Ethics @ Work: Is Israel ready for 'green metrics'?

By ASHER MEIR

Earlier this week a conference took place at theTel Aviv Stock Exchange to discuss environmental, social and corporategovernance. It was sponsored by the Environmental Protection Ministry,the European Commission, a group of nongovernmental organizations andfinancial advisory groups.

Thepurpose of the conference was to promote a variety of initiatives, allrelated to increasing transparency in terms of corporate performance onenvironmental issues. The main initiatives were mandatory reporting forpublic companies on their environmental performance; "green metrics,"which means developing and publishing an index of environmentalactivity for leading companies in Israel; and discouraging investmentcompanies from investing in companies guilty of environmental offenses.

The first goal is to enable investors to screen outenvironmentally risky companies. This is important for investors whothink helping the environment is more important than making money; forothers it matters because they are money-oriented but think being apolluter foreshadows a future financial risk, as regulations andlawsuits will turn environmental damage into financial loss. Theultimate goal is to encourage companies to pollute less and therebyforestall divestment by concerned and informed investors.

I think these are worthy goals. It would be wonderful if wecould rely on government policy to find the perfect balance between thebenefits and the costs of pollution in the business sphere. However,there will always be individuals who disagree with the balanceestablished by public policy and will want to put their money wherethere mouth is. There is no reason to assume that people do, or should,care only about money when they invest; evidence suggests that manypeople want to put their money where their values are. This may be asmall fraction of investors, but collectively they control a lot ofmoney, plausibly enough to influence corporate policy.

Another very important advantage is providinginformation for future research and government policy. There areextensive reporting requirements to enable government agencies tocalculate standard economic statistics such as GDP, imports, exports,investment, etc.; these figures are invaluable in shaping academicresearch and public policy.

But we should consider three reservations regarding the metrics:

  • Quality of the metrics. If the parameters beingreported, or the "green metrics" being compiled, are poorly correlatedwith the environmental damage being done by companies, then the entireexercise is a waste of time. It is important to make the metricstransparent and subject to public evaluation.
  • Cost. That these are worthy goals doesn't mean theyshould be achieved at any cost. Given that environmental audits arevery expensive, and that extensive environmental reporting is alreadymandatory, we should ask if the new reporting requirements are tooburdensome.
  • Equity. The first reporting requirement applies onlyto publicly listed companies; the second only to some subset ofprominent companies. This could give an unfair advantage to unlistedcompanies.

    The first two reservations are partially addressed by the intentionto use norms that are already being applied in other countries,particularly in the European Union. However, I think the EnvironmentalProtection Ministry should calculate and publish figures that make apersuasive case that these initiatives are cost-effective.

    My most serious reservation regards the last initiative:discouraging investment in companies accused of wrongdoing. Publishednews reports were skimpy on details regarding how this would be carriedout, but it sounds like a very inequitable program. Legislators andregulators have carved out an entire enforcement mechanism forenvironmental regulations. The mechanism includes some kind of hearingand investigation process, as well as various personal and financialsanctions.

    If an official government agency decides to add additionalsanctions in the form of dissuading investors from investing money inthese companies, this would seem to be a violation of due process. Noone authorized the ministry to impose sanctions on these companiesbeyond what is defined by the law. If some private citizens decide topromote a boycott of a firm because of its conduct, there is generallyno issue of due process. But when a government agency is involved, thencareful thought is needed before doing an end run around legislativeprocedures.

    Environmental pollution is a serious problem in Israel andother countries. Improving awareness and incentives by publicizing goodmetrics can be a constructive step toward mitigating this problem in aneffective way.

    ethics-at-work@besr.orgAsher Meir is researchdirector at the Business Ethics Center of Jerusalem, an independentinstitute in the Jerusalem College of Technology (Machon Lev).