Grantee Research Project Results
Final Report: Environmental Management Strategies and Corporate Performance: Identification and Analysis of the Motivators of Regulated Entities' Environmental Behavior and Performance
EPA Grant Number: R829687Title: Environmental Management Strategies and Corporate Performance: Identification and Analysis of the Motivators of Regulated Entities' Environmental Behavior and Performance
Investigators: Delmas, Magali A. , Aigner, Dennis J.
Institution: University of California - Santa Barbara
EPA Project Officer: Hahn, Intaek
Project Period: January 1, 2002 through December 31, 2004 (Extended to June 30, 2006)
Project Amount: $229,473
RFA: Corporate Environmental Behavior: Examining the Effectiveness of Government Interventions and Voluntary Initiatives (2001) RFA Text | Recipients Lists
Research Category: Environmental Justice
Objective:
The objective of this research is to assess the economic and institutional drivers of the adoption of environmental management practices beyond regulatory compliance. The project is divided into two complementary parts. The first part consists of the collection of original data through a survey of environmental managers in 3000 manufacturing facilities in 8 industries in the United States. The second part is a detailed analysis of the electric utility sector through the combination of publicly available databases. While the first part allows an inter-industry cross sectional analysis by asking directly environmental managers about the drivers of their environmental activities, the second part is a longitudinal in depth analysis of the drivers of environmental performance in one specific industry. Each of these methods has their advantages and limits, and by combining both, we generate stronger results.
Summary/Accomplishments (Outputs/Outcomes):
1. Survey Questionnaire on Environmental Management Practices
Despite burgeoning research on companies’ motivations to adopt environmental management practices beyond regulatory compliance, it remains unclear how stakeholders—including governments, customers, activists, local communities, environmental interest groups, and industry associations— can be effective at pressuring firms to adopt such practices. In this research we test how and why organizations respond differently to pressures from different stakeholders. We develop and test a model that describes why organizations respond differently to similar stakeholder pressures. We argue that the way in which managers perceive and act upon these pressures at the facility level depends upon facility- and parent company-specific factors, including the organizational structure of the facility. We suggest that differences in how organizations distribute power across their internal corporate departments lead their facilities to prioritize different institutional pressures and thus adopt different management practices. Stakeholder pressures are channeled to different organizational functions, which influences how they are received—and acted upon—by facility managers. As a result, managers of facilities that are subjected to comparable institutional pressures may adopt distinct sets of management practices to appease their external constituents. (For more details, see Delmas and Toffel, 2005 and Delmas and Toffel, 2006.) There are no archival data that report how managers perceive and act upon institutional and economic pressures. A survey methodology is therefore necessary to gather original data on these questions.
Method
Data for this study are derived from two main sources: (1) a survey questionnaire sent to 3160 facilities in the fall of 2003; and (2) publicly available databases. The survey provided information about the management practices each facility has adopted as well as the number of environmental staff, the types of environmental auditing conducted, and perceptions of stakeholder pressures.
To measure the adoption of environmental management practices, we asked survey respondents the extent to which: (1) the facility adopted and communicated an environmental policy; (2) employees received environmental training; (3) employee performance reviews incorporated environmental performance; (4) procurement decisions incorporated environmental concerns; and (5) the facility participated in government and industry-initiated voluntary environmental programs. In addition, internal and external audit frequency and whether the facility had the International Standardization Organization’s (ISO) 14001 certification were included.
To measure institutional pressures, we asked survey respondents to indicate the extent to which various external groups influenced their facility to improve its environmental performance. The list of external groups included customers, suppliers, competitors, trade associations, the local community, environmental organizations, regulators/legislators, the media, shareholders, and socially responsible investment (SRI) funds. This list corresponds to external stakeholders identified by scholars in the corporate environmental strategy literature. Respondents ranked each stakeholder on a five-point scale from “no influence” to a “very strong influence.” We conducted an exploratory principal components factor analysis to detect the underlying structure in the relationship among these variables. Missing observations were excluded listwise. The underlying variables loaded onto two factors: the first represents the receptivity to market pressure exerted by customers, suppliers, and competitors, while the second represents the receptivity to non-market pressure exerted by the local community, environmental organizations, regulators, and the media. Shareholders, trade associations, and SRI funds loaded fairly evenly across both factors. These two factors explained 55.7% of the variance, with Eigenvalues of 4.25 and 1.32. We removed the three variables that loaded fairly evenly on both factors (shareholders, trade associations, and SRI funds), and repeated the analysis. The two resulting factors had Eigenvalues of 3.33 and 1.19 and explained 64.6% of the total variance.
