Is Corporate Social Responsibility an environmental ‘Dodge’?

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Why companies don’t make the environmental their top priority

By Peter Burnett

Corporate Social Responsibility has been in the news a lot lately. Corporates have been active in recent social debates, for example as advocates for same sex marriage and Indigenous recognition; and most recently when some companies backed September’s School Strike for Climate. This has prompted the Australian Government to push back, urging corporations to ‘stick to their knitting’.

In the USA, the high profile Business Roundtable, whose members are the CEOs of ‘leading American companies’ such as Tim Cook of Apple, recently dumped their long-held position that the purpose of a corporation is to serve shareholders, in favour of a commitment to ‘all of our stakeholders’ (their emphasis). This included a commitment to ‘protect the environment by embracing sustainable practices across our businesses.’

The ‘rules’ for corporations

Can a corporation really embrace sustainable practices if it is not in their immediate commercial interests to do so?

This is an issue with a long history (even longer than post-war discussions on this thing called sustainability). In the 1910s, on the back of the success of his Model T car, Henry Ford cut prices, gave his workers significant pay rises and started building a war chest to fund future expansion. But Ford hit the wall when he proposed putting an end to special dividends as a way of making his war chest even larger. Two of Ford’s shareholders, the Dodge brothers (themselves car makers), successfully sued Ford for such an audacious proposal. The Michigan Supreme Court forced Ford to continue paying the dividends on the basis that the company must operate in the interests of shareholders.

This case is often discussed as a key source of two key principles of corporate law, namely shareholder primacy and the ‘business judgement’ rule. And these are not just US principles, but are reflected in modern corporate law in Australia. Section 181 of Corporations Act 2001 requires directors to act in good faith in the best interests of the corporation, while  section 180 enacts the business judgment rule, in essence that directors meet their duty to act in the best interest of the corporation if they believe, rationally and after exercising due diligence, that they are so doing.

The net result is that, while directors must act in the best interests of the corporation, directors have significant scope to apply their best judgment in determining what those interests are.

However, acting in the best interests of the corporation effectively means acting in the interests of the shareholders, since they are its owners. Furthermore, since (almost all) shareholders are investors, acting in the corporation’s best interests pretty much means making money, or at least increasing shareholder value, as much as possible.

So, broadly speaking, corporations are in it for the money. They have a one-track mind. And, allowing some leeway for management discretion, shareholders are entitled to make sure it stays that way.

Corporations and voluntary action for the environment

What does all this mean in terms of caring for the environment?

Well, corporations often claim they will care for the environment, as the US Business Roundtable has just done. Further, corporations often acknowledge the need for a social licence, which is not quite the same thing.

Finally, corporations sometimes take voluntary environmental action at the behest of government. A recent example came in a statement by Trevor Evans, Federal Assistant Minister for Waste Reduction and Environmental Management, who said that creating a more circular economy in Australia is a responsibility shared between individuals, governments and industry. (Of course, industry mostly consists of corporations).

Despite the impression created by such statements, the bottom line is set not by business roundtables and ministers, but by the rights that the law gives to shareholders.

If a company is led by a visionary and the shareholders share the vision, almost anything is possible. Elon Musk for example has managed to spend hugely on his vision to accelerate the world’s transition to sustainable energy, pushing Tesla Corporation to the limits of viability through borrowing and even giving valuable rights away by opening patents to all-comers, without attracting shareholder litigation of the Dodge Bros v Ford type*.

Keeping out of ‘Dodge’ City

On the more likely scenario that there will inevitably be some modern Dodge brothers among the shareholders in any large company, how might a corporation take voluntary action for the environment without risking shareholder litigation?

For example, how might companies respond to Minister Evans’ call to share in responsibility for the circular economy without getting in trouble? The answer depends on whether the corporation is a direct participant in the circular economy, such as a recycler, or simply affected by it, say a department store.

It is in the commercial interests of a recycler to see the circular economy grow as it will increase demand for recycled products. Therefore the directors might justify going well beyond general industry engagement with government policy development. They might decide for example that the company will sell recycled product at a loss, or adopt unprofitable circular economy practices within its own business, to establish itself as an exemplar. They might even justify paying their employees a ‘recycling allowance’ to promote recycling at home and to spread the word on social media.

A department store, on the other hand, may not be able to justify any voluntary investment in circular economy practices, beyond some basic ‘greenwashing’ at the margins to support a general ‘we are environmentally responsible’ stance. In fact, it might be in the interests of an upmarket store to maximise the use of virgin materials and extravagant packaging, to enhance the overall ‘customer experience’. These interests might even lead it to oppose some circular economy initiatives in the name of customer choice.

