Sunday Brunch: Can we totally rely on regulation ?
Sustainability, Strategy & Finance

Sunday Brunch: Can we totally rely on regulation ?

Regulation is seen as an important element of the process of building a more sustainable economy. But sometimes it fails - we need to remain vigilant.

If you play the game you accept the rules - old Swedish proverb

Regulation is seen as an important element of the process of building a more sustainable economy. And at one level this makes perfect sense. We frequently argue that companies, on their own, cannot do all the work. We need regulation to set a floor as to what is acceptable, and to create a level playing field.

And we know that regulation is not perfect, every regulation has flaws. But in most cases they give us 80-90% of the outcomes we seek. I will take those odds every time.

But sometimes regulation fails. It lets us down, and lets us down badly. And this is particularly worrying when it relates to our safety.

This doesn't make regulation a bad thing. But it does mean that we cannot 'set and forget'. We need to have processes that hold regulators to account, and that ensure regulation remains appropriate.

The recent example in Korea relating to hydrogen refueling equipment is a case in point.

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Korean hydrogen refueling safety tests 'faked'.

Before looking at what happened in Korea, a more personal perspective. I live in a beautiful part of England, an area known as the Chilterns. And the Chilterns are where you find most of the world's chalk streams. They are a very rare habitat. The UK accounts for around 85% of the global total, and most of these are in the Chilterns. Where I sometimes walk the dogs are watercress beds, that rely on clean running water to survive. And yet the UK regulator allows the local water company to discharge raw sewerage. This is not in secret, and yet nothing happens, despite this being illegal. Regulation only helps when it's enforced.

Over to Korea ... according to a government audit the Korea Institute of Industrial Technology (Kitech), issued 14 false and fabricated test results on hydrogen refueling equipment. And when the fake tests where discovered, senior managers covered it up.

‘Fatal accidents may occur’ | Government agency faked test results on hydrogen refuelling equipment: report
The Korea Institute of Industrial Technology issued false and fabricated reports, according to government audit

According to the audit "in 2022, managers at Kitech pretended they had conducted tensile strength and hydraulic rupture tests on hoses for hydrogen fuelling equipment requested by two domestic companies that were participating in a government research project. But the tests did not take place, despite the fact that the made-up results were later used for government research and development projects."

As the article points out the tensile strength test determines the force at which the hose breaks, while the hydraulic rupture test determines the pressure at which it will rupture. The hose must be able to deliver hydrogen at pressures of 700 bar (ie, 700 times higher than atmospheric pressure) at temperatures as low as minus-65°C, requiring advanced technology.

Having worked in the gas industry (many years ago) I know just how important these tests are - for the safety of the plant operators, and for the general public.

We could think of this as an isolated incident, and yet sadly it's not. A report issued by the Fukushima Nuclear Accident Independent Investigation Commission (NAIIC) after the Fukushima Daiichi nuclear disaster identified a long list of technical failures that contributed to the disaster, laying blame squarely on the shoulders of the energy utilities, regulators and the government.

The Fukushima Daiichi Nuclear Power Station Disaster: Investigating the Myth and Reality
When the Nuclear Safety Commission in Japan reviewed safety-design guidelines for nuclear plants in 1990, the regulatory agency explicitly ruled out the need to consider prolonged AC power loss. In other words, nothing like the catastrophe at the Fukushima Daiichi Nuclear Power Station was possible—no tsunami of 45 feet could swamp a nuclear power station and knock out its emergency systems. No blackout could last for days. No triple meltdown could occur. Nothing like this could ever happen. U

Regulatory capture

One explanation that is frequently advanced for regulatory failure is what is called regulatory capture. This is when the companies being regulated end up effectively 'taking over' the regulatory agency in everything but name. And "the phenomenon of regulatory capture is as old as regulation itself".

A more memorable name for this is the revolving door. This has been called out as being a contributing factor in the current US opioid crisis.

How FDA Failures Contributed to the Opioid Crisis
Pharma has long marketed opioids in ways that contribute to opioid use disorder and deaths by overdose. Regulatory mistakes in approving and labeling new analgesics by the FDA didn’t make us safer.

To be clear. This is not an argument against sustainability regulation. I believe that many of the changes we are seeking will not take place without effective regulation. The financial markets on their own will not deliver. But it is a plea for constant alertness - ensuring that once regulation is in place, it's properly enforced, and that we ensure the bodies responsible for this are fit for purpose.

This is an age old challenge - we can go back to the Roman poet Juvenal who asked ' who will watch the watchmen'.

Yes, this takes time and money. But what is the alternative?

it has been said that democracy is the worst form of Government except for all those other forms that have been tried from time to time.…’Winston S Churchill, 11 November 1947

This is why legal NGO's are so important, challenging governments and companies, and holding them to account.

Legal trends in climate action
Legal actions against governments are seeing some interesting changes. And legal actions against governments have implications for companies and investors.

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