Scholar argues that private governance initiatives offer considerable potential to combat climate change.
“We are still in.”
This is the message that 3,629 state, local, and private sector leaders from across the United States wished to underscore in an open letter to the international community in the wake of the Trump Administration’s withdrawal from the Paris Agreement.
Jonathan Gilligan, a professor at Vanderbilt University, argues in a paper recently posted online that private governance efforts such as the We Are Still In coalition can substantially reduce greenhouse gas emissions despite the federal government’s refusal to address the problem. Gilligan defines private governance as businesses, organizations, and individuals acting to pursue goals traditionally associated with government regulation that will produce broad influence over others. According to Gilligan, these efforts will prove most effective when they are constructive rather than combative—that is, when they use the proverbial carrot rather than the stick.
Although the We Are Still In coalition with its business giants like Google and Nike has received the most attention, it is not the only meaningful development in the realm of private governance. Gilligan explains that many other private organizations have seized the opportunity to use their market power to advance public policy and effectively self-regulate their industries. For example, the 2018 Global Supply Chain Report issued by the Carbon Disclosure Project found that in 2017 more than 4,800 companies took action within their supply chains to implement sustainable policies, which led to an overall reduction in carbon dioxide emissions of 551 million metric tons.
In addition to large purchasing and manufacturing firms that can contract with suppliers to create more energy-efficient products, institutional investors and the financial industry can also engage in private governance and self-regulation to fight climate change, says Gilligan. He explains that large pension funds and other trust managers have expressed their belief that their fiduciary duties to investors requires accounting for the long-term financial impacts of climate change. Furthermore, Moody’s Investor Service—one of the “Big Three” credit rating services—previously announced that it would begin to incorporate climate change risks into its determinations of creditworthiness for governments.
Shareholders and activists within businesses also have the ability to pressure firms to focus on climate action. Gilligan argues, however, that most of the methods currently used by shareholders are confrontational and lead to reputational injuries accompanied by decreases in stock price. Rather than using the metaphorical stick, Gilligan claims that the use of carrots is a more promising method for effecting climate action through private governance.
Gilligan explains that the the metaphor of choosing a carrot or stick is especially apt in the realm of shareholder private governance because shareholders typically have only two options available to them: exit or voice.
Shareholders can “exit” when they disagree with a company’s environmental initiatives by selling their shares in the hopes of financially punishing a company. The problem with this punitive reaction, however, is that most stocks are fungible and there will always be another person willing to buy those shares, says Gilligan. The end result is that a shareholder who exits in an attempt to protest a company’s policies is removed from any potential conversations to change those policies and the company is no worse off financially.
Rather than exercising their ability to exit, Gilligan argues that shareholders should concentrate on using their “voice” constructively and positively. He believes that the most effective way to change corporate policies is for shareholders to recommend those changes themselves in the form of shareholder proposals. In fact, Gilligan notes that the average percentage of shareholders voting to pass climate-related shareholder proposals rose from 8 percent in 1999 to 21 percent in 2013. Shareholder proposals are carrots in the sense that they attempt to persuade a company to implement a change in policy for the sake of its potential benefits, rather than to avoid retaliatory measures from shareholders.
According to Gilligan, the relevant framework for assessing the potential success of any private governance method is to consider its technical potential, behavioral plasticity, and policy plasticity.
The technical potential of an action measures the total emissions reduction achievable under the assumption of perfect compliance, explains Gilligan. He suggests that shifting retailers’ focus towards selling energy-efficient products has tremendous technical potential. Using LED light bulbs, for example, leads to a 75-80% reduction in greenhouse gas emissions when compared to incandescent bulbs.
Behavioral plasticity refers to what level of compliance could realistically be expected to result from a given private governance policy, says Gilligan. For example, Gilligan argues that shareholder resolutions to implement environmental initiatives are often well-received by large firms and therefore have a high degree of behavioral plasticity. That is, even when shareholder resolutions do not receive the required number of votes, one study suggests that many companies will nevertheless change their practices if a significant minority of its shareholders express concern.
Finally, Gilligan explains that policy plasticity considers how easily a firm could actually implement a private governance policy. His findings suggest that it is far easier for institutions with long-term outlooks to address environmental risks through private governance than it is for firms or investors obsessed with short-term returns. Thus, the most significant obstacle to successful private governance is convincing firms to take a longer view when considering the potential benefits of a policy change.
Gilligan concludes by suggesting that shareholder proposals have promise as an effective form of private environmental governance, especially in the absence of government regulation. Using the framework he proposes for evaluating private governance techniques, Gilligan predicts that proposals will have the greatest chance of succeeding when emissions reductions and sustainable practices are presented as offering short-term cost savings and benefits to the organization’s reputation.