So it’s horses for courses. Yet in either these examples or others, companies can only justify voluntary environmental action if there is a business case for that action. If companies go significantly beyond what a business case would justify, they are inviting challenge by our modern Dodge brothers.

So what’s the right approach?

In a recent commentary on the US Business Roundtable decision to adopt the ‘stakeholder value’ approach, company director and philanthropist Alan Schwartz argued that it is the job of companies to maximise their profits within the rules, and the job of governments to get the rules, including environmental rules right, for example by setting a carbon price (‘Why Friedman was right’ and the Business Roundtable wrong).

In his view, efforts by companies to go beyond shareholder interests in pursuit of broader stakeholder interests are likely to be no more than a sideshow.

Looking through an environmental lens, as we do in this blog, I think Mr Schwartz has it right. It’s much better to have clear and comprehensive environmental rules set by government than to rely on the social ambition of directors and the tolerance of investors.

Image: Arek Socha from Pixabay

* There is shareholder litigation over Tesla’s acquisition of solar panel manufacturer SolarCity, but this is based on other grounds.

Federal environmental planning: the broken leg of the stool

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Our national environmental law is a bit wobbly because it doesn’t take planning seriously

By Peter Burnett

Our big and complex national environmental law is called the Environment Protection and Biodiversity Conservation Act 1999 (or EPBC Act). When you unpack its major components (as I did in a recent blog) they sort themselves quite nicely into three streams: 1. Identify Matters of National Environmental Significance (MNES) for protection; 2. Plan for Conservation; and 3. Assess and Approve for Development or Trade.

The streams can be seen as the three legs of a stool, with protecting, conserving and approving designed to combine to ensure that our most important environmental values are looked after, but without blocking economic activity more than is necessary. At least, that’s the theory. Unsurprisingly, there are some problems in practice and in this blog I’ll start with the biggest: the planning leg is half-missing.

One leg is half-missing

The Act provides a planning mechanism for everything that it protects or conserves: bioregional plans for biodiversity and other values; wildlife conservation plans for listed marine, migratory and conservation-dependent species; recovery and threat abatement plans for threatened species; and management plans for heritage places, Ramsar sites and Commonwealth reserves.

The problem is that many of these plans are dated, underdone, or were never created in the first place. I’ll illustrate by examples. In each case I looked up the relevant place or plan on the Department of the Environment and Energy website [www.environment.gov.au] and followed the links.

Dated plans

A number of plans look dated to me. For example, the very first recovery plan listed in the Species Profile and Threats Database, for the great desert skink, was made in 2001 and expired in 2011. The executive summary of the plan says that the Recovery Team will review implementation progress annually and any changes made to the plan will be made available to all stakeholders. There was nothing on SPRAT to indicate whether this had occurred.

Underdone plans

Other plans look underdone. I picked the recovery plan for Carnaby’s cockatoo, an endangered species found in the woodlands and plains around Perth. The species has been controversial because Perth’s development often involves clearance of the cockatoo’s habitat.

The recovery plan identifies eucalypt woodlands as critical to the survival of the cockatoo, in part because they provide breeding hollows, which the plan notes take 100-200 years to develop. It goes on to identify protection of nesting habitat as a recovery action and adopts as a performance measure for this the maintenance of the extent of nesting habitat (trees with nesting hollows).

The implication seems clear: don’t clear old growth woodlands. Moreover, the EPBC Act prohibits the environment minister from acting inconsistently with a recovery plan, so a plan containing a statement like this would block development in these areas.

However, the plan stops far short of such language. Under the heading ‘guide for decision makers’, it states only that the success of the plan requires that decision-makers avoid approving activities that will adversely affect the cockatoo, and that they should minimise or mitigate those impacts that cannot be avoided (ie. apply the ‘avoid, mitigate, offset’ hierarchy). The plan goes on to cite WA EPA guidance that it is ‘unlikely to recommend’ approval of projects with a significant adverse impact on the species.

In effect, the plan simply points out that if decision-makers want to save the cockatoo, significant impacts should be avoided, or at least minimised. By pulling its punches, the plan leaves it open to the federal minister to approve the destruction of critical habitat, provided he or she duly considers the plan and applies the mitigation hierarchy to the extent the minister regards as practicable.

Missing plans

At a larger scale, looking at biodiversity more generally, there are no bioregional plans for Australia’s 89 terrestrial bioregions. Nil, none, zero!

Fortunately, Australia’s marine area is much better catered for, with bioregional plans for four of five marine bioregions, supplemented by management plans for marine park networks in each bioregion plus one for the Coral Sea Marine Park.

