Grantee Research Project Results
2001 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, 2000 through December 15, 2001
Project Amount: $241,516
RFA: Decision-Making and Valuation for Environmental Policy (1999) RFA Text | Recipients Lists
Research Category: Environmental Justice
Objective:
The purpose of this research project is to develop a framework that will 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. This research project is examining the effectiveness of business-led environmental management as a mechanism for achieving a reduction in toxic pollution. This project also involves analysis of the implications of business-led environmental management for the economic performance of firms (i.e., 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 project develops a framework that analyzes the factors that could lead 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 that firms adopt. Observable characteristics of firms are used to develop proxies for the incentives provided by consumers, competitive pressure, peer firms, investors and mandatory regulations, as well as by firm-specific attributes for choosing a comprehensive environmental management system by firms. In the second part of this research project, we hypothesize that the quality of environmental management can be expected to improve the effectiveness with which polluting inputs are used, thereby reducing input use and pollution per unit output. We also hypothesize that regulatory and market-based pressures that firms face are likely to influence their pollution per unit output.
The hypotheses obtained using this framework are tested using data on environmental management practices adopted by Standard and Poor's 500 firms. These data were obtained from the Investor Research Responsibility Center, Washington DC, for 1994 and 1995. This data is supplemented by detailed and broad-based firm-level data on environmental performance from the Toxic Release Inventory, financial performance data from the Standard and Poor's Compustat, as well as data from the U.S. Environmental Protection Agency (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 has been developed to analyze these data. In the first step, negative binomial and ordered probit models consider the discrete and non-negative nature of the management practice variable and 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. Firms belonging to industries where other firms have on average adopted a higher quality environmental management system were more likely to adopt higher quality systems themselves, possibly in response to peer pressure. Additionally, firms emitting larger onsite toxic releases per unit output but smaller offsite toxic releases per unit output were more likely to adopt a comprehensive environmental management system. We also use quantile regression methods to examine the factors affecting the distribution of practices adopted by firms. Consumer pressure on final good producers is a significant factor in increasing the likelihood of adopting a higher quality environmental management system among firms that have low pollution intensity.
In the second part of this research project, we control for endogeneity in the choice of the environmental management quality of the firm by using an instrumental variable method, while examining the factors influencing the toxic releases per unit output emitted by firms. The adoption of a higher quality environmental management system has a statistically significant negative impact on total toxic releases per unit output and on onsite releases per unit output, as well as on offsite releases per unit sales. Other direct regulatory and market-based pressures are not found to have a significant impact on intensity of releases. The impact of the management system on intensity of releases was higher for firms with higher pollution intensity in the past.
This research analyzes the extent to which corporations in the United States are fundamentally changing their outlook towards environmental problems, and provides an economic rationale for their adoption of a proactive management system to address those problems. It develops objective and measurable proxies for pressures from consumers, investors, and other firms. In turn, the government may adopt such a system. This allows us to identify the types of firms that are more likely to have incentives to develop an environmental management system based on their observable characteristics. We also can determine its implications for the design and targeting of policy initiatives towards firms less likely to be self-motivated to do so. Additionally, it addresses the issue of effectiveness of these unilateral initiatives being taken by firms and the extent to which these initiatives can be relied on to achieve environmental protection.
Future Activities:
In the next year, we are planning to examine if different types of environmental management practices differ in the factors motivating their adoption and in the impact of those practices on environmental performance. We will distinguish between environmental management practices that are oriented towards improving the internal efficiency of the production process and for identifying waste reduction opportunities, and those that are oriented towards improving relationships with external stakeholders. We will examine the economic factors motivating differential levels of adoption of these two types of management practices.
We also will examine if these two types of practices have differential effects on the pollution intensity of firms. Second, we plan to examine the implications of environmental management for the economic performance of firms. Data for this analysis will be obtained from the Standard and Poor's Compustat. 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.
We will 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 the industry's size, the firm's size, demand growth, and the firms' innovativeness.
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 |
---|
Type | Citation | ||
---|---|---|---|
|
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 |
|
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 release, hazardous air pollutant, onsite toxic discharge, offsite toxic discharge, voluntary initiative, environmental economics, survey, pollution prevention, end-of-pipe abatement, regulatory pressure, market-based incentive, econometric, count data, standard industrial classification, SIC, SIC Code 20, SIC Code 26, SIC Code 28, SIC Code 33, SIC Code 36, SIC Code 37, SIC Code 45, SIC Code 48, SIC Code 49., 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.