Buying Time: How the Private Sector Can Help Overcome Democracy’s Deficits

00:00 - 00:09

Hello and welcome to On Purpose. I'm your host, Travis Allen, Senior Investment Strategist and National Director of Purpose Driven Strategies at Bernstein.

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Today, I'm thrilled to be joined by Professor Michael Vandenbergh. He's an award winning teacher, and David Daniels Allen, Distinguished Chair of Law at Vanderbilt University Law School. He's also co-author of a book, Beyond Politics: The Private Governance Response to Climate Change, which was identified in the environmental forum as one of the top environmental law and policy books of the last 50 years. Prior to his time in academia. Michael served as chief of staff at the Environmental Protection Agency from 1993 to 1995.

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Michael, welcome and thank you for joining us. It's a pleasure to be here and thank you for the invitation.

00:50 - 01:21

Yeah, I thought we would start with having you share a little bit of background about your area of research, but also about the time you spent working in Washington, DC, some time ago at the EPA. Well, those two are closely related, so it's easy, I think, to respond to those combined questions. I started my journey in the environmental area as the EPA chief of staff early in the Clinton administration and after that left to go to Latham and Watkins, a large global law firm.

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And I represented Fortune 500 companies, private equity firms, and investment banks. And I think my research really does reflect the combination of insights I got from those two experiences. On the one hand, I care deeply about government. I care deeply about the environment.

01:38 - 02:03

I care about climate change. On the other, the experience of Washington in the 1990s was the first part of our current era of polarization. The pipeline of major new environmental pollution control statutes was coming to an end. And that's true whether what you wanted was less pollution control or more pollution control to deal with climate and other issues. But it was coming to an end and we didn't realize it at the time.

02:04 - 02:31

But I also saw when I was in the private sector, all kinds of commercial and self-interested, as well as altruistic reasons why businesses were starting to try to become more efficient, to become more worried about what we would now call ESG type issues. And so I learned both about the limits of what we can expect from government, even if we try to make it do as best it can, but also about why the private sector might be driven to doing more.

02:31 - 03:03

And so my research focuses really on two areas. One is on household behavior, which is surprisingly important and worth focusing on because it has a major effect on behavior on carbon emissions. In the last several years, household energy use has gone down for the first time since the Second World War, and that's very likely attributable to the uptake of LED light bulbs and households. The amounts are phenomenal, maybe as much as entire industrial sectors going carbon neutral. So that's one area that I focus on.

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Why is it happening? How can we change that? The other area is on what I call private environmental governance. You might call ESG related or CSR related activities.

03:14 - 03:45

And so what I focus on is why are businesses motivated to reduce energy use and carbon emissions and how likely is that going to occur in the future? And how can we accelerate that? And as well, how does that interact with government? Can we do that in ways that doesn't undermine support for environmental protection? That's the focus of the book that I wrote called Beyond Politics: The Private Governance Response to Climate Change. Michael, we'll come back to the point you just raised about changes in corporate behavior.

03:45 - 04:12

But before that, I thought you might be in a really good position to give us some insights into how government regulation, the approach to government regulation, you alluded to this, has changed. What do you think some of the main differences are today between government regulation, as it works or doesn't work, and, you know, the role you played at EPA and other regulatory agencies and how they worked 25 years ago?

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That's a great question. And one of the things that we didn't realize when I was at the EPA is that we were at an inflection point in the way government functions.

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There were roughly two dozen major pollution control statutes up and through 1990, but we've only had at most one since then. And that's probably a reflection of the deep polarization in America today. And I think it's very important to understand that polarization hasn't gone away. And what that does, it means that it's very difficult to adopt new major pollution control statutes today.

04:48 - 05:19

And so if you're managing a business or any kind of other organization, you now are facing a population that really cares deeply about climate and many other issues. But you are not seeing the large scale public response that you used to. And so instead what we're seeing is executive branch actions like executive orders and in some cases regulations. But it's very important to understand that the US Senate is controlled by 18 percent of the US population, most of whom live in small and rural states.

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We have a Supreme Court that is largely 6:3 opposed to an expansive view of government. We have an electoral college that limits the effects of voters on the president, and we have the ability to gerrymander House seats as well.

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So it's important to understand that the focus now is not so much on major legislation. Not that I wouldn't support that if we can get it, but it's on the ability and limits of the executive branch. And what that means is that the efforts in the private sector are more important than ever because we probably need major legislation, but we won't get it in time. And as a result, the work that I do focuses on what can we do in the private sector to buy time to allow the public sentiment to get to a place where it overcomes these democracy deficits that we have.

