Grantee Research Project Results
2000 Progress Report: Business-led Environmental Management: Economic Incentives and Environmental Implications
EPA Grant Number: R827919Title: Business-led Environmental Management: Economic Incentives and Environmental Implications
Investigators: Khanna, Madhu , Thurston, Deborah
Institution: University of Illinois Urbana-Champaign
EPA Project Officer: Chung, Serena
Project Period: December 15, 1999 through December 15, 2001 (Extended to December 15, 2002)
Project Period Covered by this Report: December 15, 1999 through December 15, 2000
Project Amount: $241,516
RFA: Decision-Making and Valuation for Environmental Policy (1999) RFA Text | Recipients Lists
Research Category: Environmental Justice
Objective:
This research will:
- Develop a framework to investigate the factors that have motivated corporations to undertake business-led environmental management. In particular, we seek to examine the relative role of mandatory environmental regulations, pressure groups such as consumers and stockholders, as well as firm-specific attributes in creating incentives for the adoption of proactive environmental management practices by firms.
- Examine the effectiveness of business-led environmental management as a mechanism for achieving a reduction in toxic pollution and analyze the extent to which mandatory regulations and business-led environmental management complements or substitutes.
- Analyze the implications of business-led environmental management for the economic performance of firms, that is, the extent to which firms that undertake proactive environmental management achieve better economic performance than they would have achieved otherwise.
Progress Summary:
The first part of this research develops a framework to analyze the factors that could be leading firms to undertake unilateral initiatives to improve their environmental management systems and possibly their environmental performance. This framework is used to obtain empirically testable hypotheses of the determinants of the environmental management practices adopted by firms that are tested using a detailed firm-level data set. This framework is used to analyze the incentives provided by environmentally friendly consumers, competitive pressure, mandatory regulations, and firm-specific attributes for choosing a comprehensive environmental management system by firms. The quality of environmental management also is assumed to improve the effectiveness with which polluting inputs are used, thereby reducing the effective costs of those inputs. This framework is used to examine conditions under which improved quality of environmental management can lead to improved environmental performance. Theoretical analysis shows that firms that face greater pressure from consumers, are larger polluters, belong to less concentrated industries, and face a stronger threat of mandatory costs of compliance are more likely to find it in their self-interest to improve the quality of environmental management. However, a higher quality of environmental management does not ensure an improvement in environmental performance. The impact on environmental performance depends on the relative strengths of the effect of environmental management on pollution per unit output, and on demand and production levels.The hypotheses obtained using this framework are tested using data on environmental management practices adopted by Standard & Poor=s (S&P) 500 firms. The data were obtained from the Investor Research Responsibility Center, Washington, DC, for 1994 and 1995. The data are supplemented by detailed and broad-based firm-level data on environmental performance from the Toxic Release Inventory; financial performance data from the S&P=s Compustat database; and data from the EPA on the number of Superfund sites for which firms are held potentially responsible and on the number of times firms were inspected. A two-step empirical method is developed to analyze these data. In the first step count data models, the negative binomial and the ordered probit?which take into account the discrete and non-negative nature of the management practice variable?are used to analyze the motivations for firms to adopt a comprehensive environmental management system. The analysis shows that economic factors?such as the threat of environmental liabilities and penalties for noncompliance with mandatory regulations, as well as market pressures on firms that produce final consumer goods and belong to industries that are more competitive?play a statistically significant role in inducing corporate environmentalism among these firms. Additionally, firms emitting larger onsite toxic releases per unit output, but smaller offsite toxic releases per unit output, and facing a greater threat of anticipated regulations on hazardous air pollutants were more likely to adopt a comprehensive environmental management system. We are in the process of undertaking the second step of our analysis in which instrumental variables obtained from the first step will be used to examine the impact of adoption of environmental management practices on toxic releases generated by firms. Toxic releases will be disaggregated into those discharged onsite and those transferred offsite for disposal and treatment.
The research conducted so far addresses the first objective stated above. The contribution of this research lies in being one of the few studies examining the extent to which corporations, particularly in the United States, are fundamentally changing their outlook towards environmental problems, adopting a proactive management system to address those problems, and providing an economic rationale for their adoption. It develops objective and measurable proxies for pressures - from consumers, investors, and the government - that might motivate the adoption of such a system by firms. This allows us to identify the types of firms, based on their observable characteristics, that are more likely to have incentives to develop an environmental management system and its implications for the design and targeting of policy initiatives towards firms less likely to be self-motivated to do so. Additionally, it also will address the issue of effectiveness of these unilateral initiatives being taken by firms, and the extent to which these initiatives can be relied upon to achieve environmental protection.
Future Activities:
In 2001, the research will be addressing the second and third objectives listed above. First, we plan to analyze the implications of adoption of environmental management practices for the toxic releases emitted by firms. Cross-sectional data analysis methods and panel data methods will be used to examine whether adoption of environmental management practices led to reductions in toxic pollution, while controlling for several other factors such as regulatory and market pressures that could have induced such changes anyway. Additionally, the factors motivating the adoption of specific management practices, such as total quality management, corporate-wide environmental standards, self auditing, and participating in voluntary programs, will be analyzed. The implications of the adoption of each of these individual practices for environmental performance of firms will be analyzed using both cross-section and panel data methods.The researchers also will examine the implications of environmental management for the economic performance of firms. Data for this analysis will be obtained from the S&P Compustat database. Economic performance will be measured using both accounting and market-based measures. Instrument variable techniques will be used to correct for endogeneity that arises, because the adoption of environmental management practices is determined simultaneously with the profits of the firm. Both cross-section and panel data methods will be used for this part of the analysis as well. This would address the third objective listed above. We seek to extend the existing literature that examines whether environmental performance influences the way that investors view the value of the firm by analyzing the impact of a firm=s adopting an environmental management system on its economic performance. While examining the impact of environmental management on economic performance, we plan to control for several other firm-specific variables such as concentration of the industry, size of the firm, demand growth, and innovativeness of the firm.
Journal Articles on this Report : 2 Displayed | Download in RIS Format
Other project views: | All 8 publications | 3 publications in selected types | All 3 journal articles |
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Type | Citation | ||
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Khanna M. Non-mandatory approaches to environmental protection. Journal of Economic Surveys 2002;15(3):291-324. |
R827919 (2000) R827919 (2001) R827919 (Final) R827918 (2001) |
Exit |
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Khanna M, Anton WRQ. Corporate environmental management: regulatory and market-based incentives. Land Economics 2002;78(4):539-558. |
R827919 (2000) R827919 (2001) R827919 (Final) R827918 (2001) |
Exit |
Supplemental Keywords:
toxic releases, hazardous air pollutants, on-site toxic discharges, off-site toxic discharges, voluntary initiatives, environmental economics, survey, pollution prevention, end-of-pipe abatement, regulatory pressures, market-based incentives, econometric, count data, analytical, panel data, random effects model., RFA, Scientific Discipline, Economic, Social, & Behavioral Science Research Program, Economics and Business, Ecology and Ecosystems, decision-making, Social Science, Economics & Decision Making, alternative compensation, ecosystem valuation, policy analysis, economic research, toxic release inventory, decision analysis, business-led environmental management, cost benefit, economic incentives, environmental values, standards of value, cost/benefit analysis, environmental policy, psychological attitudes, public values, pollution prevention, public policy, source reduction, benefits assessmentProgress and Final Reports:
Original AbstractThe perspectives, information and conclusions conveyed in research project abstracts, progress reports, final reports, journal abstracts and journal publications convey the viewpoints of the principal investigator and may not represent the views and policies of ORD and EPA. Conclusions drawn by the principal investigators have not been reviewed by the Agency.