Seeking Greener Pastures

By Meghan Laska and Steve Guglielmi

Wharton’s Eric Orts: On the Cutting Edge of Environmental Management

Listening to Eric Orts speak passionately about ozone depletion, species extinction and climate change, it’s not surprising that the Wharton legal studies professor considers himself an environmentalist. But Orts is quick to banish the suggestion that he’s of the “us-versus-them, blame-corporate-America” school.

“Business corporations are not the enemy,” says Orts, who also heads Wharton’s Environmental Management Program. “It’s too easy to say that businesses are the bad guys. They are only responding to market demands. A key is for environmentalists and businesses to work with markets, rather than against them.”

Gauging the ever-changing public mood about environmental issues and the fast-paced changes in regulation that often result is perhaps the biggest challenge businesses face today, Orts says. And the best way to stay ahead of the curve of regulation and public opinion, he believes, is to take seriously their responsibility to the natural world.

“This doesn’t mean becoming a charitable organization,” he says, “but it does require making tough and informed choices about a firm’s environmental impact and policy.”

Corporations, environmentalists and the government working together is a key theme of Orts’ recent work. A 2001 book he co-edited, Environmental Contracts: Comparative Approaches to Regulatory Innovation in the United States and Europe, explores an alternative type of regulation that brings businesses, governments and nonprofit environmental organizations together to forge cooperative agreements. The approach is used widely and successfully in Europe, and Orts believes environmental contracts would ultimately be far more productive for U.S. businesses and the environment than “the usual lobbying and litigating over ‘command and control’ regulation.”

The “command and control” environmental regulatory system in the United States has had some measure of success, especially in light of disasters that have taken place in other parts of the world without more stringent environmental codes, such as Russia. The problems with the system are numerous, however, and loopholes are common. “The job of businesses is to maximize profit,” Orts says. “Government is only a constraint. If you could persuade the government to let you pollute and even destroy a river, you could do that under the old model. After all, you’re just doing your job.”

Within the past 20 years or so, however, the laws themselves have matured, and public opinion has evolved in a way that regards polluting practices as a liability for companies. Still, the question remains for businesses how it’s possible to remain innovative under increasingly restrictive codes.

“It used to be an either-or proposition for most businesses: either we’re environmentalist, or we’re going to make money,” says Orts. “Now, the objective is changing to ‘we’re going to be environmentalist and make money.’ ” He points to British Petroleum and Shell as two blue chip companies that are “long green” – businesses that are looking at the benefits of working with the environment so that resources will be available to them in the future.

Looking ahead is key to Orts; he does it constantly. “The science is clear that global climate change is happening. Who will be equipped to deal with that in 50 years?” he asks. He points out that along with climate change will come a new regulatory regime as well as a new public opinion consensus, and businesses will need to be prepared to deal with both. The point is not to wait for change, but to be proactive. And that, according to Orts, is precisely what environmental contracts encourage companies to be.

By bringing the government, nonprofit organizations and business to the negotiating table, environmental contracts make corporations active players in determining what the rules will be. Contracts could be structured in a way that address corporate stakeholder objectives as well as the concerns of local public interest groups and environmental conditions, and implementation could happen quickly compared to the snail-pace of current regulation formation. And, unlike the calcified nature of regulations, contracts can be renegotiated in light of new information, environmental changes, or technological advances.

An especially important advantage that environmental contracts provide is the element of predictability in the regulatory process. If all members agree to a contract, then it becomes binding on all sides, which enables corporations to engage in long-term planning without the threat of the government reneging. As Orts explains, a drawback in the current “command and control” model is the government’s ability to change the rules. For example, the government could give a company credits if it reduces toxic emissions by 30 percent. However, after the company implements this voluntary policy, the government could then decide to require all businesses to reduce emissions by 50 percent, giving no credit for the company’s previous 30-percent reduction. “This is a bind that a lot of businesses find themselves in. They look at voluntary programs and ask how much they will really get out of them if the government then changes its mind in the future,” says Orts.

He maintains that if the government and businesses agree to a certain regulation, the government shouldn’t be allowed to easily change the rules after that point. Orts adds that there may be constitutional support for this argument. In one recent case (United States v. Winstar), the U.S. Supreme Court held against the government’s argument that it always had a sovereign right to change the rules. If this rule applies in the environmental sector, he says, businesses may have a greater trust that the government would not change its mind after a regulatory agreement and become more willing to invest the time and effort needed to negotiate such contracts.

Admittedly, the underpinnings of this theory strike some as being anti-democratic: with contracts being formed between businesses and government, ordinary citizens would seem to be cut out of the loop. “It would be important for nonprofit, public interest groups to be involved in the process,” Orts says, citing examples such as McDonalds Corporation partnering with Environmental Defense to make their packaging more environmentally friendly, and Chevron teaming up with the World Wildlife Fund in conservation efforts in Papua New Guinea.

