CAM BSM M3U1 Notes

MODULE 3 UNIT 1
Policy and regulation as a lever for

sustainable change
© 2022 University of Cambridge

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Table of contents
1. Introducing policy and regulation 3
1.1 What is policy and regulation? 3
2. The role of government 4
2.1 Overlapping governance 6
2.2 International governance 6
2.3 Systemic approaches 7
3. Policy approaches and instruments 8
3.1 Market-based instruments (MBIs) 9
3.1.1 Taxes 11
3.1.2 Markets or trading schemes 11
3.1.3 Incentives and public investment 13
3.2 Command-and-control (CAC) regulation 13
3.3 Other policy approaches 15
3.3.1 Standards and voluntary agreements 15
3.3.2 Behavioural insights: Nudge theory 16
4. Influencing the policy process 17
4.1 Business influencing policy 17
4.2 Climate activism 18
4.3 The role of the judiciary 19
5. Conclusion 20
6. Bibliography 20

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Learning outcomes:
LO1: Identify the range of policies and frameworks that are applied to achieve a range
of sustainability goals.
LO2: Discuss the degree to which current policy addresses sustainability challenges
facing society.
1. Introducing policy and regulation

What role does governance, policy and regulation play in driving transformative change
and building a sustainable future? Can businesses influence the policies and regulations
that ultimately shape their markets and operations? These are some of the questions we
will explore in this module, with a particular focus on how public policy and regulation can
act as a lever for change.
While political and legal systems around the world vary greatly, at the core of all policy and
regulation is an intention to drive behavioural change. In this set of notes, we consider a
range of different policy instruments that can be used to influence behaviour and business
practices in the context of sustainability. We also briefly explore the role of governmental
actors in local, national and international contexts, and how actors in different political,
economic and social spheres can mobilise collective action to shape public policy and
regulation.
Many of the examples you will see in this set of notes relate to environmental or climate-
related policy interventions. However, it is important to note that policy and regulation are
important drivers of change in all sustainability areas; they can be designed to create an
enabling environment in which business and society are encouraged to reduce pollution,
limit biodiversity loss, address social inequalities, transform the economy and facilitate the
transition to a net zero future.
1.1 What is policy and regulation?

Policies are collections of ideas or principles that guide decision-making and represent
plans of action for specific institutions. They reflect values and beliefs, and can be either
public (e.g. governmental or institutional) or private (e.g. applied within an organisation).
Laws are mandatory rules that outline how people and businesses need to act and operate
in specific contexts, and what the consequences are if the law is not followed. Broadly
speaking, law consists of statutory law (legislation, regulation and by-law) and case law.
While regulations are created and implemented by governmental institutions, case law is
derived from the decisions of courts and other relevant tribunals; it plays an increasingly
important role in the context of enforcing obligations to limit climate change.
Policies and regulations can take many different forms. They are important drivers of
sustainable business models and behaviours in that:

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● They influence attitudes and drive behavioural change: A regulation intended
to mitigate climate change might focus on correcting market failures by pricing the
cost of externalities (e.g. air pollution) into the cost of the product; for example,
through the introduction of a carbon tax (Helbling, 2010). This increased cost may
influence consumer choice and behaviour.
● They have a positive or negative impact on sustainability efforts: Effective

policy and regulation help to create an enabling environment for sustainable
business practices and provide certainty for business leaders in a fast-changing
economy. To achieve the desired impact, policies and regulations must be based
on the best available data and be consistently implemented and enforced.
Optional resource:
Watch the following video to learn more about what policy is, and the role policies play
in everyday life.
2. The role of government

One of the main roles of government is to mediate between the numerous interests in
society to reach a consensus about the common good (Blowfield & Murray, 2019).
Governments can perform this duty by generating and facilitating transparent and
constructive debate, and by creating and implementing policy and regulatory measures
that express its will (acting on behalf of the society it represents). These regulatory and
policy instruments shape the rules under which businesses operate.
Although governments do not control all the ways new policy initiatives develop, they are
key to both the development and implementation of policy (Besley, 2005). They play an
important supporting role to various institutions, civil society and the private sector.
Through collaborative decisions and actions, government policy can be implemented to
develop and sustain an enabling environment of certainty, conducive to scaling the
behaviour change required to achieve a net zero economy (Raworth, 2018).
While there is generally widespread agreement on the role policy and regulation can play
in driving sustainable change, there is an enormous disparity around the world in how
effectively different governments are perceived to maintain the rule of law for all. This has
important implications for the degree to which policy instruments can successfully translate
intent into meaningful action. In the words of the World Justice Project (2020):
“Effective rule of law reduces corruption, combats poverty and disease, and
protects people from injustices large and small. […] Despite this, all over the world,
people are denied basic rights to safety, freedom, and dignity because the rule of
law is weak or non-existent.”
Communities with a strong rule of law hold organisations, individuals and governmental
bodies accountable under regulations that are applied consistently and fairly to all, thus
creating a stable environment for businesses to operate in. On the other hand, in

