Energy Companies Have the Power to Act on Purpose

September 5, 2019, 10:26 PM UTC
cars factory pollution NJ Turnpike
CARTERET NEW JERSEY, NJ - NOVEMBER 17: Vehicles move along the The New Jersey Turnpike Way while a Factory emits smoke on November 17, 2017 in Carteret, New Jersey. The United States is still contributing to the global greenhouse gas emissions as the Trump Administration has dismantled the U.S. foreign-policy to reduce carbon pollution. Political divisions in the United States over climate change have spilled over to the outside world as seen at the COP23 United Nations Climate Change Conference that ends today in Bonn, Germany. (Photo by Kena Betancur/VIEWpress/Corbis via Getty Images)
Kena Betancur—VIEWpress/Corbis via Getty Images

This week’s announcement by Walmart on limiting its own gun sales seems to match last month’s Business Roundtable (BRT) statement to re-frame the broader purpose of a corporation “that serves all Americans.” Over 180 CEOs of leading companies joined this statement, which, beyond merely serving shareholders, promotes a multi-stakeholder orientation. Supporters and critics wrongly saw this extension as a departure from the mission of the Business Roundtable since its creation in 1972.

In fact, the BRT founders were strong advocates of corporate social responsibility regarding employee welfare, equal opportunity, environmental stewardship, and honest business practices—consistent with what the business community now labels “ESG,” environmental, social, and governance principles. BRT leaders—such as Irving Shapiro of DuPont, Thomas Watson of IBM, and Reginald Jones of GE—advocated for the Superfund Cleanup and Acceleration Act, the Foreign Corrupt Practices Act, and affirmative action in the workplace.

This latest Business Roundtable edict supposedly challenged economist Milton Friedman’s admonition that “the social responsibility of business is to increase its profits” with a focus only on the supremacy of shareholders. In reality, Friedman’s statement was not to underscore prevailing practice, but was meant as a correction to the then-surge of corporate do-gooders. Furthermore, even the forgotten rest of Friedman’s commentary acknowledged, “It may well be in the long-run interest of a corporation… to devote resources to providing amenities to that community.”

Nonetheless, the recent BRT statement of a broader business purpose was greeted with immediate criticism. Some raised concerns that this was walking away from shareholder capitalism, would lead to less accountability for performance, and was appeasement to far left progressives. To others, it seems like window-dressing to cover up corporations’ self-interest.

But the U.S. Environmental Protection Agency (EPA) has provided an opportunity for the business community to demonstrate its commitment to match lofty words with credible actions. Last week, the EPA stated an intent to roll back regulations around methane leaks in natural gas extraction. This policy would eliminate critically important environmental protections when the need to address greenhouse gas emissions and climate change have never been more urgent. Yet, according to the EPA, methane accounts for around 10% of all U.S. greenhouse gas emissions. Roughly a third of those emissions are generated by the natural gas and petroleum industry. 

A number of oil and gas companies have already opposed this rollback in regulations, similar to the concerns expressed by four automakers to a rollback in emission standards. For example, Gretchen Watkins, Shell U.S. president, underscored their pledge to reduce its methane leaks to less than 0.2% by 2025. Also last week, BP President Susan Dio stated support for tighter EPA standards: “It’s not only the right thing to do for the environment, there is also a clear business case for doing this.”

Elsewhere in the energy industry, many utility companies, reacted with alarm over EPA rollbacks of mercury contamination limits, regulation which was linked to $80 billion in health care savings, due to the estimated reduction of Mercury-related health issues and premature deaths. In requesting the preservation of the rule, many in the industry reported that they already spent most of the $9.6 billion in necessary compliance costs.

To be true to their principles of a broader sense of purpose, when the government issues policies that fail to address the rising climate threat, it is necessary for leading companies to lead.

Businesses can do so by, first, aligning with other like-minded firms. A recent study published in the American Political Science Review indicates that the breadth of firm participation in strategic self-regulation is essential to its success. It is more impactful and CEOs face less risk of political reprisal when they act in concert.

Second, companies can directly share their research on harmful methane emissions, mercury, and other pollutants, thereby outlining a method of control, and articulating a higher set of standards for themselves.

And, third, corporate leaders can create credibility for their intent by engaging independent auditors who will assess their adherence to these standards and publicly communicate results.

Finally, they can engage downstream users and consumers to shift their purchases to those who follow these standards and thereby create pressure on other companies to follow suit.

Self-regulation is not new. Since medieval times, professional gilds set standards for practice and disciplined violators with sanctions. In industry, there are varied forms, ranging from the Financial Industry Regulatory Authority (FINRA) to the UL’s 120 years of global success enforcing voluntary manufacturing standards for safety, hazardous substances, and quality product performance.

Taking these types of actions will show real intent to respect broader societal interests, and in return, could earn greater trust from citizens and society, even if some skeptics are certain to remain. In turn, this will strengthen companies freedom to operate and should contribute to longer term value creation for everyone—including shareholders. Inaction, or being perceived to endorse an agenda that fails to meet the rising threat of climate change, poses a risk to not only the companies themselves, but the broader business community, and society as a whole.

Rich Lesser is CEO of the Boston Consulting Group and a member of the Business Roundtable. Jeffrey Sonnenfeld is the senior associate dean at the Yale School of Management.

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