Revue Européenne du Droit
Mastering the Labyrinth of Sustainability: Toward a New Foundation for the Market Economy
Issue #4


Issue #4


Dan Esty

Revue européenne du droit, Summer 2022, n°4

Debate 1 over how to transform capitalism and deliver a better functioning market economy has broken out on a number of fronts. In this regard, environmental sustainability has emerged as one of the areas of greatest focus as current business practices and our economic system more generally produce enormous amounts of pollution and waste – and threaten to transgress critical planetary boundaries 2 . Most notably, the build-up of greenhouse gases (GHGs) in the atmosphere creates a risk of climate change as global warming leads to sea level rise, increased intensity of windstorms, as well as changed rainfall patterns that disrupt agriculture, displace people, and unleash more floods, droughts, and wildfires 3

This article challenges the prevailing economic framework, which permits – indeed, authorizes through the issuance of regulatory permits – levels of pollution, including GHG emissions, that now threaten life on Planet Earth. It calls for a restructuring of our market economy 4 to create a sustainable capitalism based on a reinvigorated commitment to the polluter pays principle, operationalized through a framework of rules (environmental laws) that prohibit uninternalized externalities, thereby forbidding any spillover of environmental harm from private parties onto others or into the shared spaces of the commons at any scale (local, regional, national, or global) without full compensation being paid. 

As a first step toward fully internalizing environmental externalities – which will require harm charges to be imposed on all pollution damage and natural resource use – I argue for expanded corporate disclosure of emissions and other environmental impacts through better structured reporting by companies on their Environmental/Social/Governance (ESG) performance. Such ESG disclosure (backed by auditing and enforcement rules) would: (1) address information failures in the marketplace; (2) highlight unsustainable business models and expose companies that derive profits from activities that impose costs on society; and (3) promote marketplace transparency – laying the foundation for calculating the requisite harm charges by bringing hidden externalities into the light. Thus, even before regulatory regimes across the world are reframed to fully internalize environmental impacts, more rigorous ESG performance reporting could give sustainability-minded investors and consumers critical data and information to guide their investment choices and purchasing decisions, thereby creating a powerful incentive for corporate sustainability and deterring business practices that generate private gains at public expense.

  1. The Sustainability Imperative

The sustainability imperative 5 is clear: we must live within the safe operating space of our Earth’s ecological and biophysical systems and not inflict environmental damage on the planet that would threaten human development and ongoing prosperity. As the 1987 Brundtland Report (Our Common Future) suggests, we should ensure that our economic development “meets the needs of the present without compromising the ability of future generations to meet their own needs.” This commitment to sustainable development—the elements of which are spelled out in detail in the 2015 UN Sustainable Development Goals—has been ratified by 193 nations across the world. 

But the simple idea of living within boundaries has proven easier to define in theory than to execute in practice. Fundamentally, a sustainable future requires an economic framework that promotes conservation of natural resources, protection of critical Earth systems, and economic development that allows humanity to thrive over time. It depends on marketplace rules that respond to market failures, internalize externalities, and address the “tragedy of the horizon” (as former Bank of England Governor Mark Carney calls the too-often-ignored business activities that result in slowly accumulating and often-hidden social costs, such as the build-up of GHG emissions in the atmosphere). All of which requires bringing an end to unsustainable business practices. The need for such fundamental change and a revised foundation for capitalism has become ever more widely recognized by government officials, scholars, and business people—but the path forward remains uncharted 6 . This article offers a strategy for how to navigate the labyrinth of sustainability, slay the Minotaur of unsustainable business practices, and lay the foundations for a clean energy future that will enable humans to flourish in the century ahead.

  1. Conceptual Foundation for a Sustainable Future: End Externalities

Conceptually, sustainability requires a restructured market economy that prohibits externalities—forbidding production or consumption that results in environmental harms being inflicted on others 7 . No longer should pollution be accepted as the necessary byproduct of industrial production and justified on a benefit–cost basis. Nor should the private use of public resources—water, timber, minerals, or other natural resources—be condoned at less than full-price payment to society for the privilege. 

As my colleague Don Elliott and I explain in our End Externalities Manifesto, environmental law needs to be recast to prohibit pollution that causes harm to others 8 .  In advancing this argument, we propose a new starting point for environmental regulation: legal rules that forbid all damaging emissions as well as any natural resource consumption for which a full price has not been paid. We suggest that the legal requirement to stop all environmental harms be rebuttable in recognition of the fact that some production processes (for instance, making steel or cement) cannot achieve zero emissions without significant economic dislocation and societal burden. In such cases, the legal obligation should be to minimize environmental damage and pay full monetary compensation for any residual impacts including effects on both people and ecosystems. We propose that these harm charges – to be calculated by regulatory authorities — be paid directly to those affected to the fullest extent possible 9 . Likewise, the consumption of natural resources must bear an appropriate price with special attention to the level of societal compensation required for the exploitation of non-renewable resources. 

Adoption of such a no uninternalized externalities principle backed by a new framework of regulatory rules would lay the foundation for a sustainable economy in a way that existing laws do not. Indeed, the basic structure of environmental protection in most nations in the world (at least as implemented) assumes that some degree of pollution is inevitable. And almost all environmental regulatory frameworks set pollution abatement standards based on benefit–cost analysis. This legal structure permits billions of tons of uncontrolled air and water pollution, waste, and greenhouse gases to be released into the environment every year. As a result, more than 7 billion people across the world—over 90% of the global population—breathe unhealthy air 10 and nearly a billion people lack access to safe drinking water 11 . And all 7.9 billion people on the planet face the risk of climate change as greenhouse gas emissions rise to dangerous levels 12 .

