How ESG mandates might hurt the planet

Timothy P. Carney

October 20, 02:43 PM October 20, 02:43 PM

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Major companies these days issue “climate risk” and “climate impact” statements as part of their “environmental and social governance” or ESG disclosures.

The Securities and Exchange Commission and financial titan Blackrock are trying to coerce companies into promulgating ESG standards and disclosing in detail their compliance.

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It is worrisome to see such backdoor efforts at environmental regulation, considering that the United States has multiple standard avenues for environmental regulation (such as federal and state laws passed by elected legislators). But it also may be useless

ESG mandates are supposed to help the environment, but they might do the opposite. When a firm needs to disclose its emissions — and the emissions of its suppliers and customers — in order to do business in a country, that firm has extra incentive to move some of its operations to a country that doesn’t require as much.

A new paper on the topic addresses this danger: “More precise direct emissions disclosure can prompt firms to shift production to foreign suppliers where indirect emissions are less accurately assessed and priced, leading to carbon leakage.”

These disclosure mandates then act the same way many climate regulations do: They increase the cost of doing business in the U.S., thus driving manufacturing to other countries where the environmental rules are much weaker. Thus, these environmentalist rules result in no reduction in emissions and significant increases in pollution — plus a weakening of the U.S. economy.

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The added wrinkle here derives from the requirement that companies disclose not only the emissions they produce but also the emissions they induce — the upstream and downstream emissions that their suppliers and customers emit. As long as different countries have different rules, there will be gaming of these requirements.

It wouldn’t be the first time that environmental regulations undermined the environment.