The 1969 National Environmental Policy Act (NEPA) is best known for its requirement that federal agencies prepare an environmental impact statement for major federal actions significantly affecting the quality of the human environment. Although predating the concept of ESG by several decades, NEPA — and, in particular, its environmental impact statement (EIS) process — may be of value to corporations in developing and fine tuning their ESG programs, and to investors, in evaluating them.
Most don’t know that NEPA contains not only an EIS requirement, but also a broad commitment to sustainability. Section 101(b) explains: “it is the continuing responsibility of the Federal Government to use all practicable means, consistent with other essential considerations of national policy, to improve and coordinate Federal plans, functions, programs, and resources to the end that the Nation may … fulfill the responsibilities of each generation as trustee of the environment for succeeding generations.” And that commitment includes not only “assur[ing] for all Americans safe, healthful, productive, and aesthetically and culturally pleasing surrounding,” but also “achiev[ing] a balance between population and resource use which will permit high standards of living and a wide sharing of life’s amenities.” Not these broad policy statements, but rather NEPA’s EIS process, might be most pertinent to ESG.
ESG — environmental, social, and [corporate] governance — is the most recent buzzword to be applied to companies’ recent focus on serving all their stakeholders, not merely their shareholders. Prior buzzwords include: People, Planet, Profit! Environment, Economy, and Society! The Triple Bottom Line! Three Pillars! Three-legged Stool! Each of these buzzwords have been applied to the precursor concepts of corporate social responsibility and corporate sustainability, terms which themselves are confused and confusing. Some explain that corporate sustainability refers to meeting the needs of the present generation without compromising the ability of future generations to meet theirs, and that corporate social responsibility is a broader term, referring to practices a corporation has taken to advance social and environmental causes, looking back at what a company has done rather than at its strategy for the future.
Some distinguish ESG from corporate social responsibility and corporate sustainability saying ESG is outward focused, providing investors with metrics, while the other terms are more inward focused, helping corporations evaluate their own practices although providing a foundation for a strong ESG program. And “governance,” to some extent, is apples as compared to the oranges of environmental, social, and economic concerns. Regardless, a key issue to utilizing any of these concepts relates to metrics.
Recently, analytics provider Intelligize released a report that concluded that public companies are “begging for direction” on environmental, social and governance reporting, a problem the US Securities and Exchange Commission could help fix. And any system of reporting would need to start with the identification and definition of the parameters to be measured — followed by determinations of the metrics to be applied and how those metrics are to be used in corporate decision-making. NEPA’s environmental impact statement process provides a possible go–by.
CEQ’s “A Citizen’s Guide to the NEPA” explains “[t]he NEPA process begins when an agency develops a proposal to address a need to take an action.” The next step is to determine the significance of the environmental effects of that action and “to look at alternative means to achieve the agency’s objectives. Regardless of whether an agency decides an action is major and an EIS required — or it’s not and an environmental assessment will suffice — the agency is directed to analyze the full range of direct, indirect, and cumulative effects of the preferred and any other reasonable alternatives. Environmental effects or impacts include “ecological, aesthetic, historic, cultural, economic, social, or health impacts, whether adverse or beneficial.”
The Guide explains: “It is important to note that human beings are part of the environment (indeed, that’s why Congress used the phrase “human environment” in NEPA), so when an EIS is prepared and economic or social and natural or physical environmental effects are interrelated, the EIS should discuss all of these effects.” The analysis is also to include “a description of the environment that would be affected by the various alternatives.” With the information provided by this process, the agency is in the position to make an informed decision, but that decision need not be the environmentally preferred one.
So, applying the NEPA EIS model to a corporation, there are a series of questions to ask and answer, starting with what aspects of ESG does the company wish to address? Is the focus to be on sustainability as it relates to the environment or are social and governance concerns to be addressed as well? And if so, which ones? Without a consensus on what aspects of ESG are to be addressed, it’s difficult to compare one company’s performance with another. This paper starts with the assumption that pertinent aspects of ESG have been identified and, focusing on the E — environmental — suggests a method for how different corporate objectives can be evaluated
If our focus is to be on the environment, the question then is what aspects of sustainability does the company wish to address, e.g., water use, waste generation, energy generation, and/or carbon production? Consider, for example a company wishing to become — and to market itself as — net carbon zero. What is meant by net carbon zero? What are the company’s activities that collectively result in its carbon footprint, e.g., the provision of products and services? What is the carbon footprint for each of those activities throughout its entire lifecycle? Are scope 3, e.g., supply chain and ultimate users, as well scopes 1 and 2 emissions, to be considered?
