Pareto Policy Solutions, LLC

advancing innovation through smart regulation

Pareto Policy Solutions, LLC is a policy analysis and advocacy firm committed to advancing sustainability through “smart” regulation: regulation that rewards, and does not penalize, superior performance.  Often, such actions leverage advances in science and technology and make the regulatory program itself more effective as well as more efficient.

Corporate Sustainability and Regulation

Sustainability continues to be a corporate trend.  Today, nearly every major corporation has a focus on sustainability, with an emphasis on improving environmental, health, and safety (EH&S) performance.  Many of these companies issue annual reports on their efforts, complete with goals and metrics. 

And yet, whenever I read company information on its sustainability progress, I am struck by the absence of discussion about the impact of regulation.  How do the most sustainable companies view regulation?

Through a reading of the broader literature on corporate sustainability and by observing the behavior of leading companies, a few best practices emerge.

Sustainability leaders realize that the only competitive advantage from regulation is a first-mover advantage.  Regulation represents a social norm, and to stay ahead of the game, a company must be aware of regulatory trends and plan and act accordingly, ahead of its competitors.  Here is how they do it.

Sustainability leaders avoid regulation by striving for excellence in EH&S performance.  For example, consumer product company SC Johnson undertook an extensive review of its chemical ingredients and reformulated its products to eliminate chemicals of regulatory interest (such as persistent, bioaccumulative pollutants), which has enabled it in many instances to avoid regulatory coverage entirely.

When subject to regulation, sustainability leaders comply and work to minimize compliance cost over time. For example, 3M began its Pollution Prevention Pays (3P) initiative in 1975. To date, this ongoing initiative has saved the company more than a billion dollars though redesign of its production processes to avoid the cost associated with mandatory pollution controls.

Sustainability leaders are solution providers.  They realize that the products and services they offer can address critical global challenges.  They profit through innovation that helps their customers minimize their own environmental footprint.  With this mindset, they see regulation as an opportunity.  For example, DuPont initially resisted international efforts to phase out the chlorofluorocarbons (CFCs) it manufactured until it realized it could make more money developing substitutes. 

Whether they are minimizing their own footprint or designing products to solve global challenges, sustainability leaders leverage the knowledge and actions of their employees, their supply chain, their trade associations, and even the local communities in which they operate. Walmart is famous for leveraging its supply chain.  It developed its own “sustainability index” to ensure that the products it sells become more sustainable over time.  For example, the company aims to reduce GHG emissions through its supply chain by 20 million metric tons (MMT), of which 7.5 MMT were reduced by the end of 2013.

When it comes to advocacy, sustainability leaders are not reflexively against regulation (unlike most in the business community), and often support it.  But there are some rules of thumb.  They favor changes to a regulatory program that make it both more effective and efficient.  Often, such changes involve advances in science and technology.  For example, EPA changed its hazardous waste regulations to allow electronic manifesting as a substitute for paper manifests.  This change, widely endorsed by the regulated community, lowers the cost of recordkeeping and makes it easier to track performance over time.

Sustainability leaders oppose regulation that is contrary to sustainability, and they offer alternatives.  Consider EPA’s proposal to phase down the use of hydrofluorocarbons (a greenhouse gas) as blowing agents in insulation materials.  The proposal would increase the cost of building insulation and thereby reduce sales of this energy-saving product.  Ironically, the purpose of the regulation is to reduce greenhouse gas emissions, but would, in this instance, do the opposite.  Building insulation manufacturers are offering alternatives that would accomplish the stated objective.

Regulation creates opportunities for (and sometimes barriers to) sustainability.  Corporate sustainability leaders recognize this, identify regulatory trends, and then act swiftly to garner a competitive advantage over their competitors.  While their competitors reflexively oppose regulation as matter of principle, sustainability leaders are more circumspect and strategic.

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