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Over the last years, the environmental regulation system has undergone radical changes.
Various private normative schemes, including voluntary corporate codes, environmental
management systems, “green label” schemes, environmental reporting standards, green
financial schemes and green indexes, have taken an increasingly important role in the
environmental regulatory field. One of the key questions raised by this phenomenon is the
issue of efficacy. To what extent, these multiple instruments of private ordering have a
meaningful social effect? This question has to be considered in the context of the recurring
accusation that these ‘soft’ instruments are nothing but a ‘greenwash’ ploy: a façade of environmental regulation, whose only objective is to enable corporations to continue without
disruption with their ecologically destructive practices. The ‘greenwash’/private regulationconundrum reflects a broader dilemma concerning the circumstances under which firms will
take environmental actions that go beyond what is prescribed by law. The paper begins by
outlining the evolving terrain of private environmental ordering. It argues that these new
forms of private governance have taken a globalized ‘face’ – a process that has begun in the
mid-1990s. The first section of the paper discusses the unique features of this emerging fieldof transnational private governance, highlighting, in particular, the multiple links and cross-
sensitivities between the distinct schemes, which create a novel ensemble regulatory structure.
The second section discusses the efficacy puzzle, contrasting between different theoretical
accounts of compliance. It argues that the commonly used concepts of “soft law” and “green-
wash” do not capture the complex social dynamic underlying these new f orms of governance
and that it is wrong to dismiss these instruments as ‘cheap talk’. The paper concludes with abrief exploration of the future of private regulation at the global sphere.
have taken an increasingly important role in the environmental regulatory field.6
One of the key questions raised by this phenomenon is the issue of efficacy.
To what extent, these multiple instruments of private ordering have a meaningful
social effect? This question has to be considered in the context of the recurring
accusation that these ‘soft’ instruments are nothing but a ‘greenwash’ ploy: a
façade of environmental regulation, whose only objective is to enable
corporations to continue without disruption with their ecologically destructive
practices (Waddock 2008: 105; Schwartz and Tilling 2009: 296).7
The
‘greenwash’/private regulation conundrum reflects a broader dilemma concerning
1E.g., OECD Guidelines of Multinational Enterprises, the International Chamber of Commerce
Business Charter for Sustainable Development.2 E.g., ISO 14001, the EU EMAS scheme and the Responsible Care program.3 E.g., the Forest Stewardship Council certification scheme, the US Energy Star program. 4
E.g., the Global Reporting Initiative Sustainability Reporting Guidelines (“GRI”) and the AA1000
Assurance Standard.5 Green financial schemes include codes regulating lending practices and “ethical” investment
standards. Green indexes include, e.g., the Dow Jones Sustainability Indexes and FTSE4Good series.6
Some of the foregoing instruments, such as the GRI, also cover non-environmental issues. There are
similar instruments covering other aspects of the corporate responsibility issue, such as the SA8000
standard, dealing with human rights of workers (http://www.sa-intl.org/ ).7 For a definition of greenwash see CorpWatch, ‘Greenwash Fact Sheet’, 22 March 2001
(http://www.corpwatch.org/article.php?id=242) and Lyon and Maxwell (2007).
this emerging field of private governance is the multiple links and cross-sensitivities
between the distinct regimes, forming what I call an ensemble regulatory structure. By
ensemble regulation I refer to a collection of autonomous regulatory schemes that
form a regulatory network, clustering around a common core of basic principles, and
exhibiting positive enforcement and normative externalities. There are in other words,
positive complementarities among the ensemble’s sub-systems with respect both to
their impact on firms’ behaviour and their underlying normative commitments.
It is beyond the scope of this chapter to give a detailed historical account of
this transformative process. The following three examples are therefore
illustrative and non-exhaustive. Consider first the global market for
environmental management systems ("EMS"), which is dominated today by ISO
14001 environmental management system.8
ISO 14001 is a set of procedures and
organizational practices, which are used to assist an organization in achieving its
environmental goals through a process of continual improvement . The standard
gives the organization the freedom to choose between self-certification and third-
party certification and evaluation. Nonetheless, one of the unique features of the
ISO 14000 series is the comprehensive system of third-party certification and
auditing that evolved around it. This private enforcement system draws on the
institutional support of the International Organization for Standardization, and the
National Standards Institutions affiliated with it, and is perceived – despite
various limitations - as relatively trust-worthy and efficient (Potoski and Prakash
2005).