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communities where regulations are commonly disregarded or unequally implemented,
businesses may hesitate to invest and policy interventions may fail to achieve sustainable
outcomes (World Justice Project, 2020).
Moreover, policymakers commonly face numerous other challenges when designing and
implementing policies for sustainable outcomes, including:
● Lack of coordination and cooperation: Different branches of government

(national, regional and local) tend to work in silos. Failure to coordinate to achieve
a common goal can leave policies confused and conflicted, and therefore
ineffective in achieving the intended outcome.
● Insufficient or incomplete information: Developing and maintaining a defined

knowledge base and data collection system is essential for ensuring informed
decision-making and the development and implementation of policy. Access to
accurate, relevant, current and complete information is fundamental to good
governance.
● Short-termism: Designing and implementing policies whose benefits are long-

term can be challenging when the period for which politicians hold office is
generally short-term. Short-term political cycles amplify a focus on short-term
issues where quick progress can be shown to the electorate.
● Competing priorities: The task of simultaneously boosting economic growth,

reducing inequality, creating jobs, developing new industries, and providing secure
and affordable energy access may involve difficult decisions and trade-offs for
policy-makers at all levels of governance. In an environment where multiple and
potentially conflicting policy objectives and vested interests co-exist, policymakers
require collaboration, compromise and unwavering commitment.
● The tragedy of the commons: When individual use of a common resource results
in overconsumption and depletion of that shared resource, it is often referred to as
the tragedy of the commons. It suggests that the short-term interest of one
individual, organisation, or country can be in direct conflict with the long-term
interests of a larger group or society as a whole. If regulatory approaches are used
to achieve responsible management of shared resource systems, policymakers
need to align the interests of the individual and the collective to ensure sustainable
outcomes (Earth.org, 2021).
Example: Overfishing
A commonly quoted example of the tragedy of the commons relates to the over-
exploitation of fishing stocks off the coast of Newfoundland, Canada. In the 1960s, new
technology enabled individual fishermen to catch significantly larger amounts of cod
than they had over the previous centuries, and gradually this increase in demand
started to affect the breeding stock of the fish. By the 1990s, the depletion of the shared
resource led to the collapse of the fishing industry in this area (Earth.org, 2021).

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To ensure the sustainability of fish stocks, many countries and regions have imposed
fishing quotas, which are in the long-term interest of the commercial fishing industry as
a whole.
2.1 Overlapping governance

National governments and institutions are, of course, not the only player in the broader
governance landscape.
Policy-making can be top-down, i.e. initiated by international policymakers and policy-

making institutions, such as the United Nations and their subsidiary bodies, the World
Trade Organization and other treaty-based organisations (where they have formal power).
It can also be bottom-up where responsibility is delegated (most often within certain
parameters and constraints) to subnational institutions like regional, local, or city authorities
and municipalities.
Indeed, local governments have often led the way in acting on international agreements,
and in the field of climate policy and action, cities, regions and municipalities are emerging
as increasingly important players (Blowfield and Murray, 2019). In the US in particular,
state and city governments have pursued innovative policy action despite a lack of federal
progress. An example of this is the agreement the state of California reached with car
manufacturers to further reduce emission despite national regulation becoming less
stringent (California, 2019).
2.2 International governance

Policy initiatives on local and national levels have an important part to play in driving
sustainable change; however, in the face of global challenges such as climate change and
biodiversity loss, the significance of international and regional collaboration cannot be
overstated. The actions of one country (or one corporation) may have consequences –
both positive and negative – across multiple geographic, economic or social dimensions.
So, to be truly effective, governments, institutions and corporations need to work together.
Over the last five decades, the international political community has endeavoured to reach
agreement on a wide array of sustainability issues. The 17 UN Sustainable Development
Goals (introduced in Module 1) provide the most comprehensive international
sustainability framework to date.
In the realm of international environmental agreements, a central role has been played by
the United Nations Framework Convention on Climate Change (UNFCCC). This
framework was created at the Earth Summit in Rio in 1992 with the aim of facilitating
international cooperation to combat climate change and manage its inevitable impacts. To
date, 197 countries have joined the UNFCCC, and the climate change conferences,
organised every year within this framework, are now among the largest and most complex
meetings on the international agenda, bringing together representatives of governments,
businesses and civil society (UN Climate Change, n.d.). These meetings, called
Conference of the Parties (COP), have resulted in key international agreements, including:

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● The Kyoto Protocol (1997) was the world's first legally binding greenhouse gas
(GHG) emissions reduction treaty.
● The Marrakesh Accords (2001) formalised the rules and guidance on international
emissions trading.
● The Cancun Agreements (2010) established a Green Climate Fund which

formalised a commitment from developed countries to provide US$100 billion per
year by 2020 to support mitigation actions in developing countries.
● The Paris Agreement (2015) represents the most ambitious, legally binding
international treaty on climate change to date, committing all 196 signatories to
taking action in order to limit global warming to 2ºC above pre-industrial levels.
(UN Climate Change, n.d.)
The Paris Agreement was lauded as a historical landmark in international climate

governance, and subsequent discussions have focused on working out more specific
guidelines and rules for implementing the ambitions described in the agreement.
Nevertheless, global GHG emissions have continued to surge at an ever-increasing pace.
We will learn more about the Paris Agreement, what it means for business, and what
factors might be hindering or helping meaningful climate action, in Unit 2 of this module.
Optional resource:
The field of international climate change agreements is a rapidly changing policy area.
To learn more about the latest developments happening under the umbrella of the
UNFCCC, explore the United Nations Climate Change website.
2.3 Systemic approaches

The interconnected nature of the social, environmental and economic aspects of
sustainability has tangible and complex implications for decisionmakers, and for those who
ensure that their decisions are enforced.
For example, a policy initiative designed to restore biodiversity might adversely impact local
communities and economies, if poorly designed. A taxation scheme intended to reduce
carbon emissions might benefit some groups in society while creating a disadvantage for
others. Building awareness of these unintended consequences and designing resilient
policy frameworks are important elements of ensuring successful policy implementation
and achieving the desired behavioural change.
Overcoming the complex challenges mentioned in the previous section requires a shift
from siloed thinking to adopting an integrated systems approach. This applies to
policymakers at all levels of government, as well as decisionmakers in the private sector;

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systems thinking is a critical skill for successfully designing and implementing policy,
regulations or governance structures intended to drive sustainable outcomes.
A systems approach entails considering all three sustainability dimensions (economic,

social and environmental), understanding the connections and dependencies between
these different parts of the system, and then identifying synergies and potential trade-offs
between them (UNDESA, 2014).
In practice, policymakers and business leaders who adopt a systems approach also need
to:
● Identify all relevant stakeholders, understand what motivates them, and explore
how they might be impacted by a policy or regulation.
● Collaborate across traditional boundaries and engage with a diversity of

perspectives; explore how a diverse range of stakeholders can coordinate and
collaborate to successfully implement policy change.
● Draw on relevant data, including the best scientific evidence available, when
making decisions.
● Adapt solutions to fit the specific context and desired outcomes of the proposed
policy or regulation, rather than attempt to duplicate generic approaches.
(Bowman et al, 2015; UNDESA, 2014)
3. Policy approaches and instruments

The approaches and instruments used in sustainability policy can be categorised into
mandatory and voluntary measures:
● Mandatory measures (i.e. law) are principally made up of market-based

instruments (MBIs) and non-market based, or command-and-control instruments
(CACs). Their purpose is to compel certain types of behaviour, thereby limiting the
discretion of individuals or organisations. They may include punitive measures for
non-compliance (e.g. fines or sanctions).
● Voluntary measures, on the other hand, seek to encourage a change in behaviour

and accountability through transparency and the pressure of the market.
All instrument types have their own characteristics, advantages and drawbacks. Their
effectiveness is dependent on whether the correct approach or combination of approaches
has been selected for the circumstances, and on the efficacy of their implementation and
enforcement. In practice, policy instruments are complex, and it is not unusual for one kind
of policy instrument to also reflect elements of another kind.
Given the increasingly complex and inter-related sustainability challenges facing society,
governments may need to utilise several different policy instruments in order to limit

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negative consequences, or competing priorities, and to manage the trade-offs resulting
from implementation. Combining several instruments or approaches can enable a system-
wide implementation; however, it is important to align these approaches to prevent
inconsistency, mixed-messages, duplication and excessive bureaucracy.
While policies are often evaluated based on cost, a broader evaluation framework is
important – particularly when implementing a systems approach to deal with the complexity
of climate change. This should include environmental effectiveness, cost effectiveness, as
well as other impacts on society; for example, its impact on income distribution or
employment (Climate Policy Hub, n.d).
3.1 Market-based instruments (MBIs)

Market-based instruments (MBIs) are indirect regulatory instruments that are designed to
address market failures by changing economic incentive structures (Whitten, Van Beuren
& Collins, 2003). In the context of climate change, for example, the purpose of MBIs is to
add the social cost of GHG emissions to the price of generating a product or service, in
order to incentivise emitters to decarbonise their processes, and to encourage consumers
to buy less expensive, less carbon-intensive products (Roser, 2021).
Key advantages of MBIs include:
● Flexibility: MBIs allow companies to make adjustments to their activities based on

their unique needs and context. This means that smaller businesses are not
burdened by the large costs of implementing specific technologies.
● Innovation and cost savings: Incentivising businesses to find cost-effective

solutions to reduce their environmental impact is likely to generate greater
innovation to achieve sustainability targets than would be the case if a technology
or limit were prescribed.
● Potential for greater sustainability impact: MBIs provide a greater incentive for
businesses to continue reducing their environmental footprint because the more
they do so, the greater the benefit to the business.
There are three broad types of MBIs. Table 1 provides three examples of MBIs (taxes,
trading schemes and incentives):
Table 1: Types of MBIs within the three broad categories. (Sources: Climate Policy Hub,
n.d.; Rademaekers et.al., 2011; Whitten et.al, 2003)
Instrument name Purpose Examples
Price-based instruments Instruments that encourage ● Water consumption

behavioural changes by charges and taxes
altering the prices of goods
and services. ● Carbon taxes