It’s the politics stupid

Of course, there is a practical explanation for the absence of terrestrial plans. Bioregional plans require joint federal-state action, except on the small portion of land classed as Commonwealth land. Federal cooperation is never easy, even between governments of the same political flavour. Moreover, preparing lots of plans would be expensive and could well stir up local concerns about the whole gamut of development and conservation issues in the region concerned. Such a scenario is, to say the least, politically unappealing.

Yet without bioregional plans project-based environmental impact assessment (EIA) must proceed without contextualised, place-specific guidance on what needs to be conserved and where development can occur. This perpetuates one of the major flaws with project-based EIA, the ‘death of a thousand cuts’, where small environmental impacts are approved in ignorance of their cumulative effect.

The bottom line

While under-done recovery plans may provide some of the guidance that should be coming from the absent bioregional plans, at the end of the day the stool has only two-and-a-bit legs, leaving development decisions pretty much at the minister’s discretion.

This means that a minister who wasn’t really interested in protecting Matters of National Environmental Significance won’t find themselves hemmed in by plans. Even a minister determined to protect and conserve MNES would find that the absence of contextual information a major problem in seeking to make good decisions, just as it’s hard to see where you’re going in a fog.

Who wants a stool with two and half legs?

Image: A pair of Carnaby’s cockatoos feeding on banksia. This species is endemic to south-western Australia. It has experienced widespread loss of nesting and feeding habitat and is considered endangered under the IUCN Red List, and Australian federal and state legislation. Since the 1950s, numbers of the Carnaby’s cockatoo have declined by more than 50%, with its range contracting by over 30%. Image by Leonie Valentine.

What’s in the EPBC Box?

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Unpackaging Australia’s national environmental law

By Peter Burnett

I’ve decided to pull apart Australia’s national environmental law, the Environment Protection and Biodiversity Act 1999 (EPBC Act). I want to see what makes it tick and, perhaps more significantly, to see if I can explain what makes it tick.

I’m not doing this for fun; there are two major reviews coming up that will delve into this important law and I’d like to have my say in these reviews. If I’m going to have my say, I’ll have to go beyond just knowing what I’m talking about. I have to be able to communicate my understanding to support my point of view.

This is no easy task. A colleague of mine, with extensive experience in public policy but not environmental policy, recently tried to read the EPBC Act. He told me, with considerable frustration, that he found it virtually impenetrable.

I can also draw on personal experience. I recently gave a guest lecture about the Act as part of an environmental law course (the course was for non-lawyers). The blank looks I got from the students, and the absence of questions, challenged me to try a new approach to explaining what this important piece of legislation does.

The two upcoming reviews of the EPBC Act could have significant consequences for environmental law in Australia. The first is being carried out by the Productivity Commission and examines regulation of the resources sector. This review has just started and I discussed it in an earlier blog.

The second review examines the operation of the entire EPBC Act, something that the law requires every 10 years. This review is due to be announced in October.

Only for the ardent

The EPBC Act is around a thousand pages long! And that’s just the Act itself. This doesn’t include supporting regulations and guidelines. There are reasons for this length (and complexity).

Because of the peculiarities of Australian constitutional law, parts of the Act use arcane legal language to attach themselves to certain constitutional hooks.

The Act is also repetitive, because it applies similar processes to different things. The alternative would be to draft master provisions and apply them in multiple places through frequent cross-references. I’ve heard drafters argue that repetition makes the law easier to read but I’m not entirely convinced – what the Act gains in readability through repetition may be lost in the added length.

All in all, reading the Act is only for the ardent.

So, with the blank looks of the students still fresh in my memory, I decided to draw some pictures of it. I’d seen some well-drawn flow charts of some of the Act’s regulatory processes and thought I could do something similar, with a broad readership in mind.

I started with the idea of reverse-engineering a piece of equipment, say an espresso machine: first identify the major components, such as reservoir, boiler and coffee grinder, further dismantling each as necessary to see what it does. Then assemble the machine and observe how the components complement each other to produce a finished product.

So what’s in the box?

It turns out that the Act has 16 major components, at least as I’ve counted them (and leaving out ‘ancillary equipment’ such as compliance powers).

You can see these in my diagram below (Figure 1). The parts fall into three streams, indicating that the Act has three broad functions.

Figure 1: The main components of the EPBC Act (omitting supporting provisions such as compliance powers)

The first stream is about identifying various environmental values for protection. This mostly covers threatened species and special places. Once these values are identified, usually through a formal listing process, they are ‘protected’ by the Act. This means it becomes an offence to do something likely to harm them significantly, unless one obtains permission to do so (see stream three).