06:06 - 06:38

Yeah, I think what's interesting about that is that there's some optimism, of course, right, in what you're seeing in terms of changes in behavior and corporate accountability around climate practices and reducing carbon emissions. But at the same time, it seems like you're saying that for the foreseeable future we're going to continue to have this or guardrail to guardrail government approach overcorrecting as we go. And so this focus on perhaps the corporate response and the private response will be that much more important.

06:38 - 07:08

So so I actually wanted to get to that next because you mentioned your book. So in your book titled Beyond Politics The Private Governance Response to Climate Change, you discuss the importance going forward of private regulatory pressure and advocacy on changing corporate, environmental, social, and governance, or ESG practices. Do you think we are entering or have entered a whole new era of broader stakeholder advocacy and engagement with companies?

07:08 - 07:38

And do you think that's going to be enough or will it persist and get the type of changes we need? So let me start by saying it will not be enough on its own; that we won't reach the goals that I believe we need to reach to avoid very serious climate effects with private sector action. The government is going to need to play a very important role. And I think it will ultimately, it is playing an important role right now, but that government alone is unlikely to be enough either in the US or globally.

07:38 - 07:58

And I have seen in the last two decades a remarkable growth in the extent to which companies are motivated to reduce their carbon emissions. It has gone from a more superficial interest for most companies to something that is more fundamental to the business operations.

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And I think one of the most fascinating questions in this area is the extent to which that's real. Is it happening in a way that we can rely on in the future? And I think the answer is yes. And the reason I'm optimistic about that is that many, many companies have a range of different drivers for why they're doing this. To some extent, it is because they need a good reputation. And as you know, a large share of the market value of many companies is based on reputation.

08:26 - 08:55

And I had the head of a major, the environmental part of a major tech firm tell me not long ago that the ability to recruit and retain the very best employees is central to what they do. And so when you're thinking about their climate commitments, you have to see them through the lens, not just of whether they could dupe the public perhaps, but whether they can really retain and get the best software engineers or the best marketers or lawyers or whomever it might be.

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And so that causes a level of genuineness, I think, to much of this activity that you might not otherwise see.

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The other development that I think is fascinating and that we all need to keep an eye on is this idea about the universal or common owner, that large institutional investors now hold so much of the American economy and in some cases are responding to pension type interest so that they also have a long time horizon.

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So they have some genuine interest now, not just the success of any one company and outcompeting another, but of the economy as a whole, succeeding. And as we learn about climate risks, we realize that the economy as a whole will not succeed unless we avoid catastrophic climate change. So we're beginning to see some reasons from the investor side why the investment pressure might be sustained and durable over time. I think that's really quite new and quite exciting. I totally agree.

09:54 - 10:21

We have faced that challenge at AB. We're in a competitive marketplace for talent. Many of the people who are looking at firms and have a lot of options really care about the firm's values and what the firm stands for and whether or not diversity, equity, and inclusion is more than just a buzzword. Right. What are you really doing about that? So a first hand experience with some of those environmental, social, and governance pressures that are necessary in order to build the firm that you want in the future.

10:21 - 10:54

So let's continue maybe along the lines of what's happening with corporations, because you've also written extensively about corporate disclosures with some optimism. And, you know, again, with the lack or the uncertainty in government leadership on these issues and the ever elusive standardization or lack of standardization on disclosures, do you think we're making enough progress there? Right. Are companies being open enough with what's happening from an environmental, social, and governance standpoint that we can actually get a good read on how to make progress?

10:54 - 11:15

That's a great question, and I think disclosure is at the core of much of the positive development we've seen. But you're absolutely right. If you're signaling that disclosure is very uneven and that there are multiple standards there. I'd like to see more rigor and greater standardization in these systems. I don't know if it's going to happen, though.

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Many of these systems have emerged bottom up and sometimes government is driving them. Sometimes the private sector is driving them. Sometimes there is a hybrid. So I don't know if we are going to see as much standardization as might be efficient and beneficial for the continued decarbonization of the economy. But I do find that there are reasons for real optimism.

11:39 - 12:07

Just recently, the Carbon Disclosure Project, now called CDP, issued a report summarizing the disclosures of almost ten thousand businesses around the world. And that report was backed by investors with over one hundred trillion dollars in assets under management. So I think that kind of disclosure activity is getting broader. And the CDP disclosure depends upon the greenhouse gas protocol, which is a reasonably standardized system.

