There's no need to quantify everything

ESG stands for Environmental, Social, and Governance, and investors are increasingly considering these non-financial factors when identifying companies' risks and growth opportunities.  

About ESG, the Economist writes:

[M]uch of ESG is deeply flawed. The concept’s popularity has been partly fuelled by real-world concerns, especially climate change. Yet it has had a negligible impact on carbon emissions, especially by the biggest polluters. Its attempt to address social issues such as workplace diversity is hard to measure. As for governance, the esg industry does a lousy job of holding itself to account, let alone the companies it is supposed to be stewarding. It makes outsize claims to investors. It puts unmanageable demands on companies. ESG investing: A broken system needs urgent repairs, Economist, 23 July

I share the Economist's scepticism; I dislike the over-formalising and quantification of things that are best left to people's discretion. When certain ESG concerns, or such matters as affirmative action become over-formalised, then politics steps in, the debate becomes polarised and meaningful discussion becomes impossible. 

However, a Social Policy Bond regime would revolve around the targeting of broad, meaningful outcomes, and just about any measure of such outcomes can be gamed and manipulated. (There are workarounds, though. For example, when targeting for improvement the literacy rate of teenage girls in Bangladesh, participants in random surveys would not be specified in advance. so that they couldn't be given more attention than other girls.) As well, there is Campbell's Law to consider: 'The more any quantitative social indicator is used for social decision-making, the more subject it will be to corruption pressures and the more apt it will be to distort and corrupt the social processes it is intended to monitor.'  I'd like, therefore, to see a panel of trusted, impartial experts confirm that any recorded improvements are genuine. Because Social Policy Bonds work best at a large scale - national or global, say - the costs of monitoring and verification would be relatively low.

I don't need to know about electric vehicles

Rich Barnett writes to the editor of the Spectator: 

Martin Vander Weyer might continue to bang the drum for electric cars and their ‘green’ credentials but the problem is that in the drive for such cars we have effectively seen a cessation in development of petrol and diesel engines....[Y]our correspondent swerves the issue of just how clean these [electric] cars are, especially when we follow the production process back to the raw materials. In reality, the cleanest cars are those already built and maintained. Rich Barnett, the Spectator, 9 July

Mr Rich may be right or wrong. I don't know. But, as an advocate of policy that targets meaningful environmental outcomes, I don't need to know. It might be true that the environmental costs of electric vehicles is higher than that of petrol and diesel vehicles now; but that could change. What is the probability that legislation made today can correctly calculate even today's relative environmental costs, let alone those of any future time period?

My suggestion is that instead of trying to work out the best ways of improving the enviroment when our knowledge of ever-changing relationships between cause and effect is inescapably scanty, we target those environmental goals we want to achieve and reward people for achieving them. This makes better sense for two main reasons: 

• There is far more consensus about what those goals should be than the supposed means by which they can be achieved.  
• Technology, and our knowledge of the relationships between cause and effect are changing constantly in ways that nobody and, in particular, no regulatory body, can anticipate. 

When governments favour, whether by subsidy or other means, what they believe to be the most efficient way of achieving certain ends they are often looking only at current technology and short-term goals. Our environmental problems, though, require a long-term approach. Environmental Policy Bonds aim not only to re-focus policy on long-term goals but to inject the market's incentives into their achievement.

Philanthropists want to be in control. Just like governments.

Emma Saunders-Hastings, in her recent book about philanthopy, asks an important question:

Before Parisian firefighters had fully extinguished the blaze that ravaged Notre- Dame in April 2019, lavish pledges rolled in from philanthropists eager to support the cathedral’s reconstruction: €100 million from Bernard Arnault, France’s richest person; ... commitments in the millions and tens of millions of euros from individual and corporate donors in France and abroad. The pledges were greeted with a mixed reception: conventional expressions of gratitude in some quarters but swift criticism from others. Why, some skeptics asked, were private funds so readily available to repair a building
but not to address rising inequality in French society? Emma Saunders-Hastings, Private Virtues, Public Vices: Philanthropy and Democratic Equality, March 2022

Or, indeed, other social and environmental problems such as unemployment, crime, or global concerns, such as war?

Later, Ms Saunders-Hastings grants that 'some donors have a better grasp of the measures that would best promote people’s substantive interests than the elected officials whom they are seeking to influence or bypass'. She concludes: 

Democratic societies need different ways of promoting reciprocity and long-
term attention to the public good— ones that do not require reliance on the
competence and goodwill of hereditary or economic elites. Contemporary philanthropy has not yet solved this problem.  

