggest retailer) and others say they will decarbonize their supply chains. By definition, they can only do that by persuading their suppliers to lower emissions. Do these big customers have enough clout to pull this off? Can they really impose decarbonization mandates (like a regulator would) on their suppliers? Hard to say. Once those suppliers have taken all of the easier and lower-cost decarbonization steps, I expect that progress will likely slow down a lot.
Decarbonization usually costs money. The question of who should pay is generally unresolved in these voluntary programs. Everybody wants the other guy to pay. In the final analysis, of course, the only candidates to bear such costs are: the B2B supplier (their shareholders really), the B2B buyer (again, shareholders), the end customer, or all of us (i.e., the taxpayers — but only policy can make that happen).
In the near term, these programs do a lot of good. Suppliers share best practices, find ways to use less energy, discover new ways to decarbonize, determine when end customers will pay more for green products, etc. (In this vein, Walmart is helping its suppliers by providing them low-cost financing for decarbonization.) But how far can this really go? Can we truly expect supply chains to decarbonize voluntarily?
Companies and Financial Institutions Volunteer to Achieve Net Zero
Many companies and financial institutions are declaring their commitment to be “net zero” by 2040 or 2050. These pledges are also positive. But they are future-dated, non-binding and rather ambiguous. I have no problem celebrating these commitments. After all, these organizations don’t have to take these big steps — they’re doing so voluntarily, leading by example, and encouraging others to follow suit. All good.
But I worry whether these pledges can really be fulfilled. After the easy stuff is checked off the list, the costs of decarbonization likely rise sharply. Imagine two companies in a very competitive and price-sensitive market. One pursues decarbonization in the fastest way possible and accepts the associated rising costs; the other skips net-zero activities in order to keep costs as low as possible. Will the climate leading net zero-seeking company be able to compete successfully with the lower-cost firm?
Proxy Advisors Become Climate Hawks
It's currently annual shareholder meeting season in the US — the time of year when we see shareholder resolutions designed to pressure corporate boards to do important things. We should see a big upsurge in climate-related resolutions. And I expect we will be encouraged by the support they get from proxy advisors, investors, regulators, activists, and employees.
Environmental and social resolutions won an average of 33% support last season. That's pretty good. Further, proxy advisors have recently been pre-announcing their requirements to get management-friendly votes. Glass Lewis says it will vote against any governance committee chair when the company doesn't adequately disclose the board’s role in ESG oversight. ISS says it will vote against companies not doing enough to assess and mitigate climate risks. But while that's all positive, those are rather small wins.
More ambitious climate resolutions have been failing this year. For example, study the recent experience at top US banks where measures to direct management to stop financing fossil fuel investments won only approximately 11-12% of votes. This headline speaks for itself: “Climate activist shareholders are gaining support but not where it counts.” Said Citibank’s CEO, “It's not feasible…to shut down the fossil fuel economy overnight.” The problem is that when you ask a company to do something that is good for the climate but bad for business, it’s hard for management and boards to comply. They have to run their companies in ways that make business sense.
Tech Giants Insist on 24/7/365 Clean Energy
Very high-profile tech companies like Google and Microsoft — huge energy users — now seek to use only renewable energy for 100% of their needs. Again, I think this is good. They create demand for clean energy that should encourage utilities to develop more wind and solar power. We can view this as tech companies imposing their own mini clean portfolio standards. But what we (and the tech companies) really want is something quite different. We want a national clean energy standard — and the Biden administration was seeking it via its CEPP proposal. Unfortunately, we’re just not there yet.
Where Do Voluntary Climate Activities Leave Us?
All of these voluntary initiatives (and there are many more beyond those noted above) are positive. All of the many organizations and advocates who are working tirelessly to make this all happen are heroes. We had to start somewhere and this is a great start.
But voluntary initiatives like these can not coerce compliance. Further, there is a real risk these initiatives will collapse once the going gets tougher (or more expensive).
These initiatives do provide a lot of learning. We can see where progress gets stuck. That's often just where we need policy most.
These initiatives also show how much we can accomplish when we put our minds to it.
My suggestion: All of the players who made these voluntary initiatives happen should step back and ask themselves:
Are there circumstances now where they would prefer to be regulated rather than be subject to voluntary programs? and
Who can they join forces with to push hard for the policy we need?
I know it's difficult to envision sweeping new climate policies. But it would have been hard a few years back to forecast all of the voluntary initiatives that are now underway. And imagine what could be accomplished if all of the companies, investment funds, mainstream NGOs, environmental activists and others responsible for today’s voluntary programs now came together in a united push for no regrets common sense climate policy.
One of my favorite newsletter writers, Noah Smith, interviews my favorite futurist/energy guru (and friend) Ramez Naam. This is a must read. They discuss — among other topics — what public policies would likely result in the most climate progress.
The US Securities and Exchange Commission is also launching some quasi regs of their own. The SEC recently announced its plan to require companies to disclose their climate risks, carbon emissions, and progress made on any net-zero type goals they have announced. Such disclosure requirements are not even close to the regulations that I think we need to directly curb emissions. But I can tell you as a former corporate finance banker that corporate executives take SEC disclosure rules very seriously. (If you don't, you can go to jail). These new disclosures will help investors and other stakeholders understand who is doing exactly what among corporate emitters. They will also go a long way to getting management teams and boards to pay much closer attention to climate risks and emission reductions.
The sustainability exec who saw the light: Great interview here with Bill Weihl — former sustainability exec at both Google and Facebook and now founder of ClimateVoice. This new NGO pushes companies to lobby for the climate policy we need. This seems to me like very smart and important work.
One Last Thing
In a past issue, we noted that Stewart Brand’s book, Whole Earth Discipline, is one of our favorites here at The Instigator. And I’ve always admired how Stewart lives his life too — embracing emerging technologies, addressing the biggest challenges, taking big risks, putting together unusual collaborations, thinking hard about how to live a full and good life (my words, not his). Accordingly I was thrilled to read the brand new biography of my friend Whole Earth: The Many Lives of Stewart Brand by John Markoff. Go Stewart!
Thank you Mark. This is an excellent summary of the state of climate policy, shareholder action, and corporate activity. Investors have really stepped up in the last 2 years - we owe this as much to George Floyd, as to a few leaders like Generation. I hope the SEC rule is a first step towards the climate policy we truly need. You rightly point out, the squeeze for investors and companies is coming, and we're going to need a few more arrows in our quiver to keep on the path.
Thanks for writing about this. However, I disagree with the statement that "voluntary initiatives like these can not coerce compliance." Nobel Prize winner Elinor Ostrom showed that communities can sustain their own shared resources (commons) through self-governance. It's not easy but it is possible. Her former student Asseem Prakash with Matthew Potoski expanded on Ostrom's ideas and created the "club theory of voluntary environmental programs." Firms can work together toward shared goals and hold one another accountable. Successful programs balance the strictness of the standard with the compliance. It's not a replacement for regulation. But regulations will always be the minimal standard. Collaboration on a common goal is a way to move beyond compliance.
I wrote about this approach in my book, The Uncommon Knowledge of Elinor Ostrom: Essential Lessons for Collective Action. I also published a case study that applies the "club theory" to the 2030 District energy program. Firms that want to achieve environmental goals should consider collaborating and holding one another accountable.