Other questions then need to be asked and answered. What alternatives are available to achieve its objective, e.g., reductions of carbon emissions or obtaining offsets? If the alternative is to reduce carbon emissions of the corporation, its supply chain, and its ultimate users by shifting from using electricity produced by coal or gas to electricity produced by solar and wind, what are the carbon footprints associated with the extraction of necessary constituent metals and the manufacture, use, and disposal of solar cells and wind turbines as compared to those associated with the use of coal or gas? And, if the alternative is to reduce carbon generally — by effectingcarbon offsets, e.g., by planting or maintaining forests or croplands, how are those offsets to bequantified and verified?
And, especially given the increase and intensity of weather events caused by climate change, an analysis of alternatives should also consider uncertainty and arguably worst case scenarios — both probabilities and magnitudes of impacts. Although the Supreme Court, in Robertson v. Methow Valley Citizens Council, held that NEPA itself did not require that an agency perform a “worst case analysis” and although the term “worst case” was removed from CEQ’s NEPA rules, the rules do require the inclusion in an EIS of “impacts that have catastrophic consequences, even if their probability is low, provided that the analysis of the impacts is supported by credible scientific evidence, is not based on pure conjecture, and is within the rule of reason.” 40 CFR Section 1502.22(b). So another question to ask and answer in the case of the alternative of offsets resulting from planting or maintaining forests is, what are the chances of forest fires? In considering the alternative of nuclear power, a question to ask is, what is the probability of a nuclear accident? And, in each case, how are those uncertainties and their impacts to be accounted for — questions insurance underwriters are used to fielding.
But in our net carbon zero example, there are yet other questions that need be asked and answered, specifically, what are the tradeoffs in achieving net zero carbon, e.g., what effect will the steps taken to achieve net zero have on other aspects of sustainability such as water use? For example, if carbon is to be reduced by the use of Scope 2 biofuels or by planting or maintaining forests or croplands, how much more water might be required than if energy is derived from coal or natural gas? And if a switch to renewables means energy is less available or more costly, what effect might that switch have on other energy users whose access to that energy may be impaired? In developing countries, provision of energy may be weighted more heavily than addressing climate change.
At present, there is no common currency for quantifying and comparing the costs of different aspects of sustainability, let alone for comparing environmental and other social costs. But there go–bys here too. For example, there’s been much discussion as to how to calculate the social cost of a ton of carbon — the future harm inflicted by the release of one additional ton of carbon dioxide into a present monetary value. Ceres asks also: And how can those damages be weighed against the costs and benefits of actions taken today?
So if a reduction in carbon is achieved by the use of a number of additional gallons of water, what is the cost of that water? There’s been discussion also of the environmental and social costs of global water use as well as social costs of water pollution. So, to the extent there are social costs associated with the decision to go to net carbon zero, how are those costs to be quantified and compared?
And even assuming relative impacts of each alternative can be identified, quantified, and monetized, how then are those factors to be weighed in corporate decision-making and, more broadly, corporations that make those decisions to be judged by investors and other stakeholders? A NEPA EIS-type alternatives analysis might be a good start.
The NEPA environmental impact statement model for sustainability would result in a holistic approach to corporate decision making. Using this model, corporations would:
1) Identify the aspects of sustainability they wish to address, e.g., waste generation or carbon production;
2) Identify the objectives they wish to achieve, e.g., zero landfill or zero carbon;
3) Identify the activities they conduct that they will need to address to achieve those objectives, e.g., the activities necessary to produce their products or goods and services that result in landfill wastes or carbon;
4) Determine whether to address impacts of the company’s activities or those resulting from the entire lifecycle of the products or services they provide, that is, from suppliers and end users;
5) Quantify each of those impacts;
6) Identify alternatives available to them to achieve their objectives;
7) Identify and quantify the environmental and social impacts of each of those alternatives; and ?
8) Monetize those impacts so there is a common currency for comparing them.
The result would be informed corporate decision-making, with the company to decide which alternative best meets their objectives, and with investors having a better understanding of how sustainability has factored into that corporation’s decision-making. Open questions remain as to how to compare one company’s goals and achievements with another’s, and what reporting should be required, so comparisons can be more readily made.
By Jeff Civins, Senior Counsel, Haynes Boone