Is Sunshine the Best Disinfectant? The Promise and Problems of Environmental Disclosure

Last year the U.S. Environmental Protection Agency reported the continuation of a remarkable trend. Releases of toxic chemicals into the environment had declined by 46 percent from 1988 to 1999, even as the economy was growing rapidly. The decline was attributed not to new federal rules and strict penalties, however, but to a newly prominent form of environmental regulation: government-required disclosure of information about environmental risks.

In 1986 Congress passed a new law requiring manufacturers to reveal to the public their toxic releases in standardized form, chemical by chemical and factory by factory. By 1997, the EPA was referring to that disclosure system as one of the most effective environmental requirements ever. During the late 1980s and 1990s, Congress and state legislatures added dozens of other disclosure requirements aimed at improving environmental protection. Traditionally viewed as an underpinning for government standard-setting or enforcement actions, information itself became a regulatory mechanism.

Reducing Risk by Requiring Disclosure

The idea that government-required disclosure can reduce risks is not new in American public policy. In 1933 and 1934, newly elected President Franklin D. Roosevelt championed the approval of the Securities and Exchange Acts, which required companies that sold securities to the public to reveal earnings, obligations, and other data to reduce financial risks to investors. Over time, those disclosure requirements formed the basis for public confidence in the nation’s securities markets.

Many parallels exist between those laws and newer systems of environmental disclosure. Both rely on mandatory disclosure of factual information, standardized reporting at regular intervals, and identification of companies, facilities, or products that are the sources of risks. Both are based on the premise that public access to information will strengthen market incentives or political pressures for organizations to minimize risks. Both draw on the idea of Louis D. Brandeis, known as the “people’s attorney” for his battles against predatory practices of big business, that “[p]ublicity is justly commended as a remedy for social and industrial diseases. Sunlight is said to be the best of disinfectants.”

Now, in the wake of the bankruptcy of Enron, Inc., Congress, regulators, and investors are taking a closer look at how financial disclosure works in practice. Mounting evidence suggests that rules can become outdated and managers can manipulate information to deceive rather than inform the investing public. A closer look at the nation’s newly prominent systems of environmental disclosure also raises cause for concern. Like other forms of regulation, it turns out, disclosure systems can employ flawed metrics, provide a partial picture of reality, or lack the resources for effective enforcement.

Reducing Environmental Risks

In recent years, Congress and state legislatures have constructed disclosure systems to reduce some of the environmental risks the public fears most, often in response to highly publicized incidents. Congress required manufacturers to reveal their toxic releases after a disastrous chemical leak at a pesticide plant in Bhopal, India, in 1984 killed more than 2,000 people. New Jersey, Massachusetts, California, and other states created even broader systems of disclosure. Congress required local water authorities to send their customers annual accounts of detectable contaminants in drinking water after cryptosporidium invaded Milwaukee’s water supply in 1993 and sent 4,400 people to the hospital. Congress required standardized labeling of organic produce amid persistent public concern about pesticide residues in food. Other environmental disclosure systems responded to public fears by providing buyers and renters access to information about hazards from lead-based paint and giving employees access to data about health and safety risks on the job.

These disclosure systems represent a third wave in modern environmental regulation. During the 1960s and 1970s, an era of confidence in government’s capacity to influence business practices with rules, new laws called for minimum standards for design or performance. During the 1980s, a decade of particular confidence in market mechanisms, legislation called for taxes, subsidies, or trading systems to provide economic incentives for improvement. Since the late 1980s, as concern about market flaws caused by information gaps and faith in information technology have grown, new laws have emphasized public access to information.

While such disclosure measures have developed most prominently in the United States, important future applications may be international. Indonesia, the Philippines, and other developing countries have begun to adopt disclosure systems to encourage pollution control. International organizations have used disclosure to improve environmental practices when sanctions have proven infeasible. Unlike standards, taxes, or subsidies, the influence of information is not constrained by national boundaries.

Politics and Compromise

Like other forms of regulation, however, disclosure systems are inevitably the product of political compromise. The value of public access to information has often clashed with the value of protecting trade secrets or minimizing regulatory burdens. The architecture of disclosure has sometimes been skewed to give more weight to narrow, short-term interests than to broad, enduring priorities. The requirement that the public be informed about manufacturers’ toxic releases, for example, did not extend to releases from cars, trucks, buses, and small businesses, the largest sources of toxic air pollution. To ease the burden on targeted manufacturers and thereby enlist their support, Congress allowed companies to base disclosure on estimates rather than on new monitoring and adopted procedures that provided the public with information that was more than a year out of date. Nor did Congress require any calibration of exposure or chemical toxicity, meaning that levels of risk were impossible to discern. Many toxic chemicals were omitted from the government’s initial list, so substitutions might increase rather than decrease hazards. And EPA was never given the resources to assure that reporting was accurate or complete.

These problems are not unique. Public access to data about detectable contaminants in drinking water also allowed disclosure to be based on whatever information water authorities had on hand. The fact that data could be months or years old meant that customers with compromised immune systems could not discern whether the water they were drinking included contaminants they should avoid. Congress also heeded state demands for discretion in designing contaminant reports, thereby compromising consumers’ ability to compare the track records of different systems. OSHA’s hazard communication system relied on data sheets and labels of varying quality and completeness. In all these systems, the truncated scope of disclosure may have led companies to take resources from activities that would have produced larger reductions in environmental risks to devote them to minimizing reported events

Lessons Learned

The issue now is whether designers of future disclosure systems will draw lessons from the early applications of environmental disclosure and improve on this potentially powerful regulatory tool.

The most formidable obstacle to its effective use is the paucity of risk indicators that can claim broad consensus. The current metric for toxic pollution (total pounds of releases) fails to account for toxicity and exposure. But any measure of toxic risk today would be politically controversial and scientifically debatable. Giving people useful information about risks associated with contaminants in drinking water is similarly problematic. Any effort to use disclosure as a regulatory device should include an initial judgment of whether its metrics are good enough to inform rather than deceive the public and how to improve them.

The potential effectiveness of disclosure requirements, like that of other forms of regulation, can also be impaired if their scope is too narrow. If they are successful, such requirements create incentives for target organizations to reduce risks that are reported. But corporate responses can result in an overall increase in hazards or channel too many resources to reducing relatively minor problems if disclosure is not matched to the dimensions of risk in question. The disclosure system for toxic releases encouraged managers to replace listed chemicals with off-list substitutes, even if they were more toxic. It also rewarded large reductions of relatively safe chemicals more than small reductions of extremely hazardous chemicals. Designers of disclosure systems will increase chances of effectiveness by examining with care the boundaries of the risks they seek to reduce.

In addition, disclosure systems require analysis and feedback about how well they are meeting intended objectives. Like other regulations, they can create incentives that do not keep pace with changes in public priorities, scientific knowledge, and markets.

Finally, effective communication is no simple matter. It can be complicated by the cognitive shortcuts that people use to understand risks and by self-serving manipulation of data by self-interested intermediaries. Recent research by psychologists and economists suggests that people tend to overestimate rare but catastrophic risks and underestimate risks from frequent but less dramatic events. People also attach disproportionate importance to risks of events that are easily brought to mind, ignore evidence that contradicts current beliefs, and tune out when confronted with information overload. Learning more about such distortions can enable honest brokers to improve communication.

The emergence of environmental regulation by disclosure holds promise. It represents a constructive adaptation of the American political system to changing times and changing needs. Used wisely, it can improve market mechanisms, enhance public choice, and reduce environmental risks. Designed haphazardly, it can impair markets and set obstacles in the way of pursuing public priorities. No leaps in information technology can assure that accurate and complete disclosure will triumph over the politics of the moment. That is a matter of political will.