A debate is currently being played out in Brussels that could, and should, change the way we think about the way firms are managed. It could also affect the future of the planet.
The debate is about a European policy to regulate the use of chemicals. Traditionally, free-market fundamentalists -- and most companies -- have taken a stand against regulation on the grounds that any limitation of a firm's freedom of action harms its profit-making ability and economic welfare. By the same token, regulation is assumed to hinder competitiveness and cost jobs.
But in the last 10 years a more radical view has begun to gain ground. This holds that environmental and social regulation doesn't have to damage corporate health. On the contrary, positive regulation can be framed to give companies incentives to generate innovative new products and processes, offsetting the costs of regulation and benefiting business and the environment alike.
Too good to be true? Yes, if you believe many trade associations and companies in the fundamentalist US mould. But while much of the corporate world remains stuck in the mentality that fights all regulation on principle, a radical wing of progressive non-governmental organizations, economists and even companies is coming to believe that creative, market-based regulation is one of government's most important instruments for improving its citizens' quality of life and raising the performance of the economy.
This is not just a bright green position. One leading advocate of positive regulation is Michael Porter, a pillar of business-school orthodoxy who last month delivered a high-profile report to the UK's Department of Trade & Industry on the British economy. In several influential papers Porter has argued effectively that lean is green: maximizing resource productivity -- making best use of inputs -- is in the interests of a firm's shareholders as well as the environment.
Another is Adair Turner, previously director general of the CBI and now vice chairman of Merrill Lynch. In his excellent book Just Capital, Turner makes a bold case for the combined use of regulation and taxes to promote environmental aims. He also demolishes the conventional arguments that they harm competitiveness and jobs. "There is no evidence that increasing environmental constraints have slowed overall growth rates, and no evidence that higher environmental standards in some developed countries have disadvantaged them economically versus others," Turner writes. On the contrary, he argues: "Economic theory tells us that the market is an immensely powerful mechanism for minimizing the long-term cost of environmental improvements -- and the empirical record confirms that this is so."
Take chemicals. Chemicals perfectly embody the tendency of economic growth to be both blessing and curse. On the upside, chemicals are a marvel. Over their 100-year history they have come to play a central part in modern life. They are the building blocks of many industrial processes and are ubiquitous in products from food to computers to cars. High-tech industries such as information technology depend on them.
Chemicals are the world's largest and Europe's third largest manufacturing industry, employing 1.7 million Europeans directly and indirectly supporting a further 3 million.
But there is an increasingly pervasive downside. Chemicals are potentially hazardous and produce nasty side-effects. Cancers, allergies and disruption of reproductive functions in many species are at the centre of current concerns. In many cases the damage only becomes apparent years after their introduction, as with DDT, CFCs, PCBs, benzene and dioxins.
Unlike pharmaceuticals, most chemicals have never been properly tested. Only since 1981 have substances new to Europe been required to undergo prior testing and risk-assessment. That leaves fully 99 percent of the 100,000 substances on the market untested or assessed.
"Ignorance outweighs knowledge at every point in the assessment process," says the UK's Royal Commission on Environmental Pollution.
"Only a small fraction of industrially produced chemicals have been studied in any depth, and even then, the estimates of environmental exposure and effect are subject to large uncertainty and indeterminacy," the commission says.
This is the situation that the new European chemicals policy is intended to address. But Reach (for registration, evaluation and authorization of chemicals) aims to do more than fill in the gaps in chemical knowledge and control the most dangerous substances. It is a test case of the role of regulation in delivering both economic welfare and a safe environment -- in a word, sustainability.
Thus, present policies implicitly encourage European firms to rely on older, less advanced chemicals that are exempt from the testing and assessment requirements that apply to new ones. Sure enough, the EU chemicals industry in recent years has lagged behind the US in bringing new products to market.
By putting both old and new substances on the same regulatory footing, Reach aims to prod firms to compete to bring out newer, safer chemicals that will attract less stringent controls.
Prioritizing chemicals of great-est concern should reinforce the effect. With world markets inexorably moving towards tighter regulation, a European industry stimulated by positive regulation to provide safe, innovative products would command a strong position rather than a weak one.
The European Commission argues that Reach would have many other business advantages: reducing the risk of liability, simplifying overlapping existing legislation, creating markets for new products and services and not least, improving the industry's dismal image, currently a major obstacle to recruitment of employees and customers.
Reach is by no means perfect. In its response to the EU late last month, the Department for Environment Food and Rural Affairs worries that in practice the procedures will be over-complex and slow.
Companies rarely talk about the market benefits of regulation, only the costs of compliance. They thus place themselves in the untenable position of denying the distinguishing power of markets and acting against their own long-term interests.
In another recent report, for the World Wildlife Fund, two British scientists predict that Reach will benefit European consumers to the tune of US$290 billion, even after business costs. The figures can be disputed, but not the fact that regulation toward sustainability will inevitably come.
Instead of struggling, companies should embrace it. Take the pills. It's for your own good.
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