Because this is a national law, the values protected are predominantly things of high significance, such as World Heritage places or nationally-threatened species. Hence the term for many of them is ‘matters of national environmental significance’ (or MNES).

Apart from MNES, some values are there because they fall into categories that are protected by federal law alone. For example, marine species are included because the jurisdiction of the Australian states ends three nautical miles from the coast, while our Exclusive Economic Zone goes out 200 nautical miles.

The second stream is about planning for conservation. The Act doesn’t just cover planning connected to MNES and Commonwealth areas. It also provides for bioregional plans across the continent and its territorial sea, although with the major qualifier that for a region within a state (ie most of terrestrial Australia), the plans can only be done in cooperation with that state.

So far, there haven’t been any bioregional plans done with states, something I’ll discuss in another blog.

The third stream is about assessing and approving things that might harm the environmental values protected by the Act, or in the case of trade, the environment generally. The best known component in the third stream is project-based environmental impact assessment, but there is also provision for strategic environmental assessment of development.

This stream also covers assessment and approval of trade in species, whether these be endangered species under the Convention on International Trade in Endangered Species (CITES), native species for export or exotics for import.

Putting the parts together

Despite the complexity of the Act, its components do seem to fit relatively comfortably into these three broad streams. These are based on the protection and conservation of many of Australia’s most important environmental values, plus the power to assess and, if appropriate, approve (usually subject to conditions) developments that might harm what is protected and conserved.

In the broad this seems like a reasonable approach to looking after the environment while allowing for development. However, as I’ll explain in future blogs, there’s devil in the detail. In its current form, the framework does not realise its potential.

Doing the Tesla Stretch

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Electric cars to our economic rescue (with a nudge from government)

By Peter Burnett

New car sales are flat. In Australia we’ve just had the 17th consecutive month of declining sales. Of course, sales do go up and down and there are many reasons for the current dip including tight lending for cars and low consumer confidence.

Sales are also flat in other countries including the United Kingdom, but some commentators are advancing explanations far more significant than tight money and low consumer confidence. For example, the online newsletter MarketsInsider is suggesting that the US may have already passed ‘peak car’ due to generational and disruptive factors such as debt-strapped millennials, ride-hailing apps and self-driving technology.

I don’t know if being debt-strapped is the only factor for millennials, as my own millennial progeny give me the clear sense that cars just don’t have the allure that they did for me and my fellow baby-boomers. But quibbling aside, it seems clear that such disruptive factors are at work.

A Tesla for the market

I also suspect there may be another disruptive factor operating, a by-product of the ‘Tesla Stretch’. The Tesla Stretch refers to the fact that buyers are so keen to have a pure-electric car (ie, a battery-electric vehicle, or ‘BEV’, not a hybrid) that they are willing to pay around $30,000 more than they would normally spend on a new car. People who would never consider buying an entry-level BMW or Mercedes are paying BMW and Mercedes-like prices for the privilege of owning a Tesla, or at least a BEV.

The so-called ‘mass market’ Tesla, the Tesla Model 3, has only just gone on sale in Australia. In fact, the wider market for electric vehicles is only just getting off the ground here and it will be at least another 12 months before fully-electric vehicles are available here in any numbers and at least another couple after that before the cost of an electric vehicles begins to achieve price-parity with conventional internal combustion engine (‘ICE’: don’t you love these acronyms?) vehicles.

Although it’s too early to tell whether the Tesla Stretch will be a real thing here or not, there’s no reason to think Australians will be any different to Americans or Europeans in this regard. Moreover, I think the Tesla Stretch is already having an indirect impact here and that the current drop in car sales is partly the result of its by-product, which might be called the ‘Tesla Strike’.

A Tesla Strike?

The Tesla Strike would be a form of ‘buyers strike’, in which buyers want a BEV but, because they are not readily available, or not available at an affordable price, decide to wait. This flash of insight has come to me because I am one such buyer. My current car is about due for replacement and I’m keen to reduce my environmental footprint. I also like new technology (and cars, although this feels like admitting to being a dinosaur).

In principle, I’m prepared to do the Tesla Stretch, at least to some degree, but none of the handful of BEVs available so far meets my needs and fits my price-range. So, I’ve decided that my current car is my last ICE vehicle and that I’ll just wait.

In a small market like Australia there wouldn’t have to be too many more people like me out there for the Tesla Strike to be a ‘thing’, a phenomenon affecting sales and thus the economy, and calling for policy attention from government. The Government could act to increase the supply of electric cars by removing barriers to market entry, for example by streamlining the certification of electric cars for sale in Australia, introducing training programs in servicing electric cars, or subsidising the installation of recharging infrastructure, anything that would signal to electric car manufacturers that if they commit to supplying us, we’ll commit to giving this technology a long-term future.

