Private environmental regulatory frameworks play an increasingly important role alongside federal policies.[1] These schemes vary from collective labeling systems and certifications such as the Forest Stewardship Council (FSC),[2] lending standards such as the Equator Principles[3] which are environmental disclosures and assessments for project finance borrowers, to green building standards such as the Leadership in Energy and Environmental Design (LEED).[4] Environmental issues are not novel, and yet there seems to be a new regulatory framework yearly, if not monthly. In contrast, there has not been a new federal environmental statute since the 1990 Clean Air Act.[5] This web of public and private regulation means that “environmental regulatory authority has transformed from a concept overwhelmingly associated with state power into a much richer diversified notion.”[6]

The traditional model of regulation applies a state-centric lens in which governments are the primary regulators. They provide a benchmark for all private actors, a backdrop so that costs don’t spin out of control, and serve as a back-up, if needed. By doing so, said regulation seeks to prevent the Tragedy of the Commons, or the idea that collective natural resources are over-exploited in the long-term because market pressures lead to free riding, overconsumption, and a lack of self-regulation of the collective good.[7] However, with the rise of private regulators, often in the form of voluntary frameworks, the environmental regulatory landscape is changing. While traditional business incentives might prioritize less regulation, voluntary environmental regulators are gaining popularity with businesses as customers continue to demand consideration of environmental, social, and governance (ESG) factors. A study by PwC revealed that “83% of consumers think companies should be actively shaping ESG best practices and 86% of employees prefer to support or work for companies that care about the same issues they do.”[8]

Today, regulators include a mix of public and private actors, including states, international organizations, businesses, and NGOs.[9] Furthermore, the definition of regulation is viewed more expansively. For example, private environmental regulators can provide standard-setting functions such as the International Organization for Standardization (ISO)[10] and the Marine Stewardship Council (MSC),[11] implementation such as Responsible Care,[12] monitoring such as Greenscope,[13] and enforcement and adjudication such as environmental rights NGOs like EarthJustice[14] and the Center for International Environmental Law.[15]

Why are Private Regulators Emerging?

The emergence of private environmental regulators, be it for-profit or not-for-profit, can serve either as a top-down gap filler or a bottom-up initiative.

Private regulators are assuming a gap filling function via decentralization of responsibilities.[16] Decentralization refers to the transfer of authority and responsibilities for public functions from the government to subordinate quasi-independent organizations or the private sector.[17] It is usually due to gaps and/or shortcomings with centralized or state-led regulation. However, with a polycentric issue such as the climate change, it would be near impossible for a single regulation or regulatory body to capture all the factors and causes of environmental degradation. Environmental protection cannot be boiled down to one thing or undertaken by one person. Therefore, while private actors have undertaken a gap filling function, perhaps these gaps are due to the phenomenon subject to regulation itself, rather than government shortcomings.

However, the decentralized model has received criticism.[18] Its main critiques focus on decentralization’s eroding effect on the legitimacy of environment regulation and its increasing cost for businesses. First, decentralization can result in a lack of standardization between entities which may erode the legitimacy of environmental regulation in an already polarized political climate. If every company applies a different regulatory regime, it becomes increasingly challenging to gauge and compare success. Today, the myriad of ESG rating agencies such as MSCI ESG Research,[19] Bloomberg,[20] S&P,[21] CDP,[22] and Moody’s[23] are criticized for using different methodologies and criteria to release ESG scores for companies, rendering it increasingly challenging to understand or enforce. Therefore, decentralization can lead individuals to question the legitimacy of these regulatory bodies. Second, decentralization can also result in added costs and the classic Tragedy of the Commons problem. A business might opt into voluntary regulation while competitors don’t, thus imposing on themselves the additional burden and cost while free riding competitors do not have this additional expense. This free riding problem impedes companies from electing environmental regulations and thus counteracts the impact of those companies that do elect into regulation and the work of the regulators. However, the hope is that these additional costs result in brand recognition and align with growing consumer preference for sustainable products and services.[24]

We are also seeing a rise of many successful local level private regulators such as city and community initiatives. Indeed, rather than top-down decentralization, we are witnessing bottom-up gap filling. In major cities such as New York, grassroots organizations and local NGOs monitor and provide city sustainability efforts such as the Lower East Side Ecology Center that focuses on community-based sustainability models.[25] This aligns with Elinor Ostrom’s Governing the Commons theory. Ostrom studied hyperlocal communities and found that over time small groups create methods of social ordering to manage collective resources without external authority. She points to, for example, the Zanjera irrigation communities in the Philippines where there is a “central role given to small-scale communities of irrigators who determine their own rules, choose their own officials, guard their own systems, and maintain their own canals.”[26] The Zanjeras then joined a federation which was incorporated into a private corporation in 1978 and the community leaders were given roles on the board of directors.[27] Today, the private ordering by local level grassroots environmental regulators might also be described as a modern form of “governing the commons.”[28]

What Does This New Trend Mean for Regulatory Competition?