8 ISO 14001 was released in 1996 (and revised in 2004); ISO 14001 (2004) Environmental
management systems - Requirements with guidance for use. Further guidelines regarding theimplementation of ISO 14001 EMS are included in ISO 14004 (2004) Environmental management
systems - General guidelines on principles, systems and support techniques .
– Sustainability Reporting Guidelines, (Amsterdam: Global Reporting Initiative, 2006). In the
following discussion I will refer to the 2006 text.11
Ibid .12 2006 Guidelines, at 8, 25 – 34; 2002 Guidelines, at 9, 34.13 2002 Guidelines, at 9; see also, 2006 Guidelines, at 8.14
For a comprehensive list of firms using the GRI guidelines see:
http://www.globalreporting.org/GRIReports/GRIReportsList/ . 15 FTSE4Good Inclusion Criteria require high impact companies to publish environmental report
(FTSE 2006: 3). DJSI Corporate Sustainability Assessment Criteria also include a requirement of environmental (and social) reporting (see: http://www.sustainability-
Equator Principles require each subscribing institution to publish an annual report
elaborating on the way it has implemented the Principles (principle 10).
Governmental intervention has provided a second line of support. First,
national securities regulators have recognized that the disclosure requirements of
securities laws require more extensive disclosure of environmental data, due to
the recognition that environmental data is necessary to a proper assessment of
firms’ economic situation.16
Mandatory environmental disclosure programmes,
such as the US Toxics Release Inventory (“TRI”) programme, the European
Pollution Emissions Register (“EPER”), and the Canadian National Pollutant
Release Inventory (“NPRI”) provided another source of support, by further
extending firms’ disclosure obligations.17
The GRI scheme goes, however,
beyond the requirements of these two types of state-sponsored disclosure
programs, by extending the disclosure requirements to ethical and labour issues,
by expanding the scope and scale of the ecological data that must be disclosed
and by not basing the disclosure requirement on an economically defined notion
of materiality.
The GRI Guidelines offer two complementary compliance mechanisms
(GRI 2006: 1-4). First, the GRI secretariat offers to check the reporter self-
declaration of its reporting. A second alternative is to have the report reviewed by
third party. The growth of the market of sustainability reporting has also
generated demand for independent external assurance (Simnett, Vanstraelen, and
16 See, e.g., EPA Enforcement Alert, vol 4, No 3 (October 2001)
(www.epa.gov/compliance/resources/newsletters/civil/enfalert ) and Perez (2006).17
See, respectively: http://www.epa.gov/tri/, http://eper.eea.eu.int/eper/ and www.ec.gc.ca/pdb/npri,
UNEP et al (UNEP, World-Bank, and Institute 2003: 110-112) and Brehm and Hamilton (1996: 445).
Several European countries have taken a more radical step adopting regulations requiring large or state-
owned companies to publish sustainability reports, see, e.g. the Danish initiative(http://www.eogs.dk/graphics/Samfundsansvar.dk/Dokumenter/Proposal_Report_On_Social_Resp.pdf)
and the Swedish initiative (http://www.sweden.gov.se/content/1/c6/09/41/25/56b7ebd4.pdf ).
Chua 2009). Two prominent global codes that seek to regulate the emerging field
of external assurance are the International Standard on Assurance Engagements
("ISAE 3000") promulgated by the International Auditing and Assurance
Standards Board18
and AccountAbility AA1000 Assurance Standard.19
The GRI
Guidelines also include various references to other external standards.20
A third example of private ordering ‘going global’ is the field of sustainability
indexes. These indexes should be considered in the broader context of the new ethical
investment movement. Ethical investment is the “process of identifying and investing
in companies that meet certain baseline standards or criteria of Corporate Social
Responsibility…' (Social-Investment-Forum 2006: 2). From a legal perspective,
ethical investment represents a form of private rule-making, in which private investors
contract with financial institutions to invest on their behalf, subject to certain
investment rules that are designed by the financial institution. It is thus a process of
both self-regulation and standard contracting. This process has evolved in a highly
fragmented environment (EU-Commission 2001: 22), with each financial institution
devising its own set of investment criteria, sometimes relying on external
consultancies. This disordered picture has changed with the evolution of new centres
of governance. I will focus here on the role of sustainability indexes in this new
emerging field of governance.21
18 See http: http://www.accountability21.net/uploadedFiles/Issues/ISAE_3000.pdf and
http://www.ifac.org/IAASB/ . 19
See www.accountability.org.uk.20
Thus, for example, the Guidelines require organizations to list all the external economic,
environmental, and social codes to which the organization subscribes or endorses, including any
environment-related performance or certification system (GRI 2006: 23, 27).21Other sources of governance are transnational networks involving different stakeholders, UNEP new
Principles for Responsible Investment and public regulation. See, further (Perez 2008).