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It's complex. It can be varied from application from firm to firm. But there is some level of standardization that is emerging from that process. And I think that's a good thing. I also think that just the general spread of corporate commitments in this area is pretty remarkable. The UN last year reported that more than 6,000 businesses around the world have made a climate commitment of some sort, and they represent more than 40 percent of global GDP.

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So I think what we're seeing is a very large movement, increased disclosure, and like you say, real variability in the quality of that disclosure. But I think that as time goes on, we're going to see more and more nonprofit organizations, more and more investors and more governments all pushing for high quality disclosure and then holding companies' feet to the fire about the quality of that disclosure.

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And as you probably know, there's really good evidence that when firms have to disclose information about pollution, they tend to control that pollution and reduce emissions. Michael, that's really interesting. So perhaps you can give us an example.

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So the best information out there, the most rigorous studies focus on toxic releases and what Mark Cohen and some others here at Vanderbilt found was that two things happen when companies disclose their toxic releases. Again, this wasn't regulatory requirements in terms of reducing your emissions, but just disclosing the emissions, caused two things to happen.

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Number one, there was an adverse share price effect, so that if you were higher within your own sector and toxic releases, your share value went down, controlling for all other relevant factors. That was number one. And then number two, not surprisingly, those firms that were higher than others within their sector in terms of toxic releases, overcontrolled in future years, that is, they reduced their toxic releases more than the other firms in their sector did.

14:06 - 14:32

Again, and all of that occurred without any regulatory requirements to do so. And I saw when I was at EPA one of the possible reasons for that, which is that corporate executives were very interested in not being listed on the top toxic polluters in their state or region. And so that public information then drove public pressure that essentially bypassed the limits of the regulatory process and caused real change.

14:32 - 14:50

Well, I think that what is really optimistic in your response, at least for me, is that I feel like we will waste a lot of time if we sit around waiting for standardization. So the fact that the pressure is mounting and moving from a lot of different sources is actually a good thing.

14:50 - 15:10

And we have to get to standardization at the same time. So we have to do both things, continue to up the pressure, demand greater disclosures, accountability and transparency, while also building the sustainability standardization infrastructure to support that, but we can't wait for standardization, we'll lose too much time. That's right.

15:10 - 15:35

And that's the second title that we thought of using in my book instead of Beyond Politics was Buying Time, because much of what we have to do here in the private sector is reduce emissions enough not to pass tipping points or other problematic aspects of the climate system. We have to be in a place where when the public demands environmental protection and climate mitigation enough, that government actually responds in a major way.

15:35 - 15:37

We haven't lost too much ground.

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And I think that's a critical piece of the puzzle here, and a big piece of why I work in this area. So speaking of disclosures and corporate commitments, one of the things that's been in the news a lot recently is that you've had companies making a net zero commitments. I just thought that we would take the opportunity, since we have you, to give us some perspective on what the person who is focused on environmental sustainability and they hear these announcements, what do they really mean? You know, what are companies really committing to doing? That's a great question.

16:11 - 16:45

And I think that's the center of much of the current discourse on climate mitigation in the private sector. So let's start with what we mean by net zero and then let's think a little bit about what that means for us. Is that a good thing or a bad thing? And where should we go with it? So as a starting point, you can either as a firm reduce the emissions that come from your firm itself or you can buy offsets that account for the amount of emissions. So you can ask essentially someone else to reduce their emissions. Now, I'm not hardcore on this issue.

16:45 - 17:19

I think we have to get to a decarbonized society as quickly as we possibly can. And if an offset is a legitimate offset, if that is really reducing carbon emissions from another source, then I'm agnostic on whether you reduce your own or another source's emissions. I think the risk is that some of those offsets are not very high quality. The second risk is that ultimately the sources themselves need to reduce their emissions. So if you're generating petroleum, ultimately you need to figure out how not to cause greenhouse gas emissions from the generation of that petroleum.

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It is not enough to simply pay someone else to reduce emissions because ultimately your emissions are a part of the problem as well. So what are the long-term implications of that? So over the long term, it is not enough just to pay someone else to reduce their emissions. Over the long term,

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every major source of emissions is going to need to reduce its own direct carbon emissions. And that's simply because the overall economy has to be decarbonize.d We can't simply pay others to do that while we continue to emit carbon. But if committing to net zero locks in a company on a pathway that includes both in the near term buying emissions offsets, and in the long term, decarbonizing its own operations, then I think that's a really good thing.

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And I think that an important focus of the advocacy community and of investors and others is to make sure that we don't just focus on the adequacy of the commitments made by companies making commitments, maybe two-thirds of the fortune 100 have made climate commitments so far, but that we also focus on those who are hiding in the weeds. There's a tendency if we're at an environmental advocacy group, to really go after the companies who make commitments that we don't think are good enough.