This new regulatory landscape has in turn affected regulatory competition.[29] The landscape has shifted from top-down state-centric regulation to a multi-faceted approach, thus it is no longer about more or less regulation, but instead an opt-in voluntary model at differing jurisdictional levels. Therefore, a lot of the assumptions of traditional competitive behavior no longer hold for environmental regulation.[30]

The voluntary peer-reviewed model of regulation through the private sector means that private regulators are no longer competing based on price, but instead quality, credibility, and regulatory branding.[31] Regulatory branding refers to the act of assuming, or framing oneself as assuming, a distinct position within the regulatory market. Since all businesses voluntarily submitting to a private environmental framework are willing to incur the cost, they can essentially shop around for the framework that is best suited toward their goals. However, voluntary frameworks and the rise of private actors change the nature of this ‘regulatory shopping.’ While in a binary system, regulatory competition traditionally leads to a race-to-the bottom or race-to-the top between state governments trying to attract businesses with either more or less stringent environmental regulations, in a multi-actor system, where regulation is self-imposed, actors are shopping for quality of the regulation rather than price or deregulation.[32]

While this regulatory competition can, on the one hand, result in lower standards and enable greenwashing which may hinder the legitimacy of the policy, it can also allow for increased flexibility and ambition. For example, this new competitive behavior has pushed private environmental regulators to improve their frameworks and methodologies at a faster rate. The UN Environment Programme and S&P have recently announced their new Nature Risk Profile methodology.[33] PRI has released a new reporting methodology for 2023.[34] The Global Impact Investment Network (GIIN) is developing IRIS+, a new impact measurement platform intended to allow increased comparison between companies.[35] CDP’s 2023 methodology takes a new sector focused approach.[36] Furthermore, opting into flexible regulations that best fit the company or industry can allow for increased risk management, environmental standardization, and can provide companies with a competitive advantage or even access to new capital.[37] However, while private regulators allow for increased innovation and responsiveness, private and especially hyper-local private regulators may not hold up at scale. Whereas private regulators rely on norm-setting and market pressures, public regulators have the upper hand when it comes to scale and enforceability. Indeed, state-led regulation has the benefit of scale as it offers a blanket policy across its jurisdiction and is likely equipped with judicial or administrative enforcement tools to give bite to its bark.

Whether this new competitive environment is just a trend or here to stay, the rise of private environmental regulators and thus the new multi-faceted system adds a layer of complexity to an already complicated regulatory issue. However, this complexity might be exactly what is needed. Environmental issues have such a variety of causes and consequences in such differing geographies that a multi-layered regulatory approach is essential. So, while this new regulatory landscape reveals tensions and challenges for environmental regulation, the presence of market forces also leaves room for hope of increased innovation, legitimacy, and stronger sustainability incentives.

 

 

[1] See generally, Orr Karassin & Oren Perez, Shifting Between Public and Private: The Reconfiguration of Global Environmental Regulation, 25 Indiana J. of Glob. Legal Stud. 97 (2018).

[2] See The Forest Stewardship Council, https://fsc.org/en (last visited Feb. 5, 2024).

[3] See The Equator Principles, https://equator-principles.com/ (last visited Feb. 5, 2024).

[4] See Leadership in Energy and Environmental Design (LEED), U.S. Green Building Council, https://www.usgbc.org/leed (last visited Feb. 5, 2024).

[5] See e.g., Michael P. Vandenbergh, Private Environmental Governance, 99 Cornell L. Rev. 129, 131 (2013). Note: the 2022 Inflation Reduction Act added new funding for green banks.

[6] See Veerle Heyvaert, Regulatory Competition – Accounting for the Transnational Dimension of Environmental Regulation, 25 J. Of Env. L. 1, 1 (2013).

[7] See Rebecca Henderson, Reimagining Capitalism in a World on Fire 43 (Harvard University eds, 2021).

[8] See Casey Herman, How Much Does The Public Care About ESG?, PwC Insights, https://www.pwc.com/gx/en/services/sustainability/publications/cop26/how-much-does-the-public-care-about-esg-pwc-cop26.html#:~:text=We%20found%20that%2083%25%20of,these%20are%20still%20striking%20figures.

[9] See e.g., Kenneth W. Abbott, Jessica F. Green & Robert O. Keohane, Organizational Ecology and Institutional Change in Global Governance, 70 Int’l Org. 1 (2015).

[10] See The International Organization for Standardization, https://www.iso.org/home.html (last visited Feb. 5, 2024).

[11] See Marine Stewardship Council, https://www.msc.org/ (last visited Feb. 5, 2024).

