Balancing the Books
Assessing the True Cost of Pollution in America
In the business world, companies that do not turn a profit fail. Understandably, corporate leaders focus strongly on the financial bottom line of their company; yet, at the same time, they must also address the concerns of their customers. Since many consumers expect to engage with sustainability-prioritizing companies, businesses face a challenge: how to turn multi-faceted, abstract concepts like sustainability and corporate social responsibility into concrete dollars-and-cents figures. Carnegie Mellon University professor Nicholas Muller, Lester and Judith Lave Professor of Economics, Engineering, and Public Policy, offers an interdisciplinary solution that shows the social impact of emissions in monetary terms.
Muller created the ESG-GED Index to show the impact caused by firms’ pollution. Broadly, Muller’s motivation for creating the Index stems from the failure of public policy to manage some of society’s most pressing environmental challenges. While existing products have serious shortcomings, this tool calculates Gross External Damage (GED) to track environmental performance in monetary terms, rather than standard Environmental, Social, and Governance (ESG) indices that measure emissions in tons.
“The usual policy tools weren’t working,” said Muller. “Recording how many tons of emissions produced by a company doesn’t tell much. But showing the location-specific economic impact of pollution can help investors, for instance, determine if supporting a particular company fits their goals.”
Muller points to multiple factors in a community’s unique demographics that play into the data reflected in the index. “Pollution levels, air quality and water quality, for instance, are often worse in lower-income neighborhoods,” he said. “And because lower-income individuals tend to be less resilient from a health perspective, you get vulnerability that varies by each community’s particular situation. If a given population tends to be more obese, has a poor diet, or has higher rates of illness, the effect of adding pollution to that group is greater than if you added the same amount of pollution to a healthy population.” As a result, the location of emissions produced by different companies can appreciably affect their total impact. The spatially resolved approach embodied in the ESG-GED Index captures these differences.
Muller contends that accurately calculating the impact that a company’s emissions have on society must consider multiple factors, including environmental engineering, epidemiology, agronomy, and economics, among other fields. “If you skip any of that, the findings would be incomplete,” he said.
“Focusing on just ecology, or just epidemiology, or just finance doesn’t show the whole picture. It’s all of it, so this index brings an interdisciplinary approach to the situation.”
The ESG-GED index uses a variety of data points: historical pricing data, comparing air pollution, and climate damages from electric vehicles to conventional vehicles, estimating air pollution damage from energy production. and measuring the impact of transporting freight in the U.S. on climate can all enter into the equation of estimating individual discount rates and risk preferences for corporations.
Muller serves in both the Carnegie Mellon University’s Tepper School of Business and the Department of Engineering and Public Policy in the College of Engineering. His interdisciplinary perspective to both his research and teaching encourages students to adopt this outlook in order to effectively leverage their education to address real-world problems.
“At CMU, that kind of work is in the fiber of the university, and that’s why the best place to do this kind of work is right here,” said Muller. “It’s actually in our DNA to have economists work with engineers and put it all together. We recognize the interdisciplinary nature of a situation and build tools that reflect that understanding.”
This research was made possible by funding provided by alumni of the Tepper School of Business at Carnegie Mellon University and the Heinz Endowments. Muller’s effort was also supported by the Lester and Judith Lave Professorship.