Reconfiguring environmental law around a no uninternalized externalities principle makes sense from a range of perspectives—including: (1) economic theory, (2) conformity to the polluter pays principle embedded in a number of international environmental agreements and domestic legal frameworks, (3) environmental rights and natural law, (4) emerging case law around the world, (5) equity and environmental justice, (6) the need for policies that spur innovation, and (7) changing societal norms related to the role of corporations in society.

2.1 Economic Theory 

Economists have long argued – at least since the work of Pigou a hundred years ago – that efficient markets require that externalities, such as pollution, be internalized. But in regulatory practice, the logic of Pigouvian pollution charges with their focus on limiting the spillover of harms has been overshadowed by the Kaldor–Hicks principle, which translates into a legal framework that optimizes net social benefits 13 . This sort of benefit–cost efficiency permits externalities – including enormous amounts of pollution – to go unchecked so long as the value of the economic activity causing the damage is judged to be greater than the burden on those suffering the impacts of the externality. But this regulatory approach cannot be sustained in the face of mounting evidence that many externalities have not been fully tracked nor appropriately controlled – and that accumulating environmental harms now threaten planetary boundaries. And while it might once have seemed difficult to trace hard-to-see and widely dispersed emissions, 21st century technologies make such tracking quite straightforward 14 . Likewise, advances in epidemiology, ecosystem ecology, and valuation methodologies make it ever easier to put a price on environmental damage 15 .

The widely accepted Coase Theorem has added to the confusion in economic theory by positing that, in the pollution context, no matter whether the underlying rights are lodged with the polluter or polluted—a factory sending emissions up its smokestack or the neighbors (breathers) next door—the parties should be able to negotiate an optimal outcome. Having assumed away the problem of transaction costs, Coase posits that an efficient level of pollution will be achieved either by the neighbors agreeing to pay the factory to reduce its emissions or the factory compensating the neighbors for their respiratory distress. While this imaginary negotiation might produce an economically efficient outcome, it says nothing about the fairness of the result.

The economic tide has, however, shifted. Economists have come to accept that information asymmetries, differentials in power and influence, and significant transaction costs make real-world pollution control negotiations fraught—and fair and efficient outcomes improbable. Most people have an intuition, moreover, that the rights in Coase’s example should be lodged with the breathers. Thus, the need for tighter controls on externalities—tracking the more rigorous parameters of Pareto rather than the weaker Kaldor–Hicks net social benefits construct 16 —has begun to get greater traction in the realm of economics and beyond.

2.2 Polluter Pays Principle

The idea of internalizing externalities has been reflected in widespread adoption of the polluter pays principle in both international environmental agreements and domestic legislation around the world. Beginning with a 1972 recommendation from the Council of the Organisation for Economic Co-operation and Development (OECD) and continuing with the Rio Declaration and now many other international agreements, governments have repeatedly signaled that environmental externalities should be internalized and polluters should pay for the harm they cause 17 . The polluter pays principle plays a central role in EU environmental law, with Article 191(2) of the Treaty on the Functioning of the European Union mandating adherence to this rule 18 . And the global community has established a 2050 goal of net-zero GHG emissions in the Glasgow Climate Pact – triggering hundreds of corporate net-zero pledges – and redoubled efforts to bring an end to externalities in the climate change context 19 . The pervasiveness of the polluter pays principle in both international law and domestic legislation (if not always in practice) provides added support for an initiative to make internalizing externalities a foundational element of a transformed global economy 20 .

2.3 Environmental Rights and Natural Law

More than 100 countries have enshrined in their constitutions a right to a healthy environment in one form or another 21 . A growing body of scholarship, from legal theorists, philosophers and economists has strengthened the case for more robust protection of environmental rights, thus reinforcing the logic for internalizing externalities 22 .  The premise that environmental rights are human rights has also garnered broad acceptance 23 . Beyond the national constitutional provisions noted above, an ever-lengthening list of international agreements, human rights declarations, and scholarly publications have advanced various forms of this proposition. And a growing number of jurisdictions have moved to codify the idea of environmental rights as fundamental—with some going on to specifically highlight the duty to avoid pollution spillovers or other uninternalized externalities 24 .  

In the global policy context, the very first principle in the 1972 Stockholm Declaration on the Human Environment recognized: “Both aspects of man’s environment, the natural and the man-made, are essential to his well-being and to the enjoyment of basic human rights—even the right to life itself.” 25 With more specificity, the 1992 Rio Declaration defines a set of over-arching environmental rights and duties, including a commitment to the polluter pays principle. Likewise, in 2010, the UN General Assembly expressly declared access to safe drinking water to be a human right 26 . And the growing interest in a Global Pact for the Environment has added to the consensus around the need for more vigorous protection of environmental rights in general and adherence to the polluter pays principle in particular 27 .

Alongside the idea that environmental rights are human rights stands a widely accepted notion that people have a moral duty not to harm others. Versions of this duty can be found in the sacred texts of many religions 28 . In modern times, John Stuart Mill articulated the philosophical logic for such a “harm principle” and concomitant rights and responsibilities in his famous 1859 treatise On Liberty. And more recently, philosophers such as William David Ross have further refined the duty not to cause harm to others 29 .