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And we will do much better as a society if we really go after those firms that are hiding in the weeds, that are not doing anything, that are not making those commitments. Because once you've made a commitment, then it's possible for employees and investors and other stakeholders to begin to hold the firm to that commitment, to explore it, to push it. But in the meantime, I believe that this principal focus should be on expanding the number of firms that have made commitments.

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As I mentioned, six thousand of them have around the world. But there are thousands and thousands more that need to be making those commitments. Right. Do you think there's going to be a ripple effect?

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One other thing I would say in this area is that we're seeing a real growth in the focus on supply chains and procurement. And so if you're a medium or small size business and right now you are kind of hiding in the weeds, you're not doing much about climate, you should expect coming down the road that the buyers of your products are going to be saying, and they're not just retail buyers, the corporate buyers are going to be saying, what is the carbon content of what you're selling me and how do you have a plan in place to reduce that carbon content moving forward?

19:41 - 20:13

And so I think we're going to see over time the growth in the number of businesses that are committing to a net zero or carbon neutral or other carbon goals, growing in part because of this focus by the large companies on pushing the supply chain commitments down. I'll give you one really quick example, Wal-Mart, which is, as you know, the largest retailer in the world by quite a bit, has made a commitment to a gigaton or a billion tons of carbon emissions reductions by 2030 from its supply chain.

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And it has tens of thousands of suppliers around the world. And that total amount of carbon emissions is equal to Germany or Japan going carbon neutral for an entire year.

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And now that pressure is going to get passed through its supply chain to suppliers in China and Indonesia and in the United States, and Canada, in Mexico. And somehow we're beginning to see supply chains create a network of influence or contracting pressure to reduce carbon emissions, that's running parallel to the international climate regime that we talk about so much in the media.

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Thank you.

20:46 - 21:11

That's a great example. So I read an article that you published recently, Michael, that talked about what's happening in terms of work from home and its impact on greenhouse gas emission disclosures and whether or not we might have an opportunity here. Right. As the way that employees interact with their businesses and how much time they spent in the office and less time commuting on the roads and sitting in traffic.

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So do you think there are some opportunities that we can take advantage of as we go from being in the pandemic to returning to whatever the new normal is going to look like? The opportunities are enormous, I believe, and there are probably two pieces to that. One is the technical side. What are the effects of working from home on carbon emissions? And the second is on reporting. Actually, going back to your earlier question is how do we report those emissions. And those are related.

21:40 - 22:15

So on the first question, we've seen a movement from less than 10 percent of the American population working from home to in the 50- plus percent range because of the pandemic. And similar kinds of trends have occurred around the world. And one of the things I find fascinating is that many, many employees would like to continue working from home. Corporate executives are somewhat less eager to have them work from home. Interestingly enough, based on the surveys. But many of that, there's a widespread belief now that a much higher percentage of the total workforce will work from home, at least part of the time moving forward.

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So then the question is, what are the implications for carbon emissions? And there are a couple and there are a little more complicated than they might seem on the surface. No question that transportation makes up a third to 40 percent of US greenhouse gas emissions. And so when people stop commuting, that reduces the commuting part of the transportation part of the US greenhouse gas emissions.

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And that's quite substantial and quite important. There's some signal in the literature that people may drive around a little bit more when they work from home. So they may go out and do errands and so forth. That may cut that benefit a little bit. But nevertheless, it's a real benefit.

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On the other hand, the next implication arises from whether when you work in the office versus whether when you work at home, you're using more energy or not. And if you are working at home and your equipment is less efficient or you're having to heat an office that you wouldn't otherwise heat, those are energy uses and greenhouse gas emissions that could be a little higher if you're working from home. It might be less. It all depends on the relative energy balance of those two types of activities.

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And that's something we've looked into as well. And there's another feature which is surprisingly important, which is that when you work from home, you can move anywhere. So it's possible to move from living in a very low carbon grid area to moving in a high carbon grid area. Now, all of a sudden, the electricity that you use, even if it's the same amount of electricity, is associated with a lot more greenhouse gas emissions.

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So we have to account for that, too.

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Now, how does that relate to reporting?

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Well, as between employees and employers, employers are probably better situated to take a number of steps that can reduce the carbon emissions of their employees, providing information about how to be energy efficient, subsidizing efficient home electric equipment and appliances and things of that nature. And there are actually firms that have emerged now that offer employee energy benefits, in other words, that help companies make their employees more efficient. But why would a company do that if the employees are now working from home?