Direct subsidies to car buyers might be one policy option but this may not be as effective as removing barriers to market entry. This is because simply increasing demand in the short term, without more, may not give manufacturers an incentive to establish sales and servicing networks here when there is already more than enough demand in larger markets for the BEVs currently available.

Wouldn’t it be ironic if governments, having so far baulked at spending on an electric car transition as an environmental measure, decided to do so as an economic measure?

As a bonus, oil imports would begin to go down, as would carbon emissions, increasingly so as ever-cheaper renewable energy replaces fossil-fuel power in our electricity network.

Ironic or not, for a government focused on the economy, Tesla Stretch surely beats Tesla Strike.

Image by Image by Gerd Altmann from Pixabay

The Sustainable Development Goals: Game-changer or good-looking rehash?

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From Agenda 21 to the Millennium Development Goals and beyond

By Peter Burnett

Australia, along with most nations in the world, has signed up to the Sustainability Development Goals (or SDGs for short), the UN’s latest effort to broker a pathway forward to a more sustainable future. How are we going in our efforts to meet the SDGs? And, indeed, is there any value in the SDG approach? I’m a tad cynical but the SDGs have definitely put a new face on sustainability.

The value of SDGs came into sharp focus for me last week at a conference in Melbourne titled ‘Why Should the Public Sector Care About Sustainable Development?’ (I think the answer to the conference-title question is simple: our future depends on it.) One of the conference presenters was John Thwaites, former Victorian Deputy Premier and Environment Minister, now a Professorial Fellow and Chair of the National Sustainable Development Council (NSDC), an NGO. John’s topic was the Sustainable Development Goals. Last year the NSDC released a progress report on SDG implementation in Australia, hot on the heels of Australia’s first official progress report.

John spoke with some passion about the value of the SDGs and gave examples of how they were influencing actual decisions by government and non-government bodies alike. Having been more focused on government policy-making, I had not considered his argument that the SDGs were gaining some real traction due to their social influence. So I thought it was time for another look: are the SDGs breathing new life into sustainable development?

Origins of the SDGs

Before answering that question, some history. The SDGs are a set of 17 goals adopted by the United Nations General Assembly in 2015. The UN describes them as a ‘shared blueprint for peace and prosperity for people and the planet’.

You’ve probably seen the catchy 17-tiled SDG infographic, as it gets quite a lot of exposure (see Figure 1).

Figure 1: The 17 Sustainable Development Goals

Countries made their original commitment to sustainable development at the Rio Earth Summit in 1992. The summit adopted the Rio Declaration, which sets out some 27 sustainability principles, along with a 350-page action plan called Agenda 21 (an agenda for the 21st Century).

The problem was that, to get everyone on board, rich countries had to make commitments to poor countries based on a principle of ‘intra-generational equity’. In essence this came down to promising poor countries that they wouldn’t lose the opportunity to develop, and to consume their fair share of the environmental resource pie in doing so, just because the rich countries had already eaten most of it.

Of course, this implied that the rich countries would henceforth constrain their own consumption. With the deal done and the pressure seemingly off, the rich countries went home and, unsurprisingly, did not consume less to free up resources for poor countries. So when everyone met again, at ‘Rio+5’ in New York in 1997, the poor countries objected strongly and the meeting almost collapsed.

The MDGs

Giving up on sustainable development wasn’t really an option. So they had another go, this time endorsing eight Millennium Development Goals (MDGs) to mark the new century. The MDGs focused on poverty, with only one goal embodying a commitment to environmental sustainability*. The target date was 2015.

The MDGs breathed some life back into the sustainability. Real progress was made, though I think this was made possible by allowing the rising tide of economic growth to lift all boats, particularly in China, at the expense of ongoing environmental decline.

In any event, the Rio+20 Conference in 2012 decided that the MDGs warranted follow-on goals, and so the SDGs came to pass. Unlike the MDGs, the SDGs reflect a more even balance between social and environmental goals, with five of seventeen goals having an environmental focus. The SDG’s also have some real substance, with 17 goals supported by 169 targets and 232 indicators.

Australia and the SDGs

The proof of the pudding however is in the eating. Australia’s first implementation report to the UN is simply a compilation of actions taken by governments and others that align with the SDGs. Further, while some good things are reported (eg, the National Disability Insurance Scheme), others are glossed over. The report for example refers to government support for Ramsar wetlands, omitting mention of the small amounts involved. Still other things are trivialised: the section on ‘Sustainable Cities and Communities’ reports that community gardens are increasingly popular, supported by ‘grass-roots’ organisations!