Building on this foundation of nearly universal belief, one might argue (and I do) that access to a healthy environment is essential to human existence and thus should be considered an element of natural law 30 . The recognition of fundamental environmental rights creates reciprocal obligations and duties 31 —and thus provides the cornerstone for holding polluters to account. Indeed, to ensure that environmental rights are respected and pollution control duties upheld, society must establish a legal expectation that all pollution harms will be abated with any unavoidable residual emissions subject to an obligation to pay full compensation to those affected.

2.4 Legal Practice and Positive Law

Commitment to the no externalities principle is not merely a matter of philosophical theory; it also has deep legal roots and pervasive (if uneven) application in countries around the world. Indeed, as early as 1610, an English court in Aldred’s Case granted relief to the neighbor of a farmer whose pigs caused a stench—thereby articulating a common law standard against spillovers of harm. Tort and nuisance law in jurisdictions the world over implement principles that are meant to penalize—with both civil and criminal sanctions—activities that cause harm to others including by means of pollution. In many nations, this legal framework has been supplemented with codes, statutes, and regulations that spell out environmental obligations with more precision. While implementation of these requirements over past decades has been imperfect and incomplete—with a full-throated commitment to the polluter pays principle and comprehensive internalization of environmental externalities often lacking—standards have tightened in many places in recent years 32 .

Indeed, courts in a number of countries have issued decisions in the past decade that have broadened the reach of environmental rights and pollution control duties. In these matters, judges and justices (as a number of the most prominent opinions emanate from supreme courts) have required both governments and companies to reduce emissions. These landmark cases—including Shell and Urgenda (Netherlands); Total, UIPP, Grande Synthe, Notre Affaire a Tous, and Les Amis de la Terre (France); Bundes-Klimaschutzgesetz (Germany); Future Generations (Colombia); and Leghari (Pakistan)—have established a rapidly deepening sustainability jurisprudence that might be seen as undergirding a no uninternalized environmental externalities standard in general and creating judicial pressure to address climate change in particular.

2.5 Equity and Environmental Justice

The sanctity of environmental rights and the creation of parallel pollution control obligations find further support in the recent emergence of laws and policies—from Kenya’s modified constitution 33 to U.S. President Biden’s 2021 Executive Order on the Climate Crisis 34 —that promotes environmental justice. Underpinned by a growing body of academic theory and empirical scholarship 35 , this framework posits that, under the guise of economic efficiency, a certain amount of pollution has been allowed to persist, but these emissions almost always fall disproportionately on economically disadvantaged or minority communities. This reality belies any suggestion that society as a whole accepts the harm from polluting industries and activities in return for the highly valued goods and services provided. In fact, at the core of the environmental justice movement lies the notion that pollution will almost always unfairly burden certain segments of society and this disparate impact should not be tolerated—adding equity claims to the argument for a proscription on uninternalized externalities. Simply put, if efficiency argues for some degree of pollution being tolerated as the price for high-value economic activities being allowed to continue, equity requires that the victims of the harm inflicted these activities be fully compensated, thus internalizing the externality.

2.6 Policy Incentives for Innovation

A requirement that all environmental externalities be stopped or paid for in full would also spur innovation in pollution control and natural resource management—the importance of which has recently emerged with great force 36 . Indeed, while the world community has committed to net-zero GHG emissions by mid-century, most sustainability experts have come to the conclusion that, even though significant emissions reductions are within sight, no clear path to fully achieving the net-zero goal presently exists 37 . A consensus has thus emerged that deep decarbonization and the creation of a clean energy future will require significant breakthroughs in renewable electricity generation, heating and cooling of buildings, heavy industry practices, and our prevailing modes of transportation—and that price signals would help to induce the required investment in innovation 38 .

2.7 Redefining Corporate Purpose: From Shareholder Primacy to Stakeholder Responsibility

Society’s understanding of the role of corporations has also changed in recent years in a manner that reinforces the logic of prohibiting uninternalized externalities. Specifically, Milton Friedman’s widely followed teaching that corporations should focus on maximizing of shareholder value 39 has given way to a new theory of corporate purpose centered on stakeholder responsibility 40 . While generations of business executives geared their work around the Friedman doctrine of shareholder primacy, corporate leaders today recognize that companies are legal constructs of society and thus owe a duty not only to their owners but also to their employees, customers, suppliers, and the communities in which they operate as well as to society more generally. In fact, the unsustainability of our current structure of capitalism and the business practices it promotes can be traced in many regards to the pursuit of profits without regard to other consequences as encouraged by the Friedman doctrine. But this doctrine, as Oxford University management professor Colin Mayer observes: “is not a law of nature. On the contrary, it is unnatural; nature abhors it, if only because it has been the seed of nature’s destruction.” 41

Calls for a new foundation for capitalism that promotes more sustainable business practices now abound 42 . The commentators leading this charge universally highlight the need to ensure that companies do not profit from activities that impose costs on others—whether in the form of air pollution up a smokestack, water contamination out an effluent pipe, greenhouse gas emissions released to the atmosphere, or natural resources extracted without full compensation to the broader community. Simply put, private gain at public expense cannot be condoned as a business model.

  1.  The Labyrinth of Sustainability

With such a strong consensus that uninternalized externalities cannot be tolerated insofar as they privatize benefits and socialize costs, how is it that so many unaddressed environmental harms remain in evidence? Three fundamental explanations can be identified for the persistence of pollution and private extraction of public resources without compensation. Each of them represents a form of regulatory failure that permits environmental harms to be hidden or otherwise go uncontrolled. Addressing these failures and the complexity they create emerges as the Ariadne’s string of the labyrinth of sustainability—the mechanism by which society can find its way through the current confusion and multiple obstacles that prevent us from slaying the Minotaur of unsustainable business practices that keep us from establishing environmentally solid foundations for a restructured 21st century economy. 