Various “objective” pressures as well as firm- and facility- level characteristics were obtained from existing databases such as U.S. Environmental Protection Agency (EPA) compliance databases and the Securities and Exchange Commission (SEC) reports.
Sample
Our sample focuses on heavily polluting industrial sectors, which we identified based on their share of toxic chemical emissions reported to EPA’s Toxics Release Inventory (TRI) program. The following sectors were selected: electric utilities (Standard Industrial Classification [SIC] 49), electrical/electronics (SIC 36), petroleum refining (SIC 29), chemical and allied products (SIC 28), automotive (SIC 37), machinery manufacturing (SIC 35), primary metals manufacturing (SIC 33), and pulp, paper, and paperboard mills (SIC 26). We received a total of 536 responses. We received a 17.2% response rate, which is acceptable considering the size of the population. The sample was representative of the population surveyed in terms of industry distribution, size of the facility, and level of pollution. We tested sample representativeness in several ways. First, we ran an analysis of variance (ANOVA) and found that the different industries’ response rates, which ranged from 13% (Refining; Electric Utilities) to 17% (Machinery; Electrical/Electronics) to 19% (Automotive; Primary Metals), were not statistically significant (F = 0.03). We then conducted t-tests to compare responders to non-responders along three dimensions. The two groups were statistically indistinguishable in terms of facility employment (p = 0.19), pollution levels measured as average log- pounds of toxic emissions in 2000-2001 (p = 0.41), and the environmental harm resulting from these emissions (p = 0.80). (We compared pollution levels using data from the U.S. EPA’s TRI and environmental harm by weighting TRI air releases during 2000 and 2001 by each chemical’s toxicity weight from the U.S. EPA TRACI scheme, summing these weighted totals, and logging the result.) The results of these comparisons provide reasonable assurance that the respondents are representative of the entire sample. We tested for non-response bias by comparing early and late respondents, since late responders have been shown to be similar to non-respondents. We created two sets of late respondents: all those who responded after we sent the survey a second time, and the subset who responded only after receiving the postcard reminder several weeks later. We compared each set of late respondents to the early respondents across the 11 survey measures using a chi-squared test of independence. In both cases, the responses from early and late respondents were virtually indistinguishable. Overall, these results suggest that non-response bias is unlikely to be a serious concern.
Descriptive Statistics
Overall, the most influential external stakeholders were regulators, customers, and the local community. Customers were particularly influential in the automotive and paper sectors, and regulators were particularly influential in the refining and metal sectors. We also inquired about which specific corporate departments were particularly influential in stimulating facilities to improve environmental performance, and we found that the environmental management, legal, and strategy departments were the most frequently mentioned.
Facilities also reported a diverse set of motivations that have led them to adopt environmental management practices. Perhaps not surprisingly, the most frequently cited motivation was to improve regulatory compliance: 89% indicated that this motivation was an important or very important motivator. Other motivators appeared to be specific to a particular industry, where responses far outstripped those from other industries. For example, 55% of the respondents within the chemical sector considered improving customer loyalty as an important motivator, and 80% of the respondents within the utility sector considered “influence pending legislation” as an important motivator.
Results of Regression Analysis
We estimated the extent to which corporate functional departments influence facilities’ receptiveness to institutional pressures, while controlling for the level of institutional pressures exerted by market and non-market constituents (Hypotheses 1 and 2). In addition, we estimated the extent to which a facility’s receptivity to market and non-market pressures affects its decision to adopt two distinct environmental management practices (government-led voluntary environmental programs and ISO 14001; H3). We employed a structural equation modeling (SEM) approach and estimated the model via maximum likelihood using Analysis of Moment Structures (AMOS) Version 5. Figure 1 shows the relationships between the variables in our model.
Figure 1. The Relationships Between the Variables on Our Model
The results show that corporations’ organizational structure influences how facility managers perceive institutional pressures. Institutional pressures from different field constituents are channeled to different organizational functions, which influence how they are received by facility managers. And these differences in receptivity are critical because they in turn influence organizations’ responses in terms of adopting management practices that have yet to be institutionalized. We found a significant positive path between the influence of the corporate legal department and the receptivity to non-market pressure. Likewise, there was a significant positive relationship between the influence of the corporate marketing department and the receptivity to market pressure. We found that organizations that were more receptive to institutional pressure from market constituents (controlling for the amount of pressure exerted) were more likely to adopt the environmental management standard ISO 14001. On the other hand, we found that organizations that were more receptive to institutional pressure from non-market constituents (controlling for the amount of pressure exerted) were more likely to adopt government-initiated voluntary programs. We also found that these organizations were less likely to adopt ISO 14001.