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● Subsidies (e.g. for
installing
environmentally-friendly
machinery or power
sources)
● Tax incentives (e.g. for

businesses to invest in
energy efficiency
measures that reduce
their overall energy
consumption)
● Pesticide use tax
● Aggregates tax (e.g.

stone, rock and gravel)
● Tree protection charges
● Plastic bag tax
● Natural resource usage

tax
Rights-based instruments Instruments that control the ● Tradeable permits

quantity of a good, service or
environmental resource ● Offset schemes
being consumed to bring
consumption within a ● Quotas
socially-desired level; i.e.
● Removal of perverse
stipulating the rights that the
incentives
user has to the resource
Market-friction instruments Policy mechanisms used to ● Product labelling (e.g.

improve the functioning of eco-labelling products
private markets by has been found to lead
stimulating the market to to increased demand for
produce a desired outcome – environmentally-friendly
most often by improving products and
information flows. transparent labelling)
● Information disclosure
● Education programmes

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3.1.1 Taxes
The purpose of environmental taxes is to drive behaviour change by making
environmentally damaging behaviours more expensive. For example, the UK landfill tax
was designed to make waste treatment options (other than disposal) more financially
attractive. Its impact has been to encourage businesses to strive for zero waste targets to
landfill, thereby prompting not only increased re-use and recycling, but increasing the
efficiency of production systems and the entire supply chain to reduce the production of
waste (Shaw, 2010).
Pricing negative externalities (i.e. external costs or consequences associated with an

economic activity that affect an unrelated third party) through taxation seeks to ensure that
market prices reflect the social or environmental costs associated with the production or
consumption of goods and services. It also aims to incentivise the development of more
sustainable alternatives.
In the context of climate change, carbon taxes were first introduced in the 1990s. By 2020,
30 jurisdictions around the world had implemented some form of carbon tax (Rafaty et al,
2020). However, the acceptance of green taxes depends greatly on their perceived
legitimacy and efficacy, and some observers have expressed concern about their
regressive distributional impacts or potentially negative impact on competitiveness. Others
have questioned their effectiveness as a lever for change, stating that this is dependent on
a meaningful price being set on GHG emissions. These delicate dynamics have been
playing out across a range of countries including Australia, the UK, France and South Africa
(Cage & Tsolova, 2013; Davies, 2010).
Nevertheless, many economists now agree that taxes are an effective way to curb carbon
emissions (CL Council, n.d.). Unlike direct regulation, taxes enable governments to
generate revenue (using existing revenue collection systems), which can then be
channelled into mitigating any distributional impacts. For example, by providing financial
support to lower-income households or smaller businesses most severely affected by
higher energy prices (Roser, 2021). Revenue can also be used to finance innovation in net
zero technologies, or to advance other sustainable development goals.
For businesses, one of the benefits of carbon taxes is the stability and clarity that comes
from having transparent rules and more complete market information, thus helping
companies plan for the future (Klenert & Mattauch, 2019).
3.1.2 Markets or trading schemes

Many countries and regions around the world have developed carbon markets and
emissions trading systems (ETS). The aim of these policy instruments is to limit carbon
dioxide emissions by placing a price on them through a system of emissions allowances.
In an ideal world, such carbon markets are expected to stimulate investment, improve
energy efficiency and reduce carbon emissions.
In 2021, there were 64 carbon pricing instruments (including both taxes and ETSs) in
operation around the world. Countries and regions where ETSs have been implemented
include China, the EU, New Zealand, South Korea and parts of the US, Canada and Japan.

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They are also being piloted or considered in Indonesia, Mexico, Turkey and some South
American countries. Despite this recent upsurge, however, to date only one fifth of global
GHG emissions are covered by operational carbon pricing instruments (World Bank,
2021).
Example: The EU Emission Trading System (EU ETS)
When the EU introduced its ETS in 2005, it was the world’s first international emissions
trading system. Since then, the scheme has undergone several revisions and it is now
in its fourth phase.
The EU ETS operates as a cap-and-trade system, setting an annual maximum level

of emissions (a cap) and facilitating the trade of emissions allowances among
companies covered by the scheme. Companies need an allowance for each tonne of
CO2 (or CO2 equivalent, tCO2e) they emit, and they can obtain these either by an initial
allocation or auction, or through trading. The cap decreases every year but the price of
allowances fluctuates, depending on demand.
The revisions to the EU ETS have included:

• Switching from nationally determined caps to a single EU-wide cap on emissions;
• Adding more sectors and GHG emissions to the scheme;
• Reducing the cap at a higher rate every year;
• Implementing a Market Stability Reserve (MSR) mechanism to minimise the
surplus of allowances by transferring unallocated allowances to the reserve instead
of auctioning them off.
(World Bank, 2021; European Commission, 2021)
These revisions are designed to improve the resilience of the ETS to future shocks.
Getting the carbon price right can be a thorny task for policymakers. The price cannot be
so high that business and the public will reject it, and not too low compared to the social
cost of carbon, defined as the estimated monetary value of the future social and
environmental damage associated with carbon emissions (Bayer & Aklin, 2020). A key
challenge for governments is therefore to reach consensus on what value to put on carbon
emissions.
Globally, the price of carbon varies greatly. In 2021, it ranged from less than one US dollar
per tonne in Poland and Ukraine, to US$137 in Sweden. In the EU, the price increased
from under $5 in 2016 to almost $50 per tonne in 2021 (The World Bank Group, 2021).
Despite this recent increase, most countries who have introduced carbon pricing are still
far below the US$40-80 price range which the world’s leading economists have calculated
will be required for meeting even the 2°C goal of the Paris Agreement. Some observers
warn that even that range could be a major underestimate of the real social cost carbon
(Lensch, 2021).

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Carbon pricing policies on their own, however, are not enough to achieve the emission
reductions needed to meet the commitments made in the Paris Agreement – they need to
be complemented with other policy instruments and regulatory measures.
Optional resource:
Examine the Carbon Pricing Dashboard tool from the World Bank which gives statistics
on both regional and national carbon pricing initiatives.
3.1.3 Incentives and public investment

Incentives or subsidies are another example of trying to redress market failures, through
making “good” behaviours cheaper rather than making “bad” behaviours more expensive.
This can be a targeted and less threatening approach to incentivise certain behaviour.
For instance, one popular model for encouraging small-scale renewable energy installation
is the creation of a feed-in tariff, which pays the owner of an installation for any electricity
fed back into the national grid. Homeowners and organisations who install solar panels,
wind turbines or hydroelectric generators can sell back any excess (unused) electricity to
the government, with the energy companies acting as intermediaries to make these
payments to their customers.
Governments often focus such support in areas where they hope it will act as a catalyst for
innovation. Direct public investment can take the form of supporting early research and
development (R&D) or helping to bring new products to market. This can help overcome
the barrier of a lack of private financial capital directed towards innovative sustainable
activities and give private investors the assurance of lower risk and long-term demand. The
buying power of governmental institutions can also have a significant influence on global
supply chains. According to 2017 figures, public procurement in Europe represented more
than €2 trillion a year and had a major impact on the EU structural and investment funds –
almost half of these funds were spent via public contracts (European Commission, 2017).
It is important to recognise that governments can also delay or disrupt climate action by
subsidising fossil fuels and enabling high-emitting sectors. A working paper published by
the International Monetary Fund (IMF) estimates that in 2020 the fossil fuel industry
received US$5.9 trillion (6.8 per cent of global GDP) in explicit and implicit subsidies. These
subsidies may consist of tax breaks, pricing strategies (not pricing negative externalities)
or other market-regulating interventions (Parry et al., 2021).
3.2 Command-and-control (CAC) regulation

In contrast to MBIs, command-and-control measures (CACs) define specific parameters
for the decision-making of individuals, companies and institutions, thereby compelling
certain types of behaviour. They can take various forms, such as imposing regulations,
targets, sanctions or bans, or introducing labelling mandates, mandatory standards, or
reporting requirements.

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Example: Environmental standards
In environmental and climate policy, regulations and standards establish a rule that
must be carried out by emitters who are penalised if they do not observe this (IPCC,
n.d.) The main categories of standards include:
● Emission standards: Maximum emissions allowed per unit of output.
● Technology standards: Specific pollution or emissions abatement technologies or

production methods (IPCC, 2007).
● Product standards: Defining the characteristics of the products (Gabel, 2000).
In theory, the advantage of CAC mechanisms is that they stipulate clear outcomes (if well
considered and drafted), and that monitoring compliance can be relatively simple. CACs
also increase the chances of businesses adhering to the requirements because of the
imposition of penalties for non-compliance (Anderson, 2015). Conversely, they allow
little room for flexibility and creativity given the requirement to meet set standards. While
some argue that this approach encourages pure compliance (i.e. simply meeting the
minimum regulatory standards), others argue that mandatory regulation can stimulate
innovation and create incentives to lead the market.
At the core of climate-related CAC regulation lies climate legislation, designed to embed
net zero emissions targets and policies in law. Countries such as the UK, France, Denmark,
New Zealand, Sweden and Hungary were the first to enact legislation setting out overall
climate-related goals and wider policy parameters, and many others have since followed
or begun preparations for doing the same (Darby & Gerretsen, 2019). In June 2021, the
European Parliament approved one of the most ambitious climate laws to date, by
incorporating the target to reach net zero emissions by 2050 into law, and committing the
EU to reducing emissions by 55% by 2030 (Abnett, 2021).
Optional resource:
The Net Zero Tracker analyses the next zero targets announced by countries, regions,
cities and companies, and provides information on which ones have enacted climate
legislation or other regulations to facilitate reaching these targets.
Other types of CSC regulation also play an important role in many sectors. In the EU energy
sector, renewable energy installations are required to meet legally binding emissions
targets and the renewal of power plants is largely driven by strict emissions and pollution
standards. This has effectively resulted in the closure of older coal-fired power stations
(Henderson et al, 2020). In the automobile industry, major innovation has been prompted
by the tightening of emissions standards for most vehicle types – including cars, lorries,
trains, tractors and similar machinery and barges (Rutz and Janssen, 2007).
Mandatory labelling can provide incentives for industries to develop and invest in energy
efficient products; however, some are calling for further regulation to oblige producers to
build energy efficiency requirements into products from the design stage. In Japan, the Top