3.1 Invisible Harms Deeply Embedded in our Economic Status Quo

Many enduring environmental problems remain unresolved because they have been present for so long that the public no longer questions their existence. In fact, people may not even see them as a problem. Over more than a century, for example, the public was told that belching smokestacks were a sign of progress—and that pollution was the inevitable byproduct of industrialization. But it need not be so. 

The ideas that emissions are unavoidable or that natural resources must be offered on the cheap to encourage their productive use are myths from a bygone era. Yet these deeply embedded expectations – reinforced by decades of investment based on these presumptions – have created a path dependency that is now difficult to overcome. These myths narrow our imagination, limit our capacity for innovation, complicate the public’s understanding of sustainability, and inhibit efforts to advance the transformative change required to address problems such as climate change. They must be relegated to the dustbin of history in favor of the scientific facts about planetary boundaries and the need to internalize environmental externalities in support of a sustainable market economy built on new conceptual foundations.  

Even more challenging are the cases where environmental harms are literally invisible or spread over space and time in a manner that makes them hard to see and the damage difficult to comprehend. Smokestacks have long been used to spread out emissions and thus to make them seem to be less of a problem. In the same vein, who ever saw chlorofluorocarbons (CFCs) escaping into the atmosphere and breaking down the Earth’s protective ozone layer? At the extreme end of this spectrum are the long-lived and invisible greenhouse gases that blanket the Earth causing climate change. That regulators shy away from addressing hidden sources of harm is understandable. The costs of tackling such problems are tangible, and the perceived benefits are obscure. But these environmental externalities are real and must be addressed if a new, sustainable version of capitalism is to be constructed on ecologically secure footings.

Even where the cost of alternative sustainable approaches to critical economic activities (such as cement making or air travel) would be high, we should insist that environmental harms be minimized and that the full cost of any residual negative impacts be reflected in the price paid for the product or service. The alternative – assuming the inevitability of ongoing pollution and leaving the resulting externalities uninternalized – underprices those goods and leads to inefficient over-consumption of them. In effect, society sacrifices the health of people everywhere and the integrity of life-sustaining Earth systems to subsidize these items – a practice that can no longer be justified.

3.2 Regulatory Failures

Uninternalized externalities can also be traced to a variety of well-documented governance failures 43 . Some of the underlying problems are structural. Environmental protection efforts are often undertaken in narrow regulatory silos. For example, air emissions and water pollution are frequently addressed separately. This practice results in a legal framework that will often be incomplete or misaligned – that allows some harms to slip through the cracks. Regulators may also lack: (a) data and metrics, (b) clarity on the causal pathways of emissions to recognized impacts, (c) epidemiological or ecological understanding of risks, or (d) other scientific information that would allow them to identify harms and price the externalities involved. These difficulties will often be intensified when problems are not visible until they build up to a certain threshold – or where they have long lifetimes that may make the true scope of the harm hard to gauge.

Public choice failures may further complicate efforts to internalize externalities as special interests exert political influence through lobbying, campaign contributions, or public relations efforts to obtain favorable treatment for their industry—inducing elected officials (and the regulators they direct) to overlook emissions or permit natural resource extraction on favorable terms. Once again, these distortions of the policy process obscure externalities that might otherwise be internalized.

3.3 Greenwashing and Sustainability Metrics Gaps

Externalities may also persist because of misinformation released by companies that hides or diminishes the harm they are causing. Although a rising tide of sustainability-minded investors are now demanding information on the environmental, social, and governance (ESG) performance of the enterprises in which they invest, much of the information in the marketplace is unreliable 44 . While some ESG metrics derive from government sources, a good bit of what is available comes from private data aggregators such as MSCI, Bloomberg, Refinitiv, or Sustainalytics. The emissions data they provide are often self-reported by corporations and not independently verified or validated. As a result, there is little methodological consistency in how companies report –and even disagreement as to basic sustainability definitions. In fact, the top-line sustainability scores of MSCI and Sustainalytics – the two leading ESG data providers – correlate at only 0.32 45 , suggesting serious data discrepancies and/or widely divergent scoring systems.

Much of the sustainability information available also lacks careful screening for relevance or materiality 46 . Many metrics are reputational rather than operational, backward-looking rather than forward-looking, and narrowly risk-focused rather than highlighting sustainability-led growth and productivity. The data are often not carefully normalized, underlying assumptions are not made clear, and missing datapoints are not addressed consistently. In light of these many information issues, sustainability benchmarking is difficult to do, and confidence in the reported results remains low 47 . Investors cannot trust that the ESG reporting reveals sustainability leaders and calls out laggards. Likewise, the limits of the present voluntary reporting system mean that the public cannot trust that companies are spelling out the full extent of the environmental harms they cause, and governments cannot build regulatory programs based on the data being disclosed. Indeed, in a number of cases, companies that shade their reporting to create a more favorable picture of their sustainability—i.e., engage in greenwashing—appear to outperform their peers. More broadly, the existing ESG framework provides little basis for disciplining unsustainable business practices—and may even reward those enterprises that are most aggressive in externalizing environmental costs 48 .

4. Restructuring the Foundations of Capitalism for a Sustainable Future

To achieve a sustainable future, the regulatory framework within which capitalism operates must be recast to ensure that companies are not profiting at the expense of the environment and thus society. As I explain below, better sustainability metrics and structured ESG corporate reporting offer a path toward limiting uninternalized externalities and thus a sustainable future—although not providing a complete solution to harm-causing business behavior.