Irrespective of how good the reported measures are, the government makes no claim that the SDGs have driven any change in domestic policy and files its report under ‘aid’ on the DFAT website. Clearly the SDGs are not a game-changer from the government’s point of view.

The NSDC report is more analytical, using a ratings scheme under which Australia scores an overall 6.5/10. While this corresponds to a university ‘credit’ grade, averaging conceals a wide spread of ratings. We are best in looking after ourselves, scoring 8.9 in health and education, and worst at sharing, rating 4.4 on climate action (ie, sharing the Earth’s capacity to absorb pollution with future generations) and 4.3 on reduced inequalities.

Are the SDGs making a difference?

I’m sure John is right and that the SDGs are gaining some traction, including in ways not readily measured. But is that influence putting a dent in the underlying problem, that we are consuming environmental resources more quickly than nature can replace them?

The NSDC answers this question itself, opening its report with the comment that despite strong economic growth, ‘our children and grandchildren face the prospect of being worse off than we are as a result of increasing inequality, environmental degradation and climate change.’

A key problem is that while the SDGs are new in some respects, they are old in others. The goals, targets and performance measures are new, but the underlying principles are not. The UN Resolution adopting the SDGs in 2015 simply calls up the earlier principles and resolutions, such as those from Rio in 1992. This means that governments (and the rest of us) have no new reason for taking the hard decisions that sustainability requires, to keep the pursuit of economic development within nature’s capacity to replace what we consume.

Trumped by the short term

This is the reason for my cynicism. Because there is nothing new foundationally in the SDGs, short term political imperatives to grow the economy will continue to trump normative or moral obligations to share available resources with future generations and poor countries, no matter how often those obligations are repeated.

I’m sure John Thwaites is right and that the SDGs are making a difference. It’s just that they don’t contain anything that would make a fundamental difference. As a result, I expect that, short of a crisis, we will continue to play the game and report actions that are consistent with the SDGs, without actually changing our ways.

*The MDGs were later endorsed at ‘Rio+10’, the World Summit on Sustainable Development at Johannesburg, 2002. These ‘Rio+’ conferences are now a thing, with Rio+30 due in 2022.

Environmental regulation and the Productivity Commission

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Is ‘efficiency’ the sole solution to the challenge of ‘sustainability’?

By Peter Burnett

Last week the Australian Government announced a new inquiry by the Productivity Commission (PC) into regulation of the resources sector. While not confined to environmental regulation, in announcing the review Treasurer Josh Frydenberg made specific reference to improving the efficiency of environmental approvals to reduce the ‘regulatory burden’ on business. Frydenberg also said that the review would complement the forthcoming statutory review of national environmental protection law, the Environment Protection and Biodiversity Conservation Act. (For more on this review, see my recent blog).

In his media release, Frydenberg repeated the mantra of recent governments: that the aim was to ensure that projects were assessed efficiently while ‘upholding robust environmental standards’. This largely reflects the terms of reference of the PC inquiry, which talk of removing unnecessary costs while ‘ensuring robust protections for the environment are maintained’.

The week before the inquiry was announced, the new chair of the Minerals Council of Australia, Helen Coonan (a former Howard Government minister), identified efficient regulation as one of her top priorities. She claimed that if project approvals were sped up by one year, this would release some $160 billion and 69,000 jobs to the economy. I’m not sure where this figure came from, but it may have been based on a PC inquiry into the upstream oil and gas industry in 2009, which estimated that expediting the regulatory approval process for a major project by one year could increase its net present value by up to 18%. In any event, that’s a juicy target for efficiency savings.

The PC’s role on sustainability

On its website, the PC advertises itself as ‘providing independent research and advice to Government on economic, social and environmental issues affecting the welfare of Australians’. That’s not bad for a slogan but the substance is a little more complicated.

Under the Productivity Commission Act 1998 the substantive functions of the PC are all cast in terms of industry development and productivity. And the PC’s statutory policy guidelines, to which it must have regard, are dominated by considerations of improving economic performance through higher productivity; reducing regulation and increasing efficiency.

The statutory guidelines do, however, include considerations relevant to sustainability. Beyond a direct reference to the need ‘to ensure that industry develops in a way that is ecologically sustainable’, there are also references to other things connected to sustainability such as regional development; avoiding hardship from structural change; and meeting Australia’s international obligations. Further, one of the Commissioners must be experienced in sustainability and conservation while another must be experienced in social issues.

