Enforceable regulation that ensures businesses internalize their externalities is urgently needed if we are to meet the challenge of sustainability, writes SMART researcher Mark Taylor at the University of Oslo.
Climate breakdown is upon us. In October, the Intergovernmental Panel on Climate Change (IPCC) gave us twelve years to get it right. Failing to meet the Paris Agreement’s targets for climate gas emissions reductions that will bring global warming below 1.5°C, will result in aggravated impacts of climate change: Drought, floods, extreme weather, poverty and deprivation for hundreds of millions of people.
The magnitude of the threat means regulation has moved higher up the agenda for policy makers. EU First Vice President Frans Timmermans told a multi-stakeholder meeting of the European Economic and Social Council (EESC) in October that “if we really want sustainability to happen, we need enforceable regulation”.
Timmermans emphasised that, in his experience, business was often open to the long term benefits of sustainability. But he added that the challenge was both urgent and transformational.
He compared the willingness of policy makers to regulate for sustainability to the EU response on the issue of data protection, “if we see that our citizens are under threat and we cannot solve that threat through dialogue, we will regulate. And we would rather regulate badly than not regulate and see our citizens under threat.”
What would sustainability regulation look like? Here are a couple of reflections.
First, regulation will need to tackle head-on the reality that, well, ‘it’s the economy, stupid’. Climate science has made clear that our systems of production and consumption are operating well beyond what our biosphere can withstand.
To make matters worse, our systems for managing crises – politics, democracy, legal regulation - are malfunctioning. Capital accumulation has for years been the basis for inequality, which in turn has undermined public trust in institutions, including legal institutions, and that has again led to the rise of political polarisation. All of this weakens our ability to turn things around.
Second, any attempt to regulate to ensure business operates sustainably would have to address the actually existing systems of production and consumption. This means ensuring that regulation addresses the realities of global value chains (GVCs), which dominate the global production of goods and services.
The challenge with regulating GVCs is that they extend across borders, so no one country has jurisdiction to regulate an entire chain. This fragmentation of jurisdictions is aggravated by the difficulty in designing rules that apply to all businesses fairly.
This is because most of the businesses operating within GVCs are small or medium size enterprises: Large multinationals govern GVCs, but much of the work is outsourced to smaller firms. In addition, the large multinationals that tend to govern GVCs are powerful and well versed at blocking regulation that will impact their bottom line or arbitraging their operations to ensure they benefit from low cost (and weakly regulated) jurisdictions.
The need for a global approach – one that is simultaneously local and international – is evident. International law can work: The Paris Agreement targets for climate gas emission are agreed by states and are pretty clear. But climate change is only one facet of the environmental challenge we face.
Treaties protecting species and governing pollution are not stopping the loss of biodiversity we are experiencing, which is being wiped out at an alarming rate. Likewise, our ability to use international law to regulate to protect human and labour rights faces the same challenges of regulating across GVCs.
To call these ‘policy challenges’ is to be polite. These are in fact unimaginable losses suffered by people and animals and damage done to our planet, our common home. And all of this significantly reduces the ability of life on our planet to adapt to the changes that are about to hit us.
The Sustainable Development Goals (SDGs) represent an attempt to elaborate an integrated (social and environmental) and global approach to sustainability. Described as an “urgent call”, the SDGs aim to end poverty, spur economic growth and tackle climate change and preserve biodiversity, all by 2030. Timmermans said he thinks “we need the SDGs as our guiding principles. They can make (regulation) predictable over 20, 30 years.”
Business has been quick to latch on to the SDGs, both as a moral justification for doing business in general, as well as an opportunity in themselves: if governments are going to be investing in meeting the SDGs then business may be able to profit from those investments, not least through public-private partnerships.
The problem with a reliance on the SDGs is that it replicates the approach of unfettered profit for market actors, which has got us to where we are. The 2030 agenda assumes that business will be the engine that creates the value that will be needed to meet the SDGs, but says nothing about how private value creation should be conducted in a manner that does not undermine the overall objective of sustainability, both social and environmental. There is nothing in the SDGs which requires governments to regulate to re-structure our existing systems of production and consumption.
Fortunately, there are frameworks which place the SDGs on a sustainable footing facilitate the shift of our economy towards supporting a “safe and just space for humanity”. Those are being applied and developed to law and regulation, not least by the team of scholars that are part of the SMART project.
This research indicates the need for an approach to regulation which insures that businesses internalize the social and environmental externalities that they would otherwise shift onto society.
No single rule change will suffice. But there is increasing evidence that the internalization of externalities will require a mix of changes to corporate governance rules, clarifications to duties of care on the part of companies, as well as rules governing corporate transparency and accountability.