24:20 - 24:53

And that's where the reporting piece of the puzzle comes in, because right now, if an employee moves from working in a headquarters' office, those are either Scope 1 or Scope 2 emissions. And companies routinely report those. When an employee works from home, those are now Scope 3 emissions for a company and companies don't typically report those. So simply moving employees from the headquarters' building to a home will make it look like a company has reduced its carbon emissions when all they've done is cross the reporting boundary and now they're outside of that reporting boundary.

24:53 - 25:24

And so it's going to become really important, and this is what our paper suggests, that the reporting standards that companies use begin to fold employees back into the corporate envelope for reporting, otherwise, companies are going to be able to claim emissions reductions that are phantom reductions. They've simply shifted them, and they won't have incentives to do what they can do very efficiently, which is to use employee energy benefits, information, subsidies, things like that, to enable employees to work from home with lower energy use.

25:24 - 25:59

And by the way, that's a great form of compensation on some level, too. If I'm working at home and you've saved my energy costs by 20 to 30 percent because I weatherize my home and I bought a more efficient heating and cooling system, it's a wonderful benefit for the employee and very likely would improve morale and things of that nature as well. That's very, very interesting. I just had an image of fewer people in the headquarters, but more people at home in the summers running their own air conditioning equipment and how that is not giving us the type of gains that perhaps you see on the surface.

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So, Michael, this has been a fascinating conversation. I thought before we ended our conversation today, you could just share with our listeners what are one or two things that they can do as individuals to support this movement towards greater advocacy and corporate sustainability focus and accountability. I had a wonderful time talking with you today, and I'm really excited to wrap up with that question, which I think is a great one.

26:25 - 26:45

And I would point to maybe two basic things. One is that you have to retain your sense of optimism; that as a critical piece of all this. We know from the health psychology literature that an internal locus of control and a sense of efficacy are critical to changing health behaviors. And the same is true in this space as well.

26:45 - 27:12

And a slide that I like to show when we have visuals available compares a spot from the Times Square in New York on Easter in nineteen hundred. And it shows all horses, all horses in 1900. And then I have a photograph of the same spot 13 years later, 1913, around the time of Easter, and it shows all automobile. And what that shows you is the rapid transitions that we can make in our society.

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And that wasn't some government mandate. We didn't mandate moving from horses to cars. They simply became a very competitive way to get transport.

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And I think we're seeing those same kinds of transformations, whether you're an investor or a consumer or an employee or simply interested, I think watching those transitions occur, pushing those transitions forward is critically important and something that a smart investor will need to keep an eye on. In terms of what you can do yourself, we can't forget that the first step is always to change the social structures that we function in. So recognizing that your role as a voter and a policy advocate is critically important, it has to be number one. We have to ultimately change some of these overall systems.

27:56 - 28:18

But secondly, your individual behavior matters a great deal and it matters not just in a micro way about a particular purchase of a particular product, but it matters in a more macro way. It matters how you buy products, it matters how you invest. It matters who you decide to bank with. It matters what voice you use as an employee.

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And so I would say that the next step in this process is for the listeners for your podcast, to remember that they are playing a very important role, and all the different roles they play as individuals. And then I would just wrap up with the idea that you want to focus on those things that matter the most, that you can also change the most. So we often focus on things that really don't matter very much because we can change them a lot or we really wish we could focus on the really big things, but we can't change them very much.

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And so what you need to do is think carefully about, what are the things where there is a combination of an important impact with a fairly large amount of ability to have an effect on it. And for you working at home or just living at home, weatherizing your home, buying efficient heating and cooling systems, buying an electric vehicle or a more efficient vehicle at a minimum, electrifying all the different aspects of your home and then pushing for decarbonization of the energy supply or things that you can do that will have a very large effect.

29:24 - 29:54

Michael, thank you again for joining us, it's a great conversation. And I look forward to perhaps connecting with you again in the future. That sounds great. I would love to come back and to be with you. And I would just wrap with one major example of how much effect you can have. We published a paper several years ago that showed that individual behavior in the United States could reduce US carbon emissions by an amount equal to all the emissions of France on an annual basis. So that's how big this opportunity is. Great. Thank you.

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This has been On Purpose. Thanks for joining us and remember, we all have values we hold dear. Now you can insure your investments reflect them. You can reach me on LinkedIn. If you enjoyed the podcast, please rate us on Apple Podcasts, Spotify, or your podcast service of choice, and be sure to subscribe. Thank you again. Bernstein: Making money meaningful for individuals, families, and foundations for over 50 years. Visit us at Bernstein.com.