It seems to me that Ms Saunders-Hastings' first question is relatively easy to answer: philanthopists are unlikely to want to undermine the system that allows them to accumulate and maintain their vast wealth; including by influencing government policy. Also important, I believe, is that philanthropists are biased in favour of projects that are highly visible, where their contributions can be easily identified. In this, it is not very different from governments, which also favour the glamorous and photogenic over more mundane goals that require multiple approaches and much experimentation and refinement before they can be achieved: hence the persistence of some of our most grievous social problems. 

I have tried, with no success, to interest philanthropists in the Social Policy Bond concept. It seems to me that they are reluctant to relinquish control over the destination of their funds. In this respect, also, they are similar to governments. It's an understandable bias - though regrettable. My wish is that all funding bodies, private or public sector, would reward those who solve our most persistent, long-term problems, rather than insist on dictating who shall receive their funding and how they shall allocate it.

A better way of achieving environmental goals

We need to target environmental outcomes, not the alleged best ways of achieving them.

Text shared thousands of times on social media claims green energy is "more destructive to the Earth's environment than meets the eye." But the posts make various inaccurate claims, including that ... solar panels or wind turbine blades cannot be recycled. Elias Huuhtanen, Posts mislead about environmental impact of green energy, AFP Factcheck, 31 March

The source also questions claims about the quantity and environmental cost of minerals used for electronic car batteries. 

My conclusion from such debates about the costs and benefits of different ways of gernerating electricity or powering vehicles is simple: advocating one option over another is just too complicated. Life-cycle analyses can be done, but they come festooned with boundary issues and are unlikely to be robust against changes in technology and our knowledge of environmental impacts, and other variables that change over time and space. And how shall the different costs of, say, child labour be weighed against possible reductions in greenhouse gas emissions? 

Can you imagine any government doing that? And getting it right? And continuing to get it right when new technology or new information about, say, mining or carbon dioxide emissions and their effects becomes available? It's not going to happen.

Which is why we need, urgently, an outcome-driven approach. The old way of doing things, with government doing what it thinks is best, might have worked when government was  well intentioned, and relationships between cause and effect on the environment much simpler to identify. It just doesn't work nowadays, when government is subject to powerful corporate interests and environmental relationships are much more complex. Government is not up to the job of working out whether climate change is best tackled by subsidising rail, electric vehicles, windmills, or catalytic converters. It's not what government is good at, and it's not what people go into government to do. 

What government can do, though, is set up a regime whereby people are rewarded for improving the environment or helping bring about climate stability, however they do so. In other words, it could contract out the achievement of a better environment or a more stable climate to a motivated, diverse, adaptive private sector. Government could stipulate the environmental outcomes it would reward, which is a simpler and less contentious task than trying to work out how best to achieve them. If it did so by issuing Environmental  Policy Bonds, or Climate Stability Bonds, then it's likely that a new sort of organisation would arise: ones that would research, experiment, refine and implement an array of diverse, adaptive approaches to society's environmental goals. They could perform their own life-cycle analyses if they wish; but whatever they do would be done with the aim of achieving our goals as cost-effectively and quickly as possible.

Rewarding nuclear peace

The Economist writes:

Nuclear-armed states may begin to believe that they can gain by copying Vladimir Putin’s tactics. One day, someone somewhere will surely turn their threat into reality... Source

Consider the incentives on offer to those in power today: if they possess nuclear weapons they can initiate a conflict knowing that they can dictate its course by threatening, implicitly or otherwise, to deploy them. If the target of their aggression doesn't possess nuclear weapons or if the target cares more about its civilian population than the aggressor, then at some point in the future, the reality feared by the Economist will come to pass. It might be today, it might be in a few years, but the number of countries with nuclear weapons continues to proliferate and we should not have to rely on those in power to continue to exercise restraint at all times. The taboo against threatening use of nuclear weapons has been broken. It now appears inevitable that, before long, the taboo against their use will also be broken. 

My previous post highlighted the continuing rise in the level of greenhouse gas emissions, despite the many agreements, protocols, treaties and hard-working organisations devoted to reducing their level: 

  

 

Fig.1 Atmospheric carbon dioxide level/Probability of nuclear conflict (?)