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Runner programme provides for annual testing of the energy efficiency of electrical
products, with the most efficient product being set as the minimum benchmark that others
must reach.
A few countries have recently introduced bans on fossil fuel exploration and extraction.
In 2018, Belize passed a law to protect its coral reefs and endangered marine species from
the dangers of oil exploration and extraction. In 2021, Spain introduced a comprehensive
climate law which immediately prohibited all new exploration for fossil fuels and committed
the country to eliminating vehicles powered by fossil fuels by 2040 (Frost, 2021).
No matter how well CACs are put together, their overall effectiveness relies on their
effective implementation and enforcement in practice. A lack of resources or poor rule of
law can create a culture of non-compliance and undermine the purpose (and therefore
outcomes) of CACs.
3.3 Other policy approaches

Formal policy instruments like MBIs and CACs play a central role in addressing
sustainability issues and influencing behaviour change, but other more informal
approaches are also gaining attention in this area. These include sector-specific standards
and agreements, individual organisational policies and supportive government policy in the
form of direct public investment. Approaches drawing on insights from behavioural science
can also be used in both the public and private sector, to influence behaviour and support
better decision-making.
3.3.1 Standards and voluntary agreements

In areas where national or international policy has historically been seen as weak, a variety
of industry-led standards and voluntary agreements have often emerged, such as
collaborative benchmarking initiatives, internal company standards, co-regulation or
industry-led frameworks. The purpose and reach of these approaches vary greatly.
Examples of voluntary sustainability standards include the Fairtrade standards, which

were developed to support agricultural workers and small-scale organisations in
developing countries by introducing requirements for fair pricing structures,
environmentally responsible agricultural practices, and safe and transparent employment
practices. There are also a number of ISO standards around environmental management
(ISO 14000), social responsibility (ISO 26000) and numerous other sustainability-related
areas, developed and managed by the International Organization for Standardization.
In recent years, environmental, social and corporate governance (ESG) criteria have
gained prominence in the financial markets – and the COVID-19 crisis has further
heightened this demand. In 2021, the Investment Association reported that UK savers had
put £7.1 billion into responsible investment funds in the nine months to September 2020 –
up from £1.9 billion during the equivalent period of 2019 (The Investment Association,
2021). However, there is no single, consistent definition or measurement of ESG criteria,
leading to inconsistent data and a lack of clarity for investors and businesses alike.

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Optional resources:
● The Task Force on Climate-related Financial Disclosures (TCFD) is a voluntary

framework that encourages accountability through transparency and the pressure
of the market. Although it is a non-mandatory mechanism, the fact that it has the
backing of many key players in the investment industry incentivises organisations
to sign up and take part.
● The Effects of Mandatory ESG Disclosure around the World.
● The International Integrated Reporting Framework seeks to embed integrated

(systems) thinking within organisations.
The disadvantage of voluntary standards and agreements is that they can only be effective
in driving change if participants fully embrace the spirit of these initiatives and show that
they are making a positive impact, rather than simply conducting a compliance exercise.
For this to be possible, it is vital that participants are held accountable for their
commitments. Moreover, a wide range of poorly aligned voluntary initiatives that exist can
cause confusion and lead to reporting fatigue. It is therefore important that organisations
are strategic in the commitments they make regarding reporting and certification standards,
as participation often involves significant cost and time implications.
While mandatory legislation is commonly regarded as more effective overall,

voluntary agreements are often a precursor to formal regulation, providing important
insights and experience. Voluntary initiatives and agreements are explored in more detail
in Module 7.
3.3.2 Behavioural insights: Nudge theory

In public policy, regulatory action is often based on the belief that if people are provided
with the “carrots” and “sticks” (incentives and sanctions) alongside accurate information,
they will act as rational individuals, weigh up the costs and benefits of their actions and
respond accordingly. However, insights from behavioural science suggest that our choices
are, in reality, likely to be influenced by small and seemingly insignificant details, or nudges,
that attract our attention in any given situation. These details can be features in our physical
environment, social signals, or cultural and institutional contexts that shape and constrain
our behaviour, and result in us making choices that are not necessarily in our best interests
(Thaler and Sunstein, 2008).
Nudge theory suggests that these insights into human behaviour can, and should, be used
to guide people’s behaviour to make better decisions. A nudge in this context is defined
as an intervention “that alters people’s behaviour in a predictable way without forbidding
any options or significantly changing their economic incentives” (Thaler and Sunstein,
2008). Importantly, for both the public and private sector, research shows that nudges can
successfully be used in policy design to produce better outcomes, from encouraging higher
pension savings to reducing air pollution.
Explore further:

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Page 16 of 24
In the following video David Halpern explains the psychology behind human actions,
and how it is possible to “nudge” people to make better decisions by adopting good
design principles for change initiatives.
Optional resource:
Read the following article to find out how your country is doing in terms of achieving
emissions reductions.
4. Influencing the policy process

Government policies and regulations are influenced by a variety of different drivers,
including national interests, public opinion, industry interests, international commitments
and the personal and political agendas of individual policymakers. Because of this, the
policy process involves a complex interplay of knowledge and power.
4.1 Business influencing policy

Government policy and regulations form the legal framework within which business must
operate. As such, business has a keen interest in shaping the policy and regulations that
will impact it.
Business needs policy to be coherent and certain so that they have clarity to inform their
decision-making on how to tackle issues such as climate change, and confidence to scale
up investments in net zero technologies or other relevant opportunities. When investors
believe governments will respond to climate change, they will have the certainty required
to invest in net zero opportunities and make investment decisions that support a well-
managed transition away from fossil fuels.
Businesses can influence policy in various ways, such as collaborating and partnering
with other businesses and government to shape the policy agenda, and indeed to
implement it. Examples of collaborative initiatives include the work of the UN Global
Compact, the Corporate Leaders Group and the Green Growth Partnership. We will look
more closely at this in Module 7.
Businesses can also seek to influence policymakers by setting ambitious, science-

based net zero targets and investing in net zero solutions. As businesses demonstrate
a commercial demand for these solutions, this sends a strong signal to governments that
encourage them to introduce supportive policies. As we have seen, governments can in
turn support stronger business action by changing market incentives, creating new markets
and giving companies greater clarity and confidence to invest at a greater scale. This
amplifying feedback mechanism is referred to as an ambition loop (The Ambition Loop,
n.d.).

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Page 17 of 24
Optional resource:
Read the following report, published by the World Resources Institute, to learn more
about the ambition loop and explore how private and public sector actors have
influenced each other to accelerate the transition to a net zero economy.
It stands to reason that any company can use its power and influence – through direct
lobbying and campaigning, involvement in industry associations, investment decisions, or
personal relationships – to drive or inhibit climate action and the push for a net zero
economy.
Business must be wary of using its influence for ill, for example by circumventing legitimate
tax obligations, or taking advantage of weak regulatory regimes in order to protect and
enhance commercial interests, often at the expense of environmental quality or human
wellbeing. In addition to the very real commercial and even existential risks this might
entail, there are also reputational risks to consider. As the public becomes less accepting
of businesses with unsustainable practises, it is harder and harder for those businesses to
get away with selling their goods and services to the public (Folk, 2018).
Misleading information on climate change is also of enormous concern and can take the
form of businesses greenwashing, fighting against increased accountability or even by
funding campaigns to block climate change action or discredit climate science (UCSUSA,
n.d.).
In Module 7, we will learn about the real opportunity for forward-thinking businesses (and
their alliances) to commit to using their influence to create a policy environment that
enables the path to a sustainable future. To be credible, all corporate lobbying (direct or
indirect) must be aligned with the climate science (Ceres, 2020).
4.2 Climate activism

Individual activists, pressure groups and non-governmental organisations (NGOs) can also
be a driver for influencing public opinion and shaping policy and business practices.
As public awareness of the climate crisis has increased, established environmental

campaign groups such as Greenpeace, Friends of the Earth and 350.org have been joined
by a wide range of pressure groups in the cause to influence global leaders and raise
awareness among the general public. Global activist movements like Extinction Rebellion
and the youth movement Fridays for Future have engaged millions of people in widespread
climate protests and sustained civil disobedience campaigns; they have disrupted and
challenged businesses and governments with the aim of prompting climate action; and
they have gained the attention of world leaders and global media. Although youth
involvement in environmental campaigns is not a new phenomenon, the ability of today’s
climate activists to mobilise support and visibility on social media has enabled them to
coordinate protest actions and amplify their message to previously unseen levels (Marris,
2019).

