Will Free Markets Rise to Meet the Environmental Regulation Challenge?

• Author: Yandle, Bruce
• Position: BRIEFLY NOTED

At a time when climate change is still seen by many as the most serious long-term threat facing humanity (even as the COVID19 pandemic is foremost on our minds), leaders of the corporate and financial worlds are looking for ways to make their activities more "green." Automakers are scrambling to shift production to all-electric vehicles and industrialists are looking for ways to reduce their corporate carbon footprints. So it's no wonder that managers of mutual funds and bond portfolios are offering more sustainable equity and "green" bond funds. Sustainability-linked loans in the developing world are increasing rapidly.

If these trends continue and the fund managers are successful, we may someday look back at how free-market forces delivered improved worldwide environmental quality while multi-country environmental regulation seemed impossible to implement. We've gotten pretty good at doing things at the national, state, and local levels, but so far we haven't found any viable solutions to the combined global effects of individual nations' environmental use.

Consider BlackRock, the world's largest fund manager, with some $7 trillion in various holdings. BlackRock recently announced that it will impose much stricter environmental and social standards on corporations whose shares it might consider owning. It's also vacating investments in firms that produce coal or have large carbon footprints and expanding holdings in firms committed to fighting climate change and increasing diversity.

Along somewhat similar lines, the Wall Street Journal reports that sales of "green bonds," which are sold to investors to fund renewable energy facilities and mass transit, rose by more than 20% last year. They are in such demand that investors are scrambling to buy them. In an effort to expand this market, the trading platform MarketAxess promised to plant five trees for every $ 1 million in these bonds traded. Based on last year's $57 billion, that would yield more than 250,000 new trees.

As this unfolds, there is growing concern regarding the soft regulatory power being exerted by the nonprofit Sustainability Accounting Standards Board, which seeks to influence how corporations report social goal progress. Also, the Securities and Exchange Commission is raising questions about what qualifies an investment fund to be called "environmentally superior."...