[12] See Responsible Care, The European Chemical Industry Council, https://cefic.org/responsible-care/ (last visited Feb. 5, 2024).

[13] See Greenscope, https://www.greenscope.io/ (last visited Feb. 5, 2024).

[14] See EarthJustice, https://earthjustice.org/ (last visited Feb. 5, 2024).

[15] See Center for International Environmental Law, https://www.ciel.org/ (last visited Feb. 5, 2024).

[16] See generally, Veerle Heyvaert, The Transnationalization of Law: Rethinking Law through Transnational Environmental Regulation, 6 Transnat’l Env’t L. 205 (2017).

[17] See World Bank Decentralization Thematic Team, Decentralization, The Online Sourcebook on Decentralization and Local Development, http://www.ciesin.org/decentralization/English/General/Different_forms.html (last visited Feb. 5, 2024).

[18] See e.g., Mitch Kunce & Jason F. Shogren, On Efficiency of Decentralized Environmental Regulation, 28 J. of Regul. Econ. 129, (2005); Vivek Ghosal et. al., Decentralized Environmental Regulations and Plant-level Productivity, 28 Bus. Strategy and the Env’t, 998, (2019); James L. Huffman, Making Environmental Regulation More Adaptive Through Decentralization: The Case for Subsidiarity, 52 U. Kan. L. Rev. 1377 (2003-2004).

[19] See Why ESG Investing?, MSCI, https://www.msci.com/our-solutions/esg-investing (last visited Feb. 5, 2024).

[20] See ESG Data, Bloomberg Professional Services, https://www.bloomberg.com/professional/product/esg-data/ (last visited Feb. 5, 2024).

[21] See ESG Evaluation, S&P Global Ratings, https://www.spglobal.com/ratings/en/products-benefits/products/esg-evaluation (last visited Feb. 5, 2024).

[22] See About Us, CDP, https://www.cdp.net/en (last visited Feb. 5, 2024).

[23] See ESG Risk, Moody’s, https://www.moodys.com/web/en/us/capabilities/esg-risk.html?cid=6256CA5ECFB17394&gad_source=1&gclid=Cj0KCQiA7OqrBhD9ARIsAK3UXh20YXS4x0-EQOSpJkBZaofF80lwTSrzcLxX94PfISCbOBConnK5lCoaAnuSEALw_wcB&gclsrc=aw.ds (last visited Feb. 5, 2024).

[24] See Bo Bothe, Building Brand Integrity Through ESG Reporting, Forbes (Aug. 28, 2020) https://www.forbes.com/sites/forbesagencycouncil/2020/08/28/building-brand-integrity-through-esg-reporting/.

[25] See LES Ecology Center, https://www.lesecologycenter.org/ (last visited Feb. 5, 2024).

[26] See Elinor Ostrom, Governing the Commons The Evolution of Institutions for Collective Action 82 (James E. Alt & Douglas C. North eds., 1990).

[27] See id. at 85.

[28] See generally, id.

[29] See generally, Arik Levinson, Environmental Regulatory Competition: A Status Report and Some New Evidence, 56 Nat. Tax J. 91 (2003).

[30] See generally, Claudio M. Radaelli, The Puzzle of Regulatory Competition, 24 J. of Pub. Pol. 1 (2004).

[31] See Heyvaert, supra note 16.

[32] See Daniel J. H. Greenwood, Democracy and Delaware: The Mysterious Race to the Bottom/Top, 23 Yale and Pol. Rev. 381 (2005); see also Heyvaert, supra note 16.

[33] See Press Release: UNEP and S&P Global Sustainable1 Launch New Nature Risk Profile Methodology, UN Environment Programme (Jan. 17, 2023), https://www.unep.org/news-and-stories/press-release/unep-and-sp-global-sustainable1-launch-new-nature-risk-profile.

[34] See Reporting & Assessment: How Investors are Assessed on Their Reporting, Principles for Responsible Investment, https://www.unpri.org/reporting-and-assessment/how-investors-are-assessed-on-their-reporting/3066.article (last visited Feb. 5, 2024).

[35] See IRIS+, Global Impact Investing Network, https://iris.thegiin.org/ (last visited Feb. 5, 2024).

[36] See Scoring Introduction 2023, CDP, https://cdn.cdp.net/cdp-production/cms/guidance_docs/pdfs/000/000/233/original/Scoring-Introduction.pdf (last visited Feb. 5, 2024).

[37] See e.g., The Impact of Environmental Regulations on Business, FasterCapital (Dec. 12, 2023), https://fastercapital.com/content/The-Impact-of-Environmental-Regulations-on-Businesses.html; What Are ESG Frameworks? How to Choose the Right One for Your Business, Quantive, https://quantive.com/resources/articles/esg-frameworks (last visited Feb. 5, 2024).