 

It seems that the probability of a nuclear strike of some sort is on a similar upward trajectory. What is to be done? 

My suggestion is that we we offer incentives for people to achieve that which we want to achieve: sustained nuclear peace whoever they are and however they do so. If people think that continuing along our present pathway isn't working, they should have incentives to research into and experiment with different approaches, refining those that appear most promising, and terminating those that don't work. This could be done with Nuclear Peace Bonds, an application of the Social Policy Bond concept. As with climate change, the aim is to encourage diverse, adaptive approaches to solving a complex, long-term problem that poses a great risk to large numbers of people and the environment.

Actually, people do care

This graph appeared recently in the Financial Times:

I'm skeptical about the targeting of greenhouse gas emissions (see here) but as that has been almost the entire focus of the climate change debate, the graph seems to imply that:

• People share my skepticisms, or
• Nobody really cares.

There is another possibility though, and that is that there is a massive gap between what most people want to see and what governments implement: between the stated goals of policies and outcomes. This applies to many other social and environmental goals, especially those that can be achieved only in the long run, and whose achievement requires a mix of approaches, the most efficient of which cannot be known in advance. 

So: almost nobody wants to see a nuclear war, yet the probability of a nuclear exchange hasn't vanished and may be increasing. Non-nuclear conflict, disease, crime, illiteracy, environmental depredations, extreme poverty...these social and environmental problems remain large and, in many areas, are growing despite our undoubted ingenuity, noble aspirations and effort put in by many individuals, government and non-government agencies and others.

In my view, this disconnect is a result of the inability of any conventional organisation - government or not - to cope with such society's complexity and long lead lines. My suggestion: we should be targeting outcomes, and rewarding people who achieve them, however they do so. Social Policy Bonds are one way in which this could be done. 

For more about the Social Policy Bond concept see here. From that page there are links to its application to climate change, conflict, crime, literacy and the environment. For a new sort of organisation that could arise to help achieve targeted outcomes see here.

We need the freedom and incentives to experiment with policy approaches

Stephen Bush writes about the difficulties the UK's New Labour Government faced when conducting trials of different policy initiatives:

In the early years of New Labour... the literacy and numeracy hours ... were initially trialled only in a handful of areas, while the “London challenge”, a bid to improve the capital’s state schools, provided a test bed for a number of policies since rolled out nationwide. But this can create problems of its own: when a policy programme doesn’t work, it is often politically painful for a government to abandon it, so all that a “pilot scheme” really does is expose one part of the country to a bad policy slightly earlier than the rest. When, as with the London challenge, the policy works, other parts of the country can quickly come to resent not feeling the benefit earlier. [Such a trial] is difficult in a democracy because it leaves governments either facing the embarrassment of abandoning an expensive, sometimes high-profile scheme, or resentment from voters at not rolling out an effective one earlier. A-B or not A-B? Why democracies struggle to innovate, Stephen Bush, Financial Times, 10 May

Exactly: these trials are difficult for governments to perform, for the reasons Mr Bush cites. What we should be doing is providing incentives for any number of bodies; first to conduct their own trials; and second to terminate those that fail, and refine, implement and replicate those that are most promising. Efficiency in achieving the policy goal should be the main criterion determining which initiatives should be dropped, and which should be promoted.

Incremental adaptation and historical accident have left us with the decision-making bodies of today. These include not only government and its myriad agencies, but private sector corporations, religious bodies, interest groups, non-governmental organisations and individuals. The way they operate gives them no financial incentive to try different approaches and prioritise and adapt the most promising. It is not simply a matter of giving more money to the people working for those bodies that conduct the most promising trials: it is - possibly more importantly - a matter of making sure that more resources are channelled into the most promising approaches and away from those that show signs of failing.

The current policymaking world has little scope for the competition that sees an end to unfortunate mutations. As well as the public relations problems cited by Mr Bush, governments find it difficult to terminate failing iniatives. The vested interests are so deeply entrenched that the Darwinian method of allowing optimal solutions to emerge from a range of possibilities isn't given a chance to work. 

Social Policy Bonds could be the solution. Under a bond regime people have incentives to explore, refine and try out new ways of doing things, and to exploit only the most successful approaches. There would be more trials conducted of more diverse possible policy initiatives, and the bonds would give incentives for the mix of promising approaches to change over time, in pursuit of long-term goals that are considered so remote as to be unachievable in today's policymaking environment. Such goals, as for instance, world peace. 

