by Robert C. Hinkley
18 October 2021
The number one stated goal of the 26th UN Climate Change Conference of the Parties (COP26) in Glasgow later this month is for “countries to come forward with ambitious 2030 greenhouse gas (GHG) emissions reductions targets that align with reaching net zero by the middle of the century (Net Zero)”. Net Zero is the latest strategy to reduce the threat of global warming. Unless the governments involved in COP26 strategically intervene to make corporations more respectful of the environment, Net Zero is as unlikely to succeed as earlier attempts to curtail GHG emissions have failed before it.
In 2006, former Vice-President Al Gore’s Academy Award winning documentary, “An Inconvenient Truth,” brought the science of GHG emissions, global warming, and climate change to the forefront of public debate. Greater numbers of people started questioning why companies should damage the environment and other elements of the public interest? The search for solutions intensified.
First, there was socially responsible investing which evolved into sustainable finance. The idea was that the finance sector could be used to coerce companies that engaged in anti-social behaviour to change their ways by cutting off their access to funds. As the threat of global warming became more dire, companies reliant on the emissions of GHGs became a focus of sustainable finance.
Second, a corporate governance movement emerged urging companies to consider environmental, social and governance matters (ESG) in addition to the interests of shareholders. The underlying theory of this change was that companies which considered the interests of other stakeholders (i.e., the environment and other elements of the public interest) would stop harming them.
Third, there was the Paris Climate Accords of COP21 where countries promised to reduce the effects of GHG emissions. The theory was that the problem could be solved by the leaders of 196 countries joining hands and promising to do something about it.
All have been well intentioned steps in the right direction, but all have ultimately been proven ineffective. Two industries responsible for a large percentage of worldwide GHG emissions, electricity generation and motor vehicles, are still able to find financing. Every major corporation pays lip service to ESG, but it has not been able to be extended to reducing GHG emissions. The Paris Accords turned out to be well-intentioned promises which world leaders could not fulfill when they returned home.
Now we come to Net Zero. For COP26 to avoid becoming another COP21, we must understand why the previous attempts to slow down and reverse global warming have failed.
Sustainable finance, ESG, and COP21 each failed because they didn’t address the root cause the problem. Rising temperatures and climate change aren’t the cause of the problem. They are its symptoms. The underlying cause is embodied in the current corporate law. Until this is changed, negotiating a solution with the managers of these companies will never be fruitful.
Like all corporations, companies which burn fossil fuels or manufacture motor vehicles are dedicated by law to the pursuit of their own self-interest or, if you prefer, the interests of their shareholders (i.e., profit). The people who run these companies (their directors) are told by the law they must act in the best interests of their company and its shareholders. Full stop.
The law says nothing about directors also owing a duty to protect the environment or other elements of the public interest. The result of this omission is that corporations, which are imbued with all the rights of citizenship, are not constrained by its obligations.
Electricity producers and motor vehicle manufacturers won’t voluntarily abandon power plants or product lines in which they have invested hundreds of millions (sometimes billions). The cost to their shareholders is just too high.
Further, they will do whatever they can to avoid being told by government they must cease and desist, including participating in trade associations which hire lobbyists to delay and frustrate proposed legislation. Moreover, they will wield their political might against politicians who support such legislation.
It helps to understand the problem of GHG emissions from a different perspective. In most cases, directors don’t make a conscious decision to emit GHGs. That decision was made by their predecessors before the dangers of global warming were fully appreciated. The decision they make today is to not decide.
Not even considering the effects of their GHG emissions fits in nicely with the unbalanced duty of directors currently contained in the corporate law. That duty demands loyalty to investors but says nothing about protecting the environment and other elements of the public interest. Not deciding preserves the status quo and serves shareholders perfectly.
Clearly, the time has come for the world to decide to get out of businesses that are destroying the planet. Sustainable finance, ESG and COP21 weren’t totally in vain. Each showed and helped build strong public support for the idea that corporate behaviour should not come at the expense of the environment. That support must now be marshalled to enact laws which protect the environment from further harm.
Alternative methods of generating electricity and powering motor vehicles are available. New laws must be enacted which tell these businesses that their operations are no longer tolerable and need to be closed or converted as rapidly as possible. To the extent alternatives may be more costly, consideration should be given to re-directing public funds to subsidise the change and spur new research and development.
However, if COP26 only results in promises from governments to close power plants and increase mileage standards, it will be in vain. Just as they found ways to avoid the Paris Accords (and for the same reason), companies in these industries will find ways to avoid Net Zero. The existing duty of directors to act in their company’s best interests is too powerful for governments to overcome. Without balancing that duty with obligations to protect the environment, laws to affect these changes will never be enacted or, if enacted, will soon come under corporate attack calling for their repeal.
The way to make these laws stick is to simultaneously change the corporate law. The duty of directors should be changed in all jurisdictions from simply acting in their company’s best interest to acting in their company’s best interest, but not at the expense of the environment.
The fact that the existing duty of directors is essentially the same all over the world, makes a global solution possible. (I note the European Union is already considering a more extensive (but similar) change to the duty of directors be adopted by each of its 26 members.)
Mankind should never again allow the corporate pursuit of profit to threaten the survival of the planet. Balancing the duty of directors with a duty to protect the environment from severe damage will reinforce this proposition in law. Anything less and the pursuit of Net Zero is doomed to fail. Anything less and COP26 will be a cop out.