4.1 Information as a Public Good Subject to Market Failure

Building a sustainable market economy requires overcoming a classic market failure: incomplete information. Specifically, because ESG data and other information on corporate sustainability performance are public goods, they are systematically underprovided 49 . The existing system of voluntary ESG disclosure with data aggregated by private companies has failed to produce the information required to put capitalism on a sustainable trajectory. What is now needed is a methodologically rigorous, transparent, and reliable framework of ESG metrics that highlights business practices that damage the environment and facilitates inter-company comparisons and benchmarking across the critical sustainability issues.

Such a comprehensive and trusted ESG data framework could be established through a universal business commitment to an agreed-upon sustainability reporting structure. But such voluntary agreement seems unlikely, particularly given the fact that an array of competing ESG reporting frameworks now exist – including data matrices offered by the Global Reporting Initiative (GRI), the Sustainable Accounting Standards Board (SASB), and the World Economic Forum (WEF) – contributing to the chaos in sustainability reporting. A government-defined mandatory sustainability reporting structure backed by the threat of legal penalties for misreporting therefore seems like a better path forward. Governments have begun to take the first steps in this direction with the European Union’s Non-Financial Reporting Directive, the French Duty of Vigilance Law, and the Monetary Authority of Singapore’s Guidelines on Environmental Risk Management all of special note. Other countries – including Kenya, the United States, Switzerland, Germany, Finland, and the Netherlands – have expanded reporting requirements under consideration. But none of these proposals offer the basis for a comprehensive structure of investment-grade ESG metrics. What is now needed is a tightly structured and streamlined ESG reporting framework that builds on the base provided by GRI, SASB, and the World Economic Forum as well as the government initiatives underway – with the goal of providing a common set of core ESG metrics with consensus not just on the categories (indicators) but also on underlying methodologies to ensure true comparability.

4.2 Toward a Sustainable Market Economy

Trustworthy ESG data would create a pathway to a sustainable market economy. Notably, better data on corporate emissions and natural resource use, as well as clear signals about corporate leaders and laggards on climate change and other critical issues, would enable a three-step process toward full implementation of the polluter pays principle and a broad-based commitment to end uninternalized externalities. 

First, a comprehensive, government-mandated (and enforced) ESG data matrix would provide the analytic foundation required for full-bore adoption and implementation of a no uninternalized externalities rule. It would make it nearly impossible for hidden externalities to persist. In particular, both individual company disclosures and the aggregation of metrics across industries would offer a database for gauging harms and putting a price on the damage they cause. This transparency would bring to the fore ongoing emissions or privileged resource access, creating a basis for government regulatory action. 

Second, by highlighting corporate outliers and other anomalies in environmental protection, better ESG data would address most, if not all, of the regulatory failures enumerated in Part 3 above. A clearer picture of sustainability performance company-by-company and industry-by-industry would help to overcome the tenacity of status quo thinking as well as the challenges presented by invisible harms, incomplete government databases on environmental threats, and public choice distortions of policymaking. Moreover, by establishing a standard reporting framework as well as requirements for third-party assurance (validation by an accredited auditor), governments could unmask and largely eliminate greenwashing. More importantly, the right structure of reporting rules would obligate companies to fill in many persistent pollution control and natural resource management data gaps that today limit the ability of governments to fully internalize externalities. Over time, the transparency created would produce rising pressure for more comprehensive implementation of harm charges as the mere presence of the data—highlighting residual emissions and resource extraction—would throw a spotlight on companies and industries enjoying special interest status and environmental privileges unavailable to others. And if an environment ministry or agency were slow to act, the ESG information made available would provide ammunition to opposition political leaders, the media, NGOs, and competitors who might wish to call out the unfairness of allowing the environmental miscreants to carry on with their damaging practices. 

To be clear: better ESG data would not address all of the complexities of internalizing environmental externalities. Putting a price on harms in the face of persistent scientific uncertainties or extended time horizons would continue to be a challenge. But mandatory corporate ESG reporting would put new momentum into the pursuit of better data foundations for environmental policymaking – and ease the transition to full pricing of environmental harms.

Third, an improved ESG framework would enable sustainability-minded investors to screen their stock and bond holdings in a manner that would put pressure on companies to improve their sustainability performance—or risk having their shares divested from a growing number of portfolios. Similarly, better and more easily accessible ESG data would enable green consumers to more readily factor a company’s sustainability track record into their purchasing decisions.  These market-based disciplines on unsustainable business practices would immediately become a point of leverage for a sustainable future – even ahead of (the inevitably slow process of) full governmental implementation of no-uninternalized-externalities regulation.


Today’s structure of capitalism is on a collision course with the emerging sustainability imperative. To ensure that our global society does not crash through planetary boundaries and damage life-sustaining Earth systems in a manner that would diminish the prospect for long-term sustainable development and human progress, the rules of engagement for business must be rewritten and the foundations of our market economy rebuilt.

Transformative change is never easy. But this article charts a path toward a sustainable future, starting with the recognition that: (1) pollution must be stopped and any residual environmental externalities internalized and (2) carefully structured corporate sustainability disclosure offers great promise as a first step toward the end of externalities. A robust corporate ESG data matrix would greatly enhance the ability of governments to regulate environmental harms and enforce a no uninternalized externalities principe. Even before that regulatory reform is completed, the existence of reliable ESG metrics would enable sustainability-minded investors and consumers to penalize companies with unsustainable business models that depend for their profitability on privatizing gains and socializing environmental costs. Likewise, they would be positioned to reward enterprises that deliver the clean technology breakthroughs required for a successful response to climate change and create a marketplace reframed to support – and not undermine – sustainability more broadly. 