Meanwhile, environmentalists are concerned that environmental regulations would be relaxed with the advent of contracts, and others point out the phenomenon of “freeriders” – companies that avoid entering into contracts while enjoying the looser regulations. Orts points out that such issues can be dealt with through a basic set of regulations that all companies must abide by, as a means of legislative fallback. “Public opinion assumes that companies will examine their practices, but that isn’t always the case,” he notes.

Other skeptics of the idea – such as Cary Coglianese, who wrote one of the chapters in Orts’ book – believe that a reliance on “consensus” is too optimistic: with consensus, there is no accountable authority, and the emphasis shifts from public to private interest. “That’s true in some cases,” Orts says, but he balances that view with the numerous examples of progress that has been made in European countries, most notably in France, Germany, Belgium, and the Netherlands, where environmental groups – once skeptical – now admit that contracts have had a measurably positive effect on the environment.

“And what are the alternatives?” Orts asks, pointing to the mounting evidence that, under the current model of command and control, the environment will only deteriorate. “Historically, environmental opinion changes because of a cataclysm,” he says, citing the Exxon Valdez oil spill in 1989 as an example. “For global climate change, there won’t necessarily be a cataclysm, no sudden change – unless the Gulf Stream suddenly stops. We’ll more likely just begin to notice things like tropical diseases moving north and other slower occurrences.

“Right now we are living through the sixth greatest extinction of species in geological history,” he says. “It is hard to say that whether a species is wiped out or not isn’t important to think about when building a power plant, because we can’t just act for this current generation – we have to think about what our children’s and grandchildren’s lives will be like. Companies must think about global climate change. They can’t merely maximize shareholder value and let someone else worry about the temperature of the planet rising too much. If there is only a five percent chance that a very extreme circumstance will happen that will wipe out the human species within two generations, we have to ask whether it is alright to take that risk.”

When describing the situation as he sees it, Orts is not a doomsayer – he’s ultimately a pragmatist. “The fact is, with the environment, the stakes are high,” he says. “We need to make sure we don’t destroy the resources we rely on while we have a good time with economic growth.

“Fortunately, the next generation is more aware of these issues,” he continues, adding that student response to his course on environmental law and policy has been strong. Orts, who also teaches corporate governance, developed the course a few years ago at the suggestion of his department’s chair. He heads Wharton’s Environmental Management Program, which allows students to major or concentrate in environmental policy and management at the undergraduate or MBA level. The program is one of an increasing number of such programs in business schools nationwide, and Wharton was recently ranked by the World Resources Institute as one of the two top “cutting edge” business schools in both environmental and social/ethical areas. Orts is also helping a group of undergraduate students develop a proposal for an undergraduate concentration in “corporate citizenship” – an amalgam of corporate governance, environmental management, and business ethics.

Orts’ early interest in philosophy and political theory, both of which he studied at Oberlin College, has carried over to his current work on environmental policy in the context of social contract theory, which involves thinking about and debating environmental issues in an ethical way. His interest in studying corporations was heightened during his tenure as an associate attorney in New York after graduating from law school in 1988. He recalls working on the litigation team that successfully represented the pilots’ union during the United Airlines takeover battle. In the end, United Airlines became one of the first employee-owned large companies in the United States and Orts’ interest in the operations and governance of corporations grew. “It really gave me a practical sense of the many different interests that play a role in corporate governance,” says Orts, who gave up practicing law because “I always wanted to teach. I like the freedom to follow my own intellectual interests in my research without preordained positions given by the interests of a lawyer’s clients.

“My theme has been viewing the business corporation as a social institution that is as important – probably more important – than government in our society,” Orts continues. Yet, social scientists have largely ignored corporations in their research. “Our academic understanding of businesses has to be as broad as businesses really are.

“At Wharton, we take these institutions quite seriously because we are preparing people to work for them,” Orts says. “We should have a critical sense of whether institutions are developing according to the right incentives and how they are structured to answer to society because it is our civilization after all that we are creating.”

When not teaching at Wharton, Orts enjoys rowing on the Schuykill River at least three days a week, reading recreationally and spending as much time as he can with his wife, Janet, and four-year-old son, Emmett. He lectures, teaches and conducts research around the world, most recently in China, and has served as a visiting professor at the University of Leuven (where his co-editor, Kurt Deketalaere, teaches), University of Michigan Law School and UCLA School of Law. He’s also recently spoken about environmental management issues in Japan and Hungary, among other countries.

Orts points out that most of his academic colleagues with similar specializations are based in Europe. “There aren’t many other scholars in the United States who focus on the idea of using environmental contracts and information in different ways as approaches to regulation.”

But this is changing. “People are realizing that we can’t just sit back and say the government will handle it,” he says. “It’s a lot more complicated than that, and leading businesses today are seeing that environmental issues are just as important for their agenda and their future as financial performance.”

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