air pollution 88.
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Earlier this week a conference took place at the Tel Aviv Stock Exchange to discuss environmental, social and corporate governance. It was sponsored by the Environmental Protection Ministry, the European Commission, a group of nongovernmental organizations and financial advisory groups.
The purpose of the conference was to promote a variety of initiatives, all related to increasing transparency in terms of corporate performance on environmental issues. The main initiatives were mandatory reporting for public companies on their environmental performance; "green metrics," which means developing and publishing an index of environmental activity for leading companies in Israel; and discouraging investment companies from investing in companies guilty of environmental offenses.
The first goal is to enable investors to screen out environmentally risky companies. This is important for investors who think helping the environment is more important than making money; for others it matters because they are money-oriented but think being a polluter foreshadows a future financial risk, as regulations and lawsuits will turn environmental damage into financial loss. The ultimate goal is to encourage companies to pollute less and thereby forestall divestment by concerned and informed investors.
I think these are worthy goals. It would be wonderful if we could rely on government policy to find the perfect balance between the benefits and the costs of pollution in the business sphere. However, there will always be individuals who disagree with the balance established by public policy and will want to put their money where there mouth is. There is no reason to assume that people do, or should, care only about money when they invest; evidence suggests that many people want to put their money where their values are. This may be a small fraction of investors, but collectively they control a lot of money, plausibly enough to influence corporate policy.
Another very important advantage is providing information for future research and government policy. There are extensive reporting requirements to enable government agencies to calculate standard economic statistics such as GDP, imports, exports, investment, etc.; these figures are invaluable in shaping academic research and public policy.
But we should consider three reservations regarding the metrics:
Quality of the metrics. If the parameters being reported, or the "green metrics" being compiled, are poorly correlated with the environmental damage being done by companies, then the entire exercise is a waste of time. It is important to make the metrics transparent and subject to public evaluation.
Cost. That these are worthy goals doesn't mean they should be achieved at any cost. Given that environmental audits are very expensive, and that extensive environmental reporting is already mandatory, we should ask if the new reporting requirements are too burdensome.
Equity. The first reporting requirement applies only to publicly listed companies; the second only to some subset of prominent companies. This could give an unfair advantage to unlisted companies.
The first two reservations are partially addressed by the intention to use norms that are already being applied in other countries, particularly in the European Union. However, I think the Environmental Protection Ministry should calculate and publish figures that make a persuasive case that these initiatives are cost-effective.
My most serious reservation regards the last initiative: discouraging investment in companies accused of wrongdoing. Published news reports were skimpy on details regarding how this would be carried out, but it sounds like a very inequitable program. Legislators and regulators have carved out an entire enforcement mechanism for environmental regulations. The mechanism includes some kind of hearing and investigation process, as well as various personal and financial sanctions.
If an official government agency decides to add additional sanctions in the form of dissuading investors from investing money in these companies, this would seem to be a violation of due process. No one authorized the ministry to impose sanctions on these companies beyond what is defined by the law. If some private citizens decide to promote a boycott of a firm because of its conduct, there is generally no issue of due process. But when a government agency is involved, then careful thought is needed before doing an end run around legislative procedures.
Environmental pollution is a serious problem in Israel and other countries. Improving awareness and incentives by publicizing good metrics can be a constructive step toward mitigating this problem in an effective way.
Asher Meir is research director at the Business Ethics Center of Jerusalem, an independent institute in the Jerusalem College of Technology (Machon Lev).