The status quo is difficult to dislodge. And the path through the labyrinth of sustainability has many twists and turns. But this article offers a string to follow on the way to a better functioning 21st century economy.


  1. Thanks to Tyler Yeargain, Nathan de Arriba-Sellier, and Zack S gerwald-Schnall for research assistance.
  2.  Johan Rockström & Matthias Klum, Big World, Small Planet: Abundance within Planetary Boundaries (2015); Will Steffen et al., Planetary Boundaries: Guiding Human Development on a Changing Planet, Science Mag. (Feb. 13, 2015),
  3. Intergovernmental Panel on Climate Change, Climate Change 2021: The Physical Science Basis (2021), [hereinafter IPCC Sixth Assessment Report].
  4. This article accepts the benefits of a market-based economic system, but challenges the free-wheeling capitalism that now prevails in many parts of the world, arguing that this free market has under-attended to market failures – resulting in unsustainable business practices that inflict significant public health and ecological damage on people and the biosphere more broadly. It calls for a re-invigorated regulatory framework that addresses these market failures – with an aim of fully internalizing environmental externalities, thereby fundamentally shifting the underpinnings of the economy onto a clean-energy foundation and requiring companies to regear their business models toward a sustainable future.
  5. David A. Lubin & Daniel C. Esty, The Sustainability Imperative, Harv. Bus. Rev. (May 2010), (spelling out the environmental logic and business implications of sustainability as a core 21st century value). 
  6. Mark Carney, Value(s): Climate, Credit, Covid, and How we Focus on What Matters 264–65 (2021). For other examples of this growing literature, see Rebecca Henderson, Reimagining Capitalism in a World on Fire (2020); Mariana Mazzucato, Mission Economy: A Moonshot Guide to Changing Capitalism (2021); Michael E. Porter and Mark R. Kramer, Creating Shared Value, Bus. Rev. (Jan.-Feb. 2011; Paul Polman and Andrew Winston, Net Positive (2021); Daniel C. Esty, Red Lights to Green Lights: From 20th Century Environmental Regulation to 21st Century Sustainability, 47 Env’t L. Rev. 1 (2017).
  7. As a matter of administrative efficiency, some degree of de minimis harm might be ignored.
  8.  E. Donald Elliott & Daniel C. Esty, The End Environmental Externalities Manifesto: A Rights-Based Foundation for Environmental Law, 29 N.Y.U. Env’t L.J. (2021).
  9. Elliot and Esty, supra at 531. We acknowledge that some scholars and many environmentalists take issue with commodification of the environment and thus reject the possibility that regulators will put an appropriate price on pollution impacts. See, e.g., Doug Kysar, Regulating from Nowhere (2010). But the alternative has not been vigorous pollution controls but rather the status quo reality of incomplete regulation, environmental degradation, and serious problems of environmental justice. See, e.g., Gerald Torres, Who Owns the Sky, 19 Pace Envt’l L. Rev (2001).
  10. See generally State of Global Air/2020, Health Effects Institute
  11. See generally United Nations Children’s Fund & World Health Org., Progress on Household Drinking Water, Sanitation and Hygiene, 2000–2017 (2019). 
  12. IPCC Sixth Assessment Report, supra note 3.
  13. See Elliott & Esty, supra note 8 at 515 (rejecting Kaldor-Hicks efficiency in favor of the equity of Pareto superiority, which requires compensation to those who are harmed).
  14. Daniel C. Esty & Quentin Karpilow, Harnessing Investor Interest in Sustainability: The Next Frontier in Environmental Information Regulation, 37 Yale J. on Reg. 625 (2019); see also Daniel C. Esty, Environmental Protection in the Information Age, 79 N.Y.U. L. Rev. 115, 140–48 (2004).
  15. See Oswald J. Schmitz, Sustaining Humans and Nature as One: Ecological Science and Environmental Stewardship, in A Better Planet: 40 Big Ideas for a Sustainable Future 11 (Daniel C. Esty ed. 2019); Per-Olav Johansson, Valuing Environmental Damage, 6 Oxford R. Econ. Pol. 34 (1990); Cass R. Sunstein, Cost-Benefit Analysis and the Environment, 15 Ethics 351 (January 2005).
  16.  Elliott & Esty, supra note 8 (discussing the “Kaldor-Hicks fallacy” and rejecting social net benefits as an appropriate foundation for environmental regulation).
  17. United Nations Conference on Environment and Development, Report of the United Nations Conference on Environment and Development, Annex I: Rio Declaration on Environment and Development, U.N. Doc. A/CONF.151/26 (Vol. I) (Aug. 12, 1992) [hereinafter Rio Declaration] (Principle 16 highlights both the need for “internalization of environmental costs” and the polluter pays principle).
  18. Article 110-1 of the French Code de l’Environnement similarly puts the polluter pays principle at the center of the nation’s framework of environmental law – although this commitment is often disregarded in practice. See ( at II)
  19. COP 26: The Glasgow Climate Pact, UN Climate Change Conference: UK 2021 (Nov. 2021),