So, while the PC is definitely about efficiency and growth, it doesn’t have a one-track mind. Environmental and social impacts are definitely members of the cast, though in supporting roles. As we’ll see below, the problem doesn’t seem to be the PC but what the government does or doesn’t do with its recommendations.

We’ve been here before

Industry keeps complaining about inefficiency and duplication in environmental regulation, and governments keep returning to this theme, often through references to the PC. In recent years, in addition to sector-specific reports on regulation (including environmental regulation) of transport, agriculture, fisheries, water, upstream oil and gas, and mineral exploration, the PC has produced general reports on native vegetation and biodiversity regulation (2004); planning, zoning and development assessment (2011); COAG’s regulatory reform agenda including environmental regulation (2012); and major project assessment (2013).

This is in addition to the statutory review of the EPBC Act itself by Allan Hawke in 2009, which also included significant recommendations for regulatory streamlining.

The PC has also conducted other relevant review activities, such as convening a roundtable on Promoting Better Environmental Outcomes (2009).

And it looks like we’ll do it again

The terms of reference for this latest review focus on identifying practices for project approval that have led to streamlining the process without compromising environmental standards. This is rather unimaginative and I think will simply lead the PC back to places it has already gone, such as recommending increased use of regional plans and other landscape scale approaches; increased regulatory guidance; and a single national threatened species list.

In response to past recommendations, governments have done some of all these things. For example, there is a process underway to adopt a common assessment method for threatened species listings.

But governments don’t seem to tackle the issues in a fulsome and vigorous way, to deal with them once and for all. In fact, they attempt to walk on both sides of the street, pursuing reforms in an incremental way while simultaneously cutting environment department budgets. On this basis, one must even question their appetite for reform.

So much at stake

So is environmental regulation just a convenient whipping boy? There’s so much at stake that I don’t think so. Perhaps governments are wedged between their own policies and the politics: they don’t want to increase spending and can’t be seen to water down existing standards, yet remain frustrated by the processes that those standards bring with them.

If governments want real improvements to regulatory efficiency, without simply winding environmental laws back, they have to front-load the regulatory process with information and guidance and resources, ie with things that the PC and others have already recommended. These boil down pretty much to landscape-scale approaches such as regional planning (done comprehensively) supported by increased levels of regulatory service, including detailed guidance on what will and won’t be approved.

It’s not rocket science, but it will take serious money. But keep in mind that such an investment would lead to saving even more serious money.

And there’s an incidental benefit in such an approach. Proper environmental information and planning will also improve the quality of decision-making, which should improve environmental outcomes.

Image: Image by Gerd Altmann from Pixabay

An ‘environmental accounting’ primer

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What is it? (and why should we use it?)

By Peter Burnett

‘Environmental accounting’ (or ‘environmental-economic accounting’ to use its full name) is, on first blush, a dry-as-dust topic. Yet the ideas behind it and the insights it unlocks are fundamental to good environmental governance and a meaningful shift towards sustainability. That’s in part why Australia’s governments adopted a national strategy, or at least a common national approach, to environmental accounting in 2018.

Recently I attended a workshop in Brisbane on environmental accounting* hosted by state and federal governments. The workshop was lively and well-attended, with many more participants asking to be part of the discussions than had been originally invited. Clearly the value of environmental accounting is beginning to be acknowledged across multiple sectors.

But the development of environmental accounting didn’t happen overnight. Its gestation took over half a century with some of its central concepts going back centuries. What’s more, a lot more needs to happen before its full potential is realised.

Origins

Environmental accounting can be traced back to the 1970s when several countries, including Norway and France, developed what was then described as ‘natural resource accounting’, or in the case of France, ‘patrimonial accounting’, as part of their response to the emergent major environmental concerns of that era. There were also fears associated with resource scarcity arising from the oil crisis of 1973. These accounts were kept in physical terms.

At about the same time, economists William Nordhaus and James Tobin (later to be Nobel laureates) wrote a seminal paper highlighting the shortcomings of GDP as an economic indicator. They argued for a ‘Measure of Economic Welfare’ (MEW) that subtracted consumption of capital, including ‘environmental capital’, from domestic product. This is because treating consumed capital as income creates an inflated sense of well-being in the short term but is unsustainable over the longer term. Implementing a MEW would require the inclusion in national accounts of figures for the consumption of environmental or ‘natural’ capital, expressed in monetary terms.

During the 1980s the United Nations Environment Program (UNEP) and the World Bank ran workshops aimed at linking environmental accounting to the System of National Accounts (SNA), an international standard maintained by the UN. This work may have influenced another well-known UN project, the Brundtland Report of 1987, famous for proposing a global goal of ‘sustainable development’.

Brundtland placed great emphasis on policy integration as essential to achieving sustainable development. Although Brundtland did not go on to recommend environmental accounting per se, it did couch some of its arguments in economic and accounting terms, referring for example to ‘overdrawn environmental resource accounts’ and the need to maintain the stock of ‘ecological capital’. Given the implicit connections made in Brundtland, it’s probably no coincidence that Agenda 21, the action plan adopted by the subsequent Rio Earth Summit of 1992, linked accounting and sustainability directly by including a commitment to develop integrated environmental and economic accounting as ‘a first step towards the integration of sustainability into economic management’.

With Agenda 21 providing a mandate, the UN soon published a handbook on integrated environmental and economic accounting in 1993. However, it took a further 20 years to develop the handbook into a full international accounting standard and even then the scope of the standard was confined to traditional natural resources, with ecosystem accounting relegated to a supporting ‘experimental’ framework. The UN is scheduled to consider adopting a revised version of this experimental framework as a full international accounting standard in 2021. I hope this indeed occurs, but it reflects how long these processes take. The gestation period for this work is nearly 30 years!

Delay aside, a key innovation of the resulting System of Environmental-Economic Accounts (SEEA) is the concept of ‘combined presentation’, the ability to produce accounts expressed in either physical or monetary terms, or both. This allows accounts to support two streams of work: 1. the integration of environmental consumption into national accounting and
2. the use of physical accounts to inform environmental management.

Why bother?

As national accounting informs economic decision-making, the rationale for environmental accounting in monetary terms is clear. But why bother with physical accounting, other than as an intermediate step to monetary accounts? The answer lies in two developments, one in the late 1960s and the other going back to medieval times.

Concerns about the extent of environmental decline had been growing steadily through the 1960s. In 1969** two resource economists, Robert Ayers and Allen Kneese made a profound observation concerning environmental ‘externalities’ (externalities are the costs or benefits affecting persons not party to an economic transaction). Their observation was that if environmental externalities could no longer be regarded as exceptions, but were more the norm, then good economic decision-making required a ‘materials balance’; that is, a full recording and accounting for environmental impacts, in physical terms. Implicitly, Ayers and Kneese had just made the case for environmental accounts.

The other development foundational to the case for environmental accounting is the concept of the ‘double entry’, which goes back at least to the medieval ‘Venetian method’ of book-keeping. Double entry recognises that almost all transactions involve both a gain and a loss. In purchasing equipment for example, a business gains the equipment but loses the money used to pay for it, so it records both the gain and the loss in separate ledgers, one for equipment and one for cash. Moreover, accounting links the two aspects of the transaction, showing that this purchase in the equipment ledger was paid for with this payment, and correspondingly that this payment was attributable to that equipment purchase.

Stocks and flows

Environmental accounting builds on the parallels between our interactions with each other in business and our interactions with the environment. Just as business accounting tracks the stocks of business assets and liabilities, and the flows of business receipts and expenditure, recording the net change in capital at year’s end, so environmental accounting tracks the stocks of environmental assets (and liabilities, eg pollutants) and the flows of ecosystem services (and expenditure on ecosystem maintenance), recording the net change in natural capital each year.

Moreover, environmental accounts record the transaction from both society’s end and the environment’s end, making it ‘quadruple entry’. As a result, environmental accounts can show for example that this flow of ecosystem services to society came from that environmental asset, depleting it by this much, but that the depletion was offset by that degree of natural replenishment and this much environmental maintenance. This capacity to link transactions so specifically to their causes and impacts is what makes accounting a powerful tool for environmental analysis and decision-making.

What next?

Environmental accounting is starting to build significant momentum in Australia. As this work is still in its infancy, despite its long gestation, the ongoing work under way nationally and internationally to develop accounting standards and protocols remains important. More important however is the need to pay extra attention to, pardon the pun, the other side of the ledger, the application of accounts for better decision-making. I will cover this in a future article.

* The Brisbane workshop on environmental accounting brought together a number of researchers to present their work on the development or application of accounts. For example, Victoria presented their work on using accounts to identify the ecosystem services provided by forests.

**1969 is big in the news at the moment with the 50th anniversary of the Moon landing. It seems strange to me that so much attention is paid to this triumph of technology; while so little attention has been given to 1969 as the dawn of modern environmental policy. Beyond the analytical insights of Robert Ayers and Allen Kneese, 1969 also marked the passage of the world’s first comprehensive environmental law the US National Environmental Policy Act (NEPA), thanks significantly to the efforts of Professor Lynton Caldwell.

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