agency/index.php?lang=en, http://www.aussi.net.au/ , http://www.jantzisocialindex.com, http://www.calvertgroup.com/sri-index.html. Other related players are ranking initiatives, such as
CRO’s 100 Best Corporate Citizens (http://www.thecro.com), Global 100: The Definitive Corporate
Sustainability Benchmark (http://www.global100.org/ ), and Business in the Community Corporate
Responsibility Index (http://www.bitc.org.uk/ ). I think that the fact that the FTSE4Good and DJSI are
not just ranking exercises, but actually act as a focal source for financial decisions make them more
influential. Also, the institutional structure in which they are embedded is much more developed.23
Fur the full list see: http://www.sustainability-index.com/07_htmle/indexes/overview.html.24 See: http://www.ftse.com/Indices/FTSE4Good_Index_Series/index.jsp. The FTSE4Good Index
Series encompasses four tradable and five benchmark indices, representing Global, European, US,
Japan (benchmark only) and UK markets. The FSTE group launched two additional indexes:
FTSE4Good Environmental Leaders Europe 40 Index and FTSE4Good IBEX Index.25 For a detailed description of the selection methodologies of both index families see (FTSE 2006;
Dow-Jones 2010).26The social impact of sustainability indexes has not been studied extensively so far, so the following
claims should be seen as plausible hypotheses, calling for further empirical research.
two index families to select and rank companies and their ultimate selections
constitute a normative benchmark for the whole ethical investment market. Second,
the ranking and the continuous engagement of the index teams with participants firms
influence firms’ behaviour. Finally, the normative benchmark developed by the
indexes influence the thematic horizon of CSR discourse as a whole.27
The ranking criteria used by both indexes include various references to other
global codes. Thus, for example, both indexes refer to EMS and environmental
disclosure in their ranking criteria. The FTSE4Good Inclusion Criteria state, for
example that high impact companies with ISO certification and EMAS registrations
are considered to meet several core indicators, which are required from such
companies. (FTSE 2006: 3). High impact companies are also required to publish
environmental report, which needs to be sufficiently detailed (FTSE 2006: 3). The
Dow Jones ranking process, as reflected in the Corporate Sustainability Assessment
Questionnaire which is sent to firms as part of the ranking process, similarly
emphasizes the existence of a certified EMS requirement and the firm's commitment
to environmental (and social) reporting.28
The following table captures the global convergence process depicted above.
Table 1: the Universe of Global Private Environmental Ordering (Partial Picture)
Field Past
Governanc
e Structure
Current
Governa
nce
Structure
: Global
Code
Level of
Specific
ity
Responsibl
e
Organizati
on
Compliance
Mechanisms
Environme
ntal
Manageme
nt
Uncoordina
ted,
organizatio
nal
managemen
ISO
14001,
Responsi
ble Care
High Internationa
l
Organizatio
n for
Standardizat
Private external
verification (relatively
robust in the case of
ISO 14001)
27
A good example for this phenomenon is inclusion of new climate change criteria in the FTSE4Goodcriteria in 2007.28 See SAM Research Corporate Sustainability Assessment Questionnaire (2009) paras. 38-41.
II. Private environmental governance: greenwash or alternative regulation
I argued above that the over-used notions of “soft law” and “green-wash” do not
capture the complex social dynamic generated the new universe of private
29 There are close links between the Equator Principles and the GRI Financial Services Sector
Supplement (See, e.g., FS2. Procedures for assessing and screening environmental and social risks inbusiness lines).30 There is some competition between ISO 14001 and the FSC rules, see, Stringer (2006).
failure, generated by the ability of under-monitored managers to use corporate
resources to advance their ideological agenda.32
The economic optimizer model does not deny, though, the possibility that
some voluntary codes will yield beyond-compliance actions. However, such
result must be grounded in economic calculation. Thus, for example, Potoski and
Prakash ‘green club’ model suggests that firms may certify to ISO 14001 because
of the standard’s contribution to firms’ reputation. Because the ISO 14001
scheme is associated with a relatively effective system of external verification,
firms cannot capture the standard’s reputational benefits without making real
effort to implement the standard (Prakash and Potoski 2006).