  20. Svitlana Kravchenko, Tareq M.R. Chowdhury & Md Jahid Hossain Bhuiyan, Principles of International Environmental Law, in Routledge Handbook of International Environmental Law 43, 50–53 (Shawkat Alam et al. eds., 2012).
  21. David R. Boyd, David Suzuki Found., The Status of Constitutional Protection for the Environment in Other Nations 6 (2013); France offers a notable case in point in Article 1 of the 2004 Charter for the Environment. See
  22. See generally The Human Right to a Healthy Environment (John H. Knox & Ramin Pejan eds., 2018); Alan E. Boyle, Human Rights or Environmental Rights? A Reassessment, 18 Fordham Env’t L.J. 471 (2007); Linda h. Leib, Human Rights and the Environment: Philosophical, Theoretical and Legal Perspectives 157–62 (2011); Lavanya Rajamani, Integrating Human Rights in the Paris Climate Architecture: Contest, Context, and Consequence, 9 Climate Law 180–201 (2019); James Salzman, Drinking Water (2017) (arguing that access to clean water for basic needs should be understood to be a fundamental human right); Erin Daly & James May, Comparative Environmental Constitutionalism, 6 Jindal Global L. Rev. 9, 24–30 (2015); Christopher D. Stone, Should Trees Have Standing? Toward Legal Rights for Natural Objects, S. Cal. L. Rev.45 (1972); Doug Kysar, Regulating from Nowhere (2010).
  23. Dinah Shelton, Human Rights, Environmental Rights, and the Right to Environment,28 Stanford J. Int’l L. 103 (1991–92);Alan Boyle, Human Rights and the Environment: Where Next?, 23 European J. Int’l Law 613 (2012): Hari M. Osofsky, Learning from Environmental Justice: A New Model for International Environmental Rights, 24 Stan. Env’t. L.J. 71, 129 (2005); Lavanya Rajamani, The Increasing Currency and Relevance of Rights-Based Perspectives in the International Negotiations on Climate Change, 22 J. Env’t. L. 391–430 (2010); Lavanya Rajamani, Human Rights in the Climate Change Regime: From Rio to Paris and Beyond, in The Human Right to a Healthy Environment (John H. Knox & Ramin Pejan eds., 2018.
  24. See, e.g., Legifrance, Charter for the Environment, art. 1,; Corte Suprema de Justicia [C.S.J.] [Supreme Court] febrero 12, 2018, Sentencia 4360-2018 (Colom.); Corte Constitutional [C.C.] noviembre 10, 2016, T-622/16, Expediente T-5.016.242 (Colom.); Leghari v. Fed’n of Pakistan, (2015) W.P. No.25501 (HC Lahore) (Pak.); Complaint, Mbabazi and Others v. The Attorney General and National Environmental Management Authority, Civil Suit No. 283 of 2012 (Uganda); Haw. Const. art. XI, § 9; Ill. Const. art. XI, § 2; Mass. Const. amend. art. XLIX; Mont. Const. art. II, § 3; Pa. Const. art. I, § 27; R.I. Const. art. I, § 17.
  25. United Nations Conference on the Human Environment, Stockholm, Swed., June 5-16, 1972, Declaration of the United Nations Conference on the Human Environment, U.N. Doc. A/CONF.48/14/Rev.1, Ch. 1 (June 16, 1972)
  26. Rio Declaration, supra note 17 (Principle 16 states that “[n]ational authorities should endeavour to promote the internalization of environmental costs and the use of economic instruments, taking into account the approach that the polluter should, in principle, bear the cost of pollution, with due regard to the public interest and without distorting international trade and investment.”); U.N. Econ. & Soc. Council, Comm. on Econ., Soc. & Cultural Rights, Substantive Issues Arising in the Implementation of the International Covenant on Economic, Social and Cultural Rights: NGO Participation in the Activities of the Committee on Economic, Social and Cultural Rights, Note by the Secretariat, U.N. Doc. E/C.12/2000/6, (July 7, 2006),
  27. Yann Aguila, A Global Pact for the Environment: The Logical Outcome of 50 Years of International Environmental Law, 12 Sustainability 5636 (2020).
  28. Caron E. Gentry, Religion: Peace through Non-Violence in Four Religious Traditions, in Palgrave Handbook of Disciplinary and Regional Approaches to Peace 168–180 (Oliver P. Richmond, Sandra Pogodda, & Jasmin Ramović eds., 2016); Jeffery D. Long & Michael G. Long, Nonviolence in the World’s Religions: A Concise Introduction (2021); Christopher Key Chapple, Nonviolence to Animals, Earth, and Self in Asian Traditions (1993).
  29.  Anthony Skelton, “William David Ross”, Stan. Encyc. of Phil. at 4.1 (June 19, 2012); see also Elliott & Esty, supra note 8, at 527–28.
  30. Michael C. Blumm & Rachel D. Guthrie, Internationalizing the Public Trust Doctrine: Natural Law and Constitutional and Statutory Approaches to Fulfilling the Saxon Vision, 45 U.C. Davis L. Rev. 741 (2012); Scott A. Davison, A Natural Law Based Environmental Ethic, 14 Ethics & Env. 1 (2009).
  31. Wesley Hohfeld, Some Fundamental Legal Conceptions As Applied In Judicial Reasoning,23 Yale L.J. 16, 28–59 (1913) (explaining how the presence of rights creates reciprocal duties).
  32. See generally United Nations Env. Programme, Environmental Rule of Law: First Global Report (2019), (noting a 38-fold increase in environmental laws worldwide since the 1970s).