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Page 18 of 24
A different kind of climate activism has also emerged in the shape of investors pressuring
companies to disclose climate-related risks and their responses to these risks. The rise of
shareholder activism is putting companies under increasing scrutiny regarding their ESG
practices (Bond, 2021). For example, in May 2021, a climate-activist hedge fund named
Engine No 1 voted in three new directors at ExxonMobil’s AGM in order to speed up the
company’s energy transition. In another example, a Dutch activist shareholder group tabled
a climate resolution at Chevron, which received a 61% backing from investors (Forsdick,
2021). These shareholder activists are also receiving the backing of larger investment
funds like Black Rock, with CEO Larry Fink directly linking climate change and a lack of
diversity to investment risks (Fink, 2020).
As such, companies need to be careful that they are able to provide shareholders’ returns
while complying with the ESG agenda. Companies need to show how they take the ESG
agenda into account when making business decisions, and how their business models are
addressing sustainability concerns (Bond, 2021).
In order for a company to get the balance between returns and ESG practises right, they
will need to focus on material issues, and how ESG criteria might directly affect their
businesses. In some instances, businesses and shareholders might disagree on what
material issues are (Bond, 2021). In an article for Raconteur, Fiona Bond, quotes Andrew
Probert (sustainability MD at Duff & Phelps) as saying, “for some investors, an issue is
material only if it has an impact on enterprise value creation. For others, an issue is material
if it has an impact on society and/or the environment. When assessing an organisation’s
ESG performance, you should consider metrics that are financially material, ‘decision-
useful’ and cost-effective,” (Bond, 2021).
4.3 The role of the judiciary

In May 2021, the District Court in The Hague delivered a landmark ruling in the climate
change case filed against Royal Dutch Shell. Judge Larisa Alwin ordered that Shell must
reduce its GHG emissions by 45% by 2030, relative to its 2019 emissions (Shell, 2021).
The court also ruled that Shell is responsible for its Scope 3 emissions (emissions
originating across the value chain, i.e. from suppliers and customers) and that its obligation
to uphold human rights included “protection against the impacts of dangerous climate
change” (Clifford Chance, 2021).
The case against Shell was filed by a group of NGOs and over 17,000 individual claimants.
Increasingly, civil society is are looking to the courts to clarify and enforce the obligations
on government and the private sector to take real action on climate change. Principally
these cases have involved action against:
● governments, to provide the certainty needed by the market through better

regulations or enforcement of those regulations
● the private sector, to enforce its obligations of corporate citizenship, which

increasingly includes a stronger expectation that good corporate governance and
the discharging of fiduciary duties requires taking climate-related risks and
opportunities into account.

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Page 19 of 24
There is also increasing advocacy work taking place outside the courts to place pressure
on business and investors to comply with their fiduciary duties.
5. Conclusion
When business and governance intersect, there is a profound opportunity for collaboration
and positive change. Policy decisions can affect business performance and profits,
especially when it relates to sustainability matters. For a long time, businesses have
operated without taking the environmental and social impact into account and, as such,
policy changes aimed at correcting the wrongs of the past may have short-term drawbacks
for some corporations. On the other hand, the cost of not acting is much higher, whether a
legal requirement exists to do so or not.
When business can embrace government as an ally in fighting climate change and social
injustice, instead of a threat to its success, there is the potential for creativity and
collaboration that can benefit both current and future generations.
Optional resources: The way forward?
The Net Zero Challenge: Fast Forward to Decisive Climate Action
How companies are preparing for a net zero future
Bring the problem forward: Larry Fink on climate risk
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MODULE 3 UNIT 1

Policy and regulation as a lever for

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1. Introducing policy and regulation

1.1 What is policy and regulation?

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● They have a positive or negative impact on sustainability efforts: Effective

2. The role of government

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● Lack of coordination and cooperation: Different branches of government

● Insufficient or incomplete information: Developing and maintaining a defined

● Short-termism: Designing and implementing policies whose benefits are long-

● Competing priorities: The task of simultaneously boosting economic growth,

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2.1 Overlapping governance

Policy-making can be top-down, i.e. initiated by international policymakers and policy-

2.2 International governance

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● The Cancun Agreements (2010) established a Green Climate Fund which

(UN Climate Change, n.d.)

The Paris Agreement was lauded as a historical landmark in international climate

2.3 Systemic approaches

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A systems approach entails considering all three sustainability dimensions (economic,

● Collaborate across traditional boundaries and engage with a diversity of

(Bowman et al, 2015; UNDESA, 2014)

3. Policy approaches and instruments

● Mandatory measures (i.e. law) are principally made up of market-based

● Voluntary measures, on the other hand, seek to encourage a change in behaviour

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3.1 Market-based instruments (MBIs)

Key advantages of MBIs include:

● Flexibility: MBIs allow companies to make adjustments to their activities based on

● Innovation and cost savings: Incentivising businesses to find cost-effective

Instrument name Purpose Examples

Price-based instruments Instruments that encourage ● Water consumption

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● Tax incentives (e.g. for

● Pesticide use tax

● Aggregates tax (e.g.

● Tree protection charges

● Plastic bag tax

● Natural resource usage

Rights-based instruments Instruments that control the ● Tradeable permits

Market-friction instruments Policy mechanisms used to ● Product labelling (e.g.

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Pricing negative externalities (i.e. external costs or consequences associated with an

3.1.2 Markets or trading schemes

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Example: The EU Emission Trading System (EU ETS)

The EU ETS operates as a cap-and-trade system, setting an annual maximum level

The revisions to the EU ETS have included: