It is well known that companies respond to financial incentives. Economists and regulators have designed a number of ways to create the 'correct' incentive for companies to reduce emissions: Command and control, taxes, fines, tradeable permits....Here's another one for the toolbox: Shame.
Capital markets react to good and bad news about the financial security of a company. Not a day goes by that you don't see headlines like "First BanCorp's Duality Worries Investors" But, can capital markets provide incentives for companies to be environmentally conscious?
Public disclosure of noncompliance with environmental regulations causes reactions by the noncompliant company. The upshot is this: A company's stock devalues when the company is publicly outed as a noncomplier (see here or here for examples). This devaluation provides an incentive for the company to become environmentally compliant (another abstract ).
Does public disclosure alone provide enough of an incentive? No. But the threat of enforcement (fines) provides enough of a stick for capital market to react to the public disclosure. So shame (and the market) makes the regulation more effective.
Hmmm...maybe I'll try that on my kids.