  33. Constitution ch. 5, pt. 2 (Kenya).
  34.  Executive Order 14,008, 86 Fed. Reg. 7,619 (2021).
  35. Dorceta Taylor, The Rise of the Environmental Justice Paradigm, 43 Am. Behav. Sci. 508 (2000);David Schlosberg, Defining Environmental Justice: Theories, Movements, and Nature (2009); Paul Mohai, David Pellow & J. Timmons Roberts, Environmental Justice, 34 Ann. Rev. Env’t & Res. 405 (2009); U.S. Env’t Protection Agency, Climate Change and Social Vulnerability in the United States: A Focus on Six Impacts 4–6 (Sept. 2021),
  36. William Nordhaus, Climate Change: The Ultimate Challenge for Economics, 109 Am. Econ. Rev. 1991 (2019); Daniel C. Esty, Red Lights to Green Lights: From 20th Century Environmental Regulation to 21st Century Sustainability, 47 Env’t L. Rev. 1 (2017); Thomas A. Weber & Karsten Neuhoff, Carbon markets and technological innovation, 60 J. of Env’t Econ. & Mgmt. 115–132 (2010); Michael E. Porter & Claas van der Linde, Toward a New Conception of the Environment–Competitiveness Relationship, 9 J. Econ. Perspectives 97 (1995); Ian Parry, William Pizer, and Carolyn Fischer, How Large are the Welfare Gains from Technological Innovation Induced by Environmental Policies?,23 J. Reg. Econ. 237 (2003); Adam Jaffe & Robert Stavins, Dynamic Incentives of Environmental Regulations: The Effects of Alternative Policy Instruments on Technology Diffusion, 29 J. Env’t Econ. & Mgmt. 43 (1995).
  37. Sustainable Dev. Solutions Network, America’s Zero Carbon Action Plan (2020),; Nat’l Acad. of Sci, Accelerating Decarbonization in the United States: Technology, Policy, and Societal Dimensions (2021),; see also IPCC Sixth Assessment Report, n. 3 supra.
  38. Daniel C. Esty, Red Lights to Green Lights: Toward an Innovation-Oriented Sustainability Strategy, in A Better Planet: 40 Big Ideas for a Sustainable Future 87 (Daniel C. Esty, ed. 2019); William Nordhaus, The Climate Casino: Risk, Uncertainty, and Economics for a Warming World 225 (2013).
  39. Milton Friedman, Capitalism and Freedom (1962).
  40. Statement on the Purpose of a Corporation, Business Roundtable (Aug. 19, 2019),; R. Edward Freeman, Strategic Management: A Stakeholder Approach (2010); see also Klaus Schwab, Davos Manifest 2020: The Universal Purpose of a Company in the Fourth Industrial Revolution, World Econ. F. (Dec. 2, 2019),
  41. Colin Mayer, Prosperity: Better Business Makes the Greater Good 2–3 (2018)
  42. Mark Carney, Value(s) (2021); Rebecca Henderson, Reimagining Capitalism in a World on Fire (2021); Mariana Mazzucato, Mission Economy: A Moonshot Guide to Changing Capitalism (2021); Paul Polman & Andrew Winston, Net Positive: How Courageous Companies Thrive by Giving More than They Take (2021); John Ruggie, Caroline Rees & Rachel Davis, Making ‘Stakeholder Capitalism’ Work: Contributions from Business and Human Rights (Working Paper No. RWP20-034, Nov. 2020) (on file with Harvard Kennedy School),; Michael E. Porter & Mark R. Kramer, Creating Shared Value, Harv. Bus. Rev. (Jan.–Feb. 2011),; Gus Speth: The Bridge at the End of the World: Capitalism, the Environment, and Crossing from Crisis to Sustainability (2008).
  43. Daniel C. Esty, Toward Optimal Environmental Governance, 74 N.Y.U L. Rev. 1495, 1508–20 (1999).
  44. Daniel C. Esty & Todd Cort, “Corporate Sustainability Metrics: What Investors Need and Don’t Get”, 8 J. Env’tl Investing 1 (2017).
  45. Ross Kerber & Michael Flaherty, Investing with “Green” Ratings? It’s a Gray Area, Reuters (June 26, 2017),; Florian Berg, Julian F. Kölbel & Roberto Rigobon, Aggregate Confusion: The Divergence of ESG Ratings (MIT Sloan Working Paper 5822-19),
  46. Aisha I. Saad & Diane Strauss, The New “Reasonable Investor” and Changing Frontiers of Materiality: Increasing Investor Reliance on ESG Disclosures and Implications for Securities Litigation, 17 Berkeley Bus. L.J. 397 (2020); Daniel C. Esty & Todd Cort, Toward Enhanced Corporate Sustainability Disclosure: Making ESG Reporting Serve Investor Needs, 17 Va. L. & Bus. Rev. (forthcoming 2022).
  47. Daniel C. Esty, Creating Investment-Grade Corporate Sustainability Metrics, in Values at Work: Sustainable Investing and ESG Reporting 51 (Daniel C. Esty & Todd Cort eds., 2020).
  48. Ralph Thurm, r3.0, The Big Sustainability Illusion – Finding a Maturation Pathway for Regeneration & Thriving (Mar. (2021),; Tariq Fancy, Financial World Greenwashing the Public with Deadly Distraction in Sustainable Investing Practices, USA Today (Mar. 16, 2021), (in which the former BlackRock chief investment officer of Sustainable Investing calls ESG screening “marketing hype”).
  49. Daniel C. Esty and Quentin Karpilow, Harnessing Investor Interest in Sustainability: The Next Frontier in Environmental Information Regulation, 36 Yale J. Reg. 625 (2019).
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Dan Esty, Mastering the Labyrinth of Sustainability: Toward a New Foundation for the Market Economy, Aug 2022,

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