Our research builds upon empirical research that has shown that pressures from field constituents including customers, regulators, legislators, local communities, and environmental activist organizations have influenced companies to adopt environmental management practices. However, this prior research has not focused on the interaction between institutional pressures and organizational characteristics to explain the adoption of proactive strategies. We addressed these research opportunities by hypothesizing and testing how organizational structure influences managerial receptivity and responses to various institutional pressures. Our results revealed that differences in the power of corporate departments to influence facility-level decisions lead facilities to respond differently to similar institutional pressures.
A potential concern in our analysis derives from heterogeneity within our sample that is not controlled for in our SEM. Specifically, because our sample includes facilities from several industries and SEM techniques do not allow for industry dummies, it is possible that unobserved differences between these industries may account for some of our results. To test whether our results were sensitive to unobserved industry differences, we estimated regression equations corresponding to the paths of the structural equations. We ran individual regressions for each of the four consequent variables in our hypotheses. In each regression, we included all antecedent variables from our model (i.e., direct and indirect antecedents) as well as industry dummies, and we used standard errors robust to heteroscedasticity. The results of each of these regressions yielded coefficients on the hypothesized variables that were of the same sign and significance as in our original structural equation, regardless of whether we controlled for industry differences at the two-digit or three-digit SIC Code level. The results of a multivariate regression, which accommodates our two ultimate dependent variables (ISO 14001 adoption and voluntary program participation), also yielded coefficients of the same sign and significance as our main results. These results provide strong evidence that our results are robust to industry effects.
2. Corporate and Environmental Performance in the Electric Utility Sector
We investigate the institutional and economic drivers of environmental performance in the electric utility sector. First, we analyze how retail deregulation influences the environmental strategies and performance of electric utilities. Economic deregulation allows the possibility for consumers to choose their electricity provider. It is therefore an excellent context to test the effects of market and economic drivers on environmental performance. (For more details, see Delmas, et al., 2007.) Second, we investigate how institutional and economic pressures facilitate environmental performance improvements within the Voluntary Agreement Climate Challenge Program. (For more details, see Delmas and Montes-Sancho, 2005.)
2.A. Deregulation and Environmental Differentiation in the Electric Utility Sector
Method
We used a combination of several databases—mainly the Federal Energy Regulatory Commission (FERC) Form Number 1 (United States Department of Energy [DOE], 1998–2000) and the Emissions & Generation Resource Integrated Database ([EGRID]; EPA, 2002 , 1998–2 000). The FERC Form 1, the Annual Report for Major Electric Utilities, is filed by privately-owned electric utilities. The report for each utility, which averages 140 pages, contains general corporate information, financial statements, supporting schedules, and a wealth of engineering statistics. EGRID contains emissions and resource mix data for all U.S. electricity-generating plants that produce electricity and report data to the United States government. It contains information from three federal agencies: EPA, the Energy Information Administration (EIA), and the FERC. EGRID aggregates the data from the plant level to the utility company level, providing a detailed emissions profile, the generation resource mix, and also capacity, ownership, corporate affiliation, and location information and other pertinent variables.
We performed a pooled ordinary least squares (OLS) estimation regression with changes in percentage of generation from renewables as the dependent variables and deregulation as the main independent variable. We also controlled for other variables that could influence the decision to change the generation. (See Delmas, et al. , 2007, for more information.)
Results
We find that utilities were more likely to take strategic actions to support an environmental differentiation strategy following deregulation in states where citizens display higher degrees of environmental sensitivity. However, under deregulation, incumbent firms that relied heavily on coal-fired generation or enjoyed strong productive efficiencies were less likely to adopt such strategies in that context. These results allow us to conclude that deregulation has led to a series of strategic choices by which utilities connected their power offerings both to the context in which they operated and to their particular endowment of organizational resources.
There are two points to consider about marketplace change following deregulation that emerged from our study. The first is that the marketplace under regulation was not allowed to develop and mature in ways that would have demonstrated the viability of new customer classes. Latent demand for differentiated services was suppressed. In short, the richness of product offerings that characterizes so many markets for consumer goods was absent under regulation. While many observers, especially economists, have applauded how deregulation has boosted consumer welfare via lower prices, fewer have highlighted the many product innovations that deregulation also elicited once firms were able to energize latent markets.
