The role of self-regulation

Rory Sullivan, director of investor responsibility with Insight Investment, defines the place for self-regulation in the modern regulatory toolkit

The growing awareness of the limitations of traditional command and control approaches to implementing environmental policy - in particular, concerns about regulatory overload, economic inefficiency, the high implementation costs for companies and the stifling of innovation - have raised interest in alternative approaches to regulation. One of the potential alternatives to command and control regulation is self-regulation, where companies individually or collectively agree to take action to address specific environmental issues. This article looks at the experience to date with self-regulation and examines the potential for self-regulation to contribute to modern environmental regulation.

A number of common themes have been

raised in virtually every major evaluation of self-regulatory regimes. These are:
  • The specific targets that are set;
  • The capture, or potential capture, of environmental policy;
  • Free-riders;
  • Soft effects; and
  • Data quality.

The targets specified in self-regulatory regimes are commonly suspected of being less stringent than those that would have been established in traditional regulatory regimes. For example, an assessment of the US chemical industry's Responsible Care programme for the period 1990-1996 concluded that there was no evidence that membership of Responsible Care had positively influenced the rate of performance among the chemical industry (and, in fact, members seemed to be improving their performance more slowly than non members).

While there is evidence that voluntary approaches can be effective at meeting their defined goals, this may reflect the limitations in the targets set rather than a positive commitment from the participants to the goal of environmental performance improvement.

A primary objective of many self-regulatory regimes is to reduce the involvement of government in business decision-making processes. If regulation is avoided or if industry's preferred targets are adopted, policy is said to have been "captured" by business. While capture is relatively easy to describe in qualitative terms, it can be very difficult to assess in practice. The reality is that every form of regulation involves some degree of negotiation between industry and government and it is difficult to demonstrate that self-regulation leads to lower targets being imposed than would otherwise have been the case.

Representation of all interests

Ultimately, the potential for regulatory capture relates less to the choice of policy instrument than to the manner in which the regulatory approach is organised - the rules that frame the regulatory process. Of particular importance are those rules that ensure that all interests are represented, control the discretionary power of the regulatory agency, require the abatement objectives and the schedule for their achievement to be made explicit, mandate ex post evaluation, and ensure effective sanctions.

In this context, self-regulatory regimes have tended to lack many of the necessary safeguards, such as the availability of sufficient information to differentiate between genuine abatement efforts and those that are simply business as usual to prevent regulatory capture.

Even though individual companies may benefit from a self-regulatory regime, companies that do not participate - "free-riders" - may also benefit. The main forms of free-riding are where all parties agree to the terms and conditions of the self-regulatory regime but some merely feign compliance; and where part of the relevant industry simply refuses to sign on to the scheme.


Depending on the issue in question, free-riding may be of more or less concern. For example, if dealing with acute local pollution effects, individual non-compliance may be important, whereas if dealing with an issue such as global warming, individual non-compliance may be of less concern than whether or not the overall goals of the programme are met. However, the failure of individual companies to meet the targets may undermine the credibility of the regime.

Self-regulation can provide a range of soft effects such as facilitating collective learning, allowing the development of improved forms of social interaction, improving relationships, facilitating capacity-building, and assisting organisations to adopt more systematic and structured decision-making processes for environmental issues. While soft effects are widely regarded as one of the most important outcomes of self-regulation, they are difficult to measure. Finally, a common criticism of virtually all self-regulatory regimes has been that they suffer from a lack of information - ambiguous targets, unavailability of monitoring data, absence of interim targets - that make it difficult to assess whether the nominated targets have been achieved.

An effective system of sanctions

Voluntary approaches appear to be suited to areas where there is a low probability of catastrophic events but where there is a high degree of technical uncertainty. However, care is required if voluntary approaches are relied on as the primary solution to a specific policy problem, in particular where there is the potential for catastrophic outcomes.

It has been argued that the self-regulatory regimes that have achieved the most effect are those that have come closest to establishing an effective system of sanctions (either within the regime itself or the threat of regulation in the event that the self-regulatory regime is not effective) or have offered the greatest rewards.

Self-regulation can help to overcome some organisational barriers to improved environmental performance through providing longer-term policy certainty, increasing senior management commitment to environmental protection, and creating pressure on participating firms to deliver on the commitments made in the regime.

Self-regulation in public policy

This analysis opens up two important roles for self-regulation in public policy. The first is a transitional role, where legislation is being contemplated and where it is in industry's interest to take early action to prepare for the introduction of the legislation.

An example could be a regime that enables business to establish the systems, processes and capacity necessary to respond to future regulation. Some of the voluntary programmes that have been established in Europe to respond to debates around energy and greenhouse have explicitly included requirements such as the preparation of inventories, the development of action plans and public reporting on greenhouse performance as key objectives.

The second is as an implementation mechanism, where a self-regulatory regime is used to assist organisations to meet regulatory requirements. A commonly cited example is the role of management systems such as ISO14001, which provide a mechanism for organisations to establish the systems and processes to allow organisations to comply with legislation and to move beyond compliance through the concept of continuous improvement

Design and implementation issues

Many of the criticisms of self-regulatory regimes have related to design and implementation issues, rather than simply the debate around voluntary versus mandatory approaches to the implementation of public policy. From the discussion above, for self-regulation to be seen as a legitimate policy approach it requires that he objectives for self-regulatory regimes explicitly indicate how they relate to broader environmental policy (or sustainability goals). This involves:

  • Clearly defining the baseline, the proposed endpoint, the basis on which the targets have been calculated, the alternative scenarios that have been considered, the business as usual scenario, and the assumptions made.
  • Credible and reliable monitoring and reporting. This enables performance to be assessed and allow the participants to be held accountable for performance and requires that participants and non-participants should be able to assess whether the regime has been implemented and the progress towards its ultimate objectives.
  • Third parties must be involved in the processes of setting objectives and monitoring performance. For this participation to be effective requires reasonable notice that the self-regulatory regime is being developed, opportunities for participation, consideration of minority views, right of appeal and publicly available records of decisions and performance.
  • Clear and credible processes for assessing non-compliance and for taking action against firms that do not comply. These processes should not be confined to the self-regulatory regime but should also involve government signalling its likely actions in the event that the regime is ineffective.
Part of the toolkit

A range of different types of instruments that can be used for the implementation of environmental policy, and voluntary approaches and self-regulatory regimes such as industry codes of conduct and environmental management systems are new seen as integral parts of the regulatory toolkit.



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