Welcome to Finance and Fury, the ‘Say What Wednesday’ Edition.

We recently had an awesome email from Zoe about a potential market solution following the ‘Solution for pollution’ episode last week;

“We sort our cans from our mixed recycling in our Sydney CBD office building to donate the 10c return to charity. We collect 50 cans per week on our floor which is on level 22 of a 23-level building.

Staff are incentivised to sort their waste through the small charitable 10c donation. However, it is difficult to return cans in the city as there is no spare space to hold sorted recycling. This could be fixed if we could hold sorted recycling in our office buildings. Rather than sending mixed and often contaminated waste to large holding areas outside of the CBD, we could send clean product directly to appropriate recycling facilities. 

There are hundreds of office building across the country holding contaminated recycling then paying waste companies to remove their rubbish. With a small 10c donation to charity for each recyclable product we have a great incentive for our office buildings in the country to hold sorted recycling in their basements which can be sent directly to the correct recycling avenue.

I’m a long-time listener, first time writer. Thank you for such an interesting podcast.”

That sounds like a great program that you are all participating in! Really awesome to hear and is definitely a great effort to help the pollution problem.

How can this become a more popular thing? not just with cans – with bottles, paper, food, plastics.

In today’s episode we will go deeper into this topic

  1. Talk about policy decision making – how to expand this sort of program and also, why policy makers are likely to stuff it up
  2. We have to operate this way due to the influencing factors such as share values, costs, Government intervention, etc.
    • All incentives based – you can lead a horse to water but you can’t make it drink. Policy may end up drowning it.
  3. Then also we’ll run through why simply regulating that companies have to be a part of the supply chain would result in a pretty bad outcome, not only for companies but also us as the consumer.

First, I want to explain a few concepts behind policy decision making and issues I see with the current regulatory environment

  1. Common practice – Things defined by ‘hoped-for’ results, rather than the actual mechanics of decision making
    • ‘Profit making’ businesses often fail to make a profit and become extinct – economist Thomas Sowell calls them ‘residual claimants to the company’s income’ – they get what is left.
    • There’s no more reason to expect a drug prevention program to reduce drug use, or public interest law firms to serve public interest, than there is to expect a company make a profit.
  2. You have to look at what they do – not what they intend to do. This is the trouble with regulation and legislation – set out with what you intend to do, but regulations aren’t a dynamic system and the information feedback loop is almost non-existent
    1. Government makes a blunder with regulations and it takes a while for them to concede (if ever)
      • Do you ever hear them turn around and say ‘we got it wrong’ – instead they say, ‘this policy will work, if we have more money’
      • Doubling down. It’s politicians’ jobs to stay in power – saying you are wrong doesn’t give voters confidence and you may not get re-elected – could be career suicide if they try to correct something that they have done wrong
      • It takes years to have the studies conducted on the effects anyway – there’s time to ride it out and still retire
    2. Let’s compare this to a company – Can a company afford to double down if it is wrong? If it does, it is no longer a company. This is part of an instant (quick) feedback of information about your decisions. Not making a profit shows that you’re doing something wrong (sales, costs, consumer wants) – need to find out ASAP and correct the model.
  3. That is where the incentives lie – how effective they are is based around the level of consequences – pros and cons
  4. But still need the information feedback loop as part of the system – allows to adjust course midstream – rather than just wait and crash – incentives aren’t worth anything if you have no information on what is working, and what isn’t
  5. Policy has to have two key components – correct incentives – quality information feedback loop
    • Issues – how do you collect all of the information needed to enforce regulations? – use Recycling as example
    • Gov – how does it know best how to collect rubbish – or transport, store, process, recycle, price, get it to the companies – this is the main issue of any centrally planned system –
    • information is limited and inability to adjust decisions to the individual level, rather than collective – farms under economic authoritarians like Stalin, Mao – weather and crop differences couldn’t be managed –
    • people forced into collective farming – people starved, even though you had a massive increase in number of workers in one project, if you don’t know what you are doing or only are able to use what you are given, hard to farm well
  6. This is why I am not a massive fan of a lot of regulations – not built in incentives but enforcement, and no feedback loop
    • Throwing darts blindfolded and hoping you don’t hit anyone

Example – Banking regulations – we will be back to another royal commission in 3-4 years on banks

If I was a betting man – derivative transaction reporting not being fulfilled – so APRA and ASIC just double down on similar policy – Could go on and on – but back to the core of designing a policy – never leaves the method up to companies, punishes them if they don’t meet the quotas

  1. Incentives are incredibly important – any policy should be designed to provide incentives to achieve the intended outcome – not a policy designed to enforce the intended quotas
    1. The name of a policy means nothing – Think about any company that is run privately and for a profit
    2. ‘for profit company’ – what if it is running at a loss? Still call it a for profit as that is the intention
    3. Problem – when things are named and designed around the intended outcome we are more willing to accept it
      • Policy to remove all inequalities in the world – only way it can be done is to remove every choice you have
      • When there are freedoms, there tends to be ranges of inequality due to choices – distributions over ranges
  2. With the right incentives, companies would willing adopt programs – but the collection/storage/transport of recycled goods is a costly process, companies would need to be incentivised to participate in these activities beyond it just being the right thing to do.
  3. What incentives will get companies attention?
    1. nature of any company in a modern economy requires incentives to be a financial incentive
    2. Even efforts that are taken for ‘good will’ are still financially motivated – doing these activities is intended to provide marketing and awareness of the company and the products/services they sell – social media posts
    3. How the ‘brand’ of a company is viewed by potential consumers is one of the biggest factors in determining their long term success. If they are seen to be doing good, consumer are more willing to support them and therefore, profits will go up. On the other side, when consumers find out that they have been doing the wrong thing companies get heavily punished.
    4. A recent example is Volkswagen emissions scandal back in 2015 where their share price halved, going from over €200 to €100 in a month
      • world’s largest automaker by sales – installed software to deceive the CO2 emissions tracking software – people bought the cars thinking they were helping – but then the market punished them. As it should – it is a market of regulations and consumers that drives business decisions
  4. We are consumers – why can’t we just force companies to do this? Boycotts etc. – we are myopic, and cost sensitive (cost in time, effort, money, all factors)
    1. Boycott may last a few days, weeks, months – but will 100% of consumers participate? And how long?
      • May have a minimal effect if company does capitulate – as long as they are seen to do something – minimal
    2. What about our short-term natures? Another barrier in having a company adopt an ongoing recycling model
      • Events of providing ‘good will’ are short lived benefits to the brand – consumers soon forget
      • We are bombarded with information constantly – companies need to constantly come up with a new campaign to grab public attention again
    3. Implementing an ongoing program that would increase their operating costs isn’t an attractive option
      • Brand goes up, but effects of activity fades over time – we adapt or forget – but costs remain

What may make companies willing adopt the responsibility of being part of the recycling supply chain

  1. Incentive for them – either tax credits or other form of regulatory benefit would need to be provided
    1. on the surface this sort of policy wouldn’t look popular – giving the fat cat companies tax cuts –
    2. But if the Gov can cease doing this, then the costs they incur goes down, meaning less tax needed
    3. Worried about those large multi-national companies avoiding more tax still?
      • They are only paying the level of tax that they view as ‘socially acceptable’, again to preserve the brand.
      • Massive banks like Citi-group, they could all pay 0% of tax using profit shifting but choose not to as that would decrease their brands value in the eyes of the consumer.
    4. This isn’t true for any small to medium sized business though – don’t have access to the same profit shifting schemes
      • SME’s are also where almost half of the population is employed
      • providing incentives to companies based around what will best incentivise them would be needed
      • also allow the greatest range of benefits to be provided when compared to blanket regulations enforcing the participation in the same activities
      • large companies could absorb the costs while SME’s would struggle to keep up with these over time
  2. No idea what the right level of incentive would need to be – don’t think it should be a blanket – something to meet each industry needs
    • Let them figure it out over time – thousands of companies trying different things – some will stick, become adopted – different things will work in smaller business, compared to large – allows for flexibility
  3. Know that it cant be a blanket enforcement – speaking of which
    1. Still reading through the UNs Circular Economy – holy moly there is a lot of additional proposals that massively increase global regulations – Global price controls, quotes, enforcement of methods – conjunction with non-profits: part of project mainstream (actual name) – Looking at the list of partners –
    2. Danone – food processing multinational – Google – Unilever – H&M Group –
    3. Intesa Sanpaolo – massive bank – 800bn euros – 25% bigger than CBA
      • They are taking care of the money (5bn euro credit facility) plus designing lots of legislation:
      • Quote – circular economy principles not only for the international corporates and large companies but also for the small and medium-sized enterprises – the main focus of our Group commitment. The circular economy is one of the most important new development frameworks, enhancing companies’ resilience and changing their business models. 
  4. All massive companies – revenues in the billions –
    1. This is who the circular economy would really benefit – either absorb the cost of participating (they are designing it based on what works for them), or pay the fines for breaking the new regulations that they championed into the market place
    2. SMEs suffer – can’t source (access to supply chain), afford (increased cost of goods), sell (restrictions on what product reused content is, or not legal to sell) etc under the new regulations
  5. This form of enforcement style policy just ends up digging the consumer into a hole
  6. The circular economy does sound good though – it sounds like a great thing to work towards – but that is because they are stating the intended goals again – but mechanisms are more important than the stated goal – Say I am going to lose weight, but if I super size myself, I wont be successful
    • This will be part of a bigger series – companies backing the circular economy and why will be part of the series

Thanks again for the question Zoe! And if you have a question or a topic you’d like to explore on the podcast, hit me up on the Finance and Fury contact page!

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