The second and related point is that shifts in the institutional environment often generate significant marketplace discontinuities that are less likely to occur in competitive markets. As just noted, one of the reasons that such discontinuities are so striking is simply that customer segments were suppressed under regulation. It is easy to see how a post-deregulation environment can create unpredictable change, a competitive landscape of heterogeneous strategies, and winners and losers when a new freedom to take strategic action coincides with the sudden unleashing of marketplace demands. In our case, environmental differentiation ensued.
For the foreseeable future, the electric generation industry will retain a strong institutional character. However, our results indicate the beginnings of behaviors consistent with more market-like tendencies. Environmental differentiation by firms—especially when the populace they serve is most likely to value that differentiation—was very much in evidence in our sample. Essentially, this differentiation acts in ways that one would expect: it creates value by identifying an underserved constituency and developing products that will interest it. The success of green power depends on taking a quintessential commodity—a kilowatt-hour—and differentiating it by how it is created.
Differentiation, Private Benefits, and the Common Good
By leveraging the literature on environmental differentiation in consumer markets, we can trace out the link between deregulation and the provision of public goods. Environmental product differentiation consists of offering products that provide greater environmental benefits, or that impose smaller environmental costs, than similar products. These products may be costlier than traditional products, but they allow the firm to command a price premium in the marketplace or to capture additional market share. The environmental differentiation literature argues that one way of creating willingness to pay for public goods is to bundle them with private goods . For example, many consumers are willing to pay a premium for organic food products that benefit their health directly and that may taste better than non-organic products. Speaking of Toyota’s entry in the hybrid automobile market, an industry observer opined that, “if you want to wear your green credentials on your sleeve, the Prius is the way to go.” Thus, the Prius produces a private benefit to the owner, as others see his or her pro-environmental behavior. Green electricity does not offer private benefits—other than the warm glow of altruism—because green and brown electricity are identical once they reach the consumer, and because the product’s use is within the household of the consumer.
Policy Implications
How can such a lack of private benefits be overcome? One way is to use the public policy process to create the benefit. Consider first how this is playing out in the case of sustainably harvested lumber. Like electricity, lumber represents a case where it is difficult to bundle private and public goods: green lumber does not have physical characteristics that differ from brown lumber. It is therefore hard to imagine that mainstream customers will be willing to buy green lumber certified by the Forest Stewardship Council (FSC) at a 10–20 percent premium. At this point, policy-driven government purchases of green building materials still constitute most of the demand for FSC- certified lumber. But as sales volumes rise and the supply chain for FSC lumber matures, it is likely that the price of FSC lumber will become competitive with non-FSC lumber, delivering private benefits.
A similar mechanism could occur in the electricity market. Green consumers still represent the minority of consumers, and change may come from recent public policies calling for requirements of minimums of green energy consumption by state-owned facilities. In the short-term, the effect of such mandates may be to increase the cost of green power via growth in demand. But over the longer term, these purchases can bring the costs of green power to competitive levels, because broadened demand will create scale economies and learning curve effects for manufacturers. In this way, demand for green power will expand and private benefits will appear. But this process is quite circuitous compared to the more straightforward provision of private benefits seen in organic produce and other consumer product markets, where the private benefit is obvious and relatively immediate.
2.B. Institutional Pressure, Resources, and Environmental Performance: The Case of the Climate Challenge Program
Within the context of environmental voluntary agreements (VAs), this paper analyzes how free riding affects the effectiveness of collective corporate political strategies that aim at shaping government policy (see Delmas and Montes-Sancho, 2005). We demonstrate that substantive cooperative strategies are more likely to be pursued by firms that enter a VA at their initiation, while free riding or symbolic cooperation is more likely to be adopted by late joiners. We argue that late joiners and early joiners within VAs adopt different cooperative strategies because they face different levels of institutional pressures and economic incentives. We also find that late joiners that cooperate only symbolically can endanger the overall effectiveness of the VA. Our analysis is based on the strategies of firms participating in the Climate Challenge Program established in 1995 by the DOE and the representatives of the national electric utilities to reduce greenhouse gas emissions. VAs are designed to associate private benefits with the voluntary provision of public goods, and they provide an interesting case to study how institutional pressures can trigger voluntary changes in environmental performance. Because most of these agreements lack explicit measures to sanction firms that pursue only