Mr Bush concludes:

Democracies will never be able to move fast and break things in the way businesses can — but giving different players freedom to experiment can help share out the benefits.

I would slightly alter that sentence: '...giving different players freedom and incentives to experiment...' 

For another post about the need for experiments in policymaking see here. For a piece on applying the Social Policy Bond principle to world peace, see here.

 

Rationality + badly-designed incentives = poor health

In the absence of broad, coherent, long-term goals that are actually meaningful to ordinary people, we end up with Mickey Mouse micro-objectives that, a cynic would believe, are designed to channel society's resources into purely private goals. This can be seen clearly in health care, where there are few incentives to increase well-being as measured by such indicators as longevity, or Quality-Adjusted Life Years, and all sorts of incentives to encourage professionals to prescribe medications regardless of how beneficial they are to the population. Several recent commentaries examplify this point:

Writing about the Number Needed to Treat (NNT) of prescribed drugs, Sebastian Rushworth says:

Doctors have been conditioned by the pharmaceutical industry to think that drugs that provide very low probability of benefit are effective. An NNT of 10 is often considered good, and an NNT of 5 is considered excellent. Even an NNT of over 100 is often considered acceptable! Patients are rarely informed that the odds of them getting any benefit from the new drug they’re being prescribed are far less than 50:50. And they’re rarely informed about what the harms are, and how likely they are to experience them. What defines a good drug?, Sebastian Rushworth, 14 April

Malcolm Kendrick writes about the Quality and Outcomes Framework (QOF) system was being used by doctors in the UK's National Health Service:

Replace it with carefully crafted treatment algorithms, based on the best possible evidence. To explain in a little more detail. QOF itself is a system whereby GPs can earn points for reaching various targets. They are then paid money for each point gained.  Evidence Based Medicine - it was a good idea, Malcolm Kendrick, 25 April

The problem is that these targets have little to do with health, and much to do with the goals of the pharmaceutical companies:  

[Y]ou can gain points for such things as lowering the blood pressure to a ‘target’ level in the approved percentage of patients. Or driving the cholesterol level down below the ‘target level’, or getting the blood sugar (HbA1c) level below the ‘target’ level in the approved percentage of patients.

In short, for QOF to work, the GP needs to create database after database of different diseases. Then carry out audit … after audit. What a great use of clinical time it all is. Appointment after appointment filled with patients called in to have their annual blood pressure check, which just sneaks in just below target level – every single time.

For the pharmaceutical companies this is manna from heaven. Every patient with diabetes logged and audited. Every one driven to reach a ‘target’. A target that will inevitably require medication. Medication that the pharmaceutical company just, ahem, happens to have developed. Medication where they just, ahem, happen to have done all the clinical trials.

Dr Kendrick's skepticism is borne out by his quote from an analysis done by Imperial College London:

A substantial number of English communities experienced a decline in life expectancy from 2010-2019, Imperial College London researchers have found … For such declines to be seen in ‘normal times’ before the pandemic is alarming.

Finally, Guy Hatchard writes about the Wall Street Journal's new-found skepticism about Covid vaccines:

The WSJ article described the effect of boosters as fleeting, mild and short-lived. It sounded a note of alarm saying that neither the CDC [US Centers for Disease Control] nor the US National Institutes of Health (NIH) had made a priority of studying vaccine complications. Moreover their VAERS [Vaccine Adverse Event Reporting System] data collection and analysis process is incomplete and inadequate. In other words, the safety investigation to date of adverse effects of mRNA vaccination is incomplete and potentially misleading. The central question raised by the WSJ opinion piece is, why wouldn’t the US regulators wish to undertake accurate and complete investigation of adverse effects of mRNA vaccination? Have pharmaceutical interests been able to influence decision-making at the FDA [Food and Drug Agency] to their own commercial advantage at the expense of safety considerations? When will these vaccine zealots wake up to the truth?, Guy Hatchard, TCW, 24 April

I share all these authors' skepticism, bordering on cynicism. It's clear that apart from a few outspoken commentators such as these, all players throughout are reacting rationally, if ignobly, to the incentives on offer. My suggestion? In place of indicators and targets designed, in my view, by vested interests, including government agencies to enhance their profits and power, we target for improvement the well-being of all citizens. We need to channel our ingenuity and society's scarce resources into improving the physical and mental well-being of whole populuations and to create incentives to do so. I have written about applying the Social Policy Bond principle to health here and, more extensively, here.

Is Hydrogen the solution? Nobody knows

We just don't know how to deal with some environmental problems. A recent UK government study points to some of the uncertainties about the impact that use of hydrogen as an energy carrier could have on the atmosphere and the greenhouse effect. Thus: 

Leakage of hydrogen into the atmosphere will decrease the tropospheric concentration of hydroxyl radicals (OH), the major tropospheric oxidant, and thereby increase the atmospheric lifetime of methane and its impact on climate. Atmospheric implications of increased Hydrogen use, Nicola Warwick, Paul Griffiths, James Keeble et al, Universities of Cambridge and Reading, April

Other uncertainties could arise from more hydrogen leaking into the atmosphere and increases in the concentration of both tropospheric ozone and stratospheric water vapour, boosting a 'radiative forcing' effect that raises temperature. 

The key concept here is uncertainty. It would seem foolish, but not inconsistent with government behaviour, to go all out for a 'hydrogen economy', which might end up creating more environmental problems than it solves. Or it might not. Nobody knows. In circumstances like this, where the science is uncertain, I would advocate Climate Stability Bonds. These would target what we want to achieve for the world's climate, but not how to get there. Bondholders would have incentives to work out the best ways of achieving our climate goal, even over the necessarily long period that such achievement will take. Most likely a range of technologies, including hydrogen, will need to be researched, refined, experimented with and implemented. No government policy can bring about the diverse, adaptive range of activities that will be necessary to achieve a climate goal. Our knowledge is too scanty and ever expanding to determine how best to proceed. But what government can do (perhaps with the help of supra-governmental bodies, non-governmental organisations and the public) is to raise funds that, in a Climate Stability Bond regime would ultimately reward those who help reach our goal.

The aim of Climate Stability Bonds isn't isn't to create a stable climate: it's to reduce the probability of catastrophic climate breakdown, now being seen by some as climate emergency. In the face of the uncertainties that bedevil almost every aspect of this emergency (some question even whether it even qualifies as an emergency), it is tempting to do nothing, or make only token, highly-publicised gestures in the right direction. A Climate Stability Bond regime would address the reluctance (or hypocrisy) of governments to channel taxpayer funds into possibly solving a long-term problem when there are so many more immediate claims on society's scarce resources. It would do so because, under a bond regime, until our climate goal has been achieved, government need spend nothing. All risks would be borne by bondholders. 

I have written extensively on Climate Stability Bonds. Links are here.

World Peace Bonds, while we have the chance

We are living before the first nuclear exchange. The probability that a nuclear weapon will be detonated in the next few years is, sadly, high. Indeed, looking at the way our species has developed, it seems inevitable. 

A world in which North Korea and other small, poor countries acquire nuclear weapons is not going to be safe for the liberal values under which most of us, mainly in the west, are lucky enough to live. We can see the pessimistic scenarios as a clash of civilizations, or a clash of values, or shifts in geopolitical power, but I choose to see it as a problem of perverse incentives.

For most of the people in politics, holding on to power, or increasing it, is an end in itself. Solution of social problems can be a means to that end but whipping up nationalistic fervour at the expense of improving your citizens' well being can work just as well, with the Russian leader being the current obvious example. Our political systems reward those most adept at acquiring power. Threatening the use of nuclear weapons is one way in which a regime can hold on to that power.

What can ordinary people - those of us who are content not to have the power to kill millions of human beings - do, faced with the realistic possibility that the nuclear taboo will be violoated some time soon? My suggestion is that we issue World Peace Bonds. These bonds would be redeemable for a fixed sum only when a targeted array of indicators of peace had been achieved and sustained for a long period. They would reward people who do what they can to end violence. Backed by a combination of governments, non-governmental organizations, philanthropists and ordinary people, they would encourage a vast number of peace-generating approaches. Some would inevitably fail; the way the market for the bonds would work means that these efforts would be terminated and resources diverted into more promising initiatives.

The effect of World Peace Bonds would be to give incentives to accelerate and guide our progress toward a less violent world more efficiently than has happened so far: a protracted, haphazard and bloody path that has, true, given us a less violent world until now, but also one that has left us fearful of self-induced catastrophe. We can do better than that. By acknowledging that not all approaches are going to work, and supplying incentives for those that do, we can guide and accelerate evolutionary processes to bring about, quickly and efficiently, what is surely our most urgent goal: world peace