Stakeholder theory offers another explanation for the possible efficacy of
soft law instruments, by highlighting the way in which external stakeholders may
influence the firm’s internal dynamic. Gunningham et al argue in this contex t that
firms operate under "multifaceted 'license to operate'", reflecting the multiple
claims (economic, social and legal) they have to deal with (Gunningham, Kagan,
and Thornton 2004: 329). The adoption and implementation of soft law
obligations constitutes a rational response (economic wise) to these pressures
(Gunningham, Kagan, and Thornton 2004: 326-328; Donaldson and Preston 1995:
75).33
In contrast to the foregoing models the institutionalist and pluralistic-self
schools take a more nuanced approach to the question of the potential effect of
soft law instruments, postulating further paths through which they can influence
32 From this perspective, altruistic CSR is no different from the ‘greed capitalism’ which characterized
the 2009 financial crisis; the solutions are also similar: the adoption of organizational or incentive-
based mechanisms, ensuring that the incentives of the firm’s managers and shareholders are aligned
(Bebchuk and Spamann 2009; Stiglitz 2009).33
Stakeholder theory has also a normative facet, which argues – contra to the agency-cost model - thatmanagers ought to pursue the interests of multiple stakeholders – not just those of the shareholders
The polyphonic model provides a more open-ended framework for thinking
about the reasons causing firms to adopt voluntary schemes and the impact of such
schemes on firms’ behaviour and internal structure. In particular, the model seeks to
unfold the institutional dynamic generated by the adoption of voluntary schemes. By
introducing new routines into the organization, standards such as ISO 14001, the
Equator Principles or the GRI Sustainability Reporting Guidelines can change the
firm's internal dynamic, moving it into a new equilibrium trajectory, which enmeshes
together environmental and economic goals, and reflects greater organizational
sensitivity to ecological concerns. The various routines underlying the ISO 14001
34 The model draws on Niklas Luhmann's communication-based theory of social systems (Luhmann
1995, 2000) and on Richard Nelson's concept of 'social technologies' (Nelson and Sampat 2001; Nelson1991). For further elaboration of this model, and application in the context of ISO 14001, see Perez,
EMS for example, ensure that environmental concerns will receive a stronger
presence in the firm's decision-making process, allowing for the discursive expression
of motivations and ideas that may have been suppressed under the previous regime
(Perez, Amichai-Hamburger, and Shterental 2009). New routines for selecting,
ordering and processing information change the organization's cognitive horizon,
enabling the generation of environmentally-related data which would not have been
available to the organization beforehand.
Another important process highlighted by the polyphonic model is the
potential virtuous cycle that the adoption of voluntary schemes such as ISO
14001 can generate between the new organizational reality and the motivations
and beliefs of the employees.35
There is in this context a potential amplifying
feedback between the organizational and individual levels, in which the
transformation of the institutional culture facilitates changes at the psychic level
(e.g., in terms of environmental commitment and loyalty to the organization),
which in turn support the institutional changes instigated by the voluntary
standard (e.g., by increasing the employees' willingness to invoke the new
conceptual apparatus introduced by the standard and to implement its routines) .
This virtuous cycle between the organizational and individual levels can
unleash economic resources which were not available in the previous organizational
setting, both by affecting the employees' internally-driven willingness to engage in
pro-environmental behaviors and by increasing employees' commitment to the
organization.36
These two processes explain the capacity of voluntary green standards
to effectuate enduring changes within firms and also provide additional explanation
35 This idea is mentioned by other CSR scholars (Reinhardt, Stavins, and Vietor 2008: 226; Portney
2008: 264, 266). However, these authors do not offer a detailed socio-psychological model that canexplain the mechanics of this virtuous cycle.36 For empirical analysis supporting this claim see Perez, Amichai-Hamburger and Shterental (2009).
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