Elke U. Weber teaches psychology, energy and the environment at Princeton University. Speaking to Srijana Mitra Das,
Weber discusses how climate change is impacting business behaviours, the ‘choice architecture’ influencing consumers’
environmental decisions — and using behavioural economics to empower green growth:
What are the most important behavioural challenges businesses face today on climate change?
A. One problem is the large and deep uncertainty that surrounds climate change action. We all know about the scientific certainty regarding how the climate system will respond to continued CO2 emissions — but, on top of that is the huge uncertainty about how people, cities, states, countries and companies will respond. Companies want predictability more than anything else. This means predict- ing government regulations, consumer demand for different products like electric vehicles, consumer preferenc- es, etc. They are not opposed to change, including better environmental protec- tion, but they really dislike zigzagging in regulations. For example, consider the higher corporate average fuel economy (CAFE) standards set in the US for car emissions under Barack Obama, then reversed under Donald Trump, now again going up but who knows for how long.
Q. Regulations aside, why have businesses accepted the realities of climate change relatively slowly?
A. The answer to this goes back to my previous reply. Most companies don’t want to get ahead of their governments and customers. They usually wait to change business practices until there is an external reason to do so. That reason can be government mandates or customer, civil society and shareholder demands. Or it can be increased losses due to disruptions in supply chains or other business operations caused by weather events that are increasing in frequency and severity. Most companies see climate change as a risk factor which is physical, political and social and which needs to be managed. It is only a small number of companies — typically, a few that have visionary CEOs — who see the potential in climate change as a way of creating new markets, products and operational practices that can get them to leapfrog ahead of competitors. There are also some companies who see climate action as a moral obligation. But with greater awareness of the need to act on climate change, both at governmental and civil so- ciety levels, companies, even those lagging, will follow suit because the risks of not acting will simply become too big.
Q. Has risk perception around climate change noticeably altered recently in the business world?
A. Yes, climate risk has become a bona fide risk category which more a nd more companies now assess, not just for t hei r op eration s but also for mak- i n g i nve st ment s and strategic deci- sions. There are growing numbers of coalitions and NGOs now like the Task Force on Climate-Related Financial Disclosures that provide guidelines for climate risk reporting standards and collect and disclose the climate risk exposure of companies belonging to these coalitions. These groups aim to change the social norms on measuring, disclosing and reducing these risks.
Q. Are extreme weather events now clearly influencing consumers in terms of environmental attitudes?
A. Civil society is certainly waking up more and more to climate change, reflected in environmental marches and climate strikes. But, very importantly, this awareness is also showing in share holder resolutions introduced at corporate meetings — for example, consider the recent election of new pro-environmental board members to Exxon’s board.
Q. You study choice architecture — can this be used to positively impact consumers’ environ- mental behaviour?
A. Defaults, or setting one choice option as the one that will be delivered if no active decision against it is made, is probably the most impactful choice architecture intervention. It is very effective for consumer choices and for professional decision makers. For consumer choices, one that impacts greenhouse gas emissions significantly is whether consumers switch from ‘brown’ electricity to optimal levels of ‘green’ electricity generated by renewables. Right now, the default option is brown electricity — but utilities which have switched the default to green have seen huge increases in uptake, not just immediately but also more permanently. For professional decisions, making sustainable options the default setting in building codes or rating systems on which professionals rely makes a very large difference.
Q. What are the most important behavioural economics lessons in helping green growth strategies?
A. One lesson which is more economic than behavioural is to price the externalities of greenhouse gas emissions that are increas- ingly costing our countries, economies and societies untold billions in extreme weath- er damages and fatalities. Behavioural economics lessons on those lines would be the importance of switching the framing of how we think about costs — rather than talking about the costs of climate action, which implicitly sets ‘non-action’ as the default choice, we ought to be — and increasingly are — talking about the costs of not acting. Bloomberg’s Risky Business report which came out a few years ago was one of the first such discussions. We need a lot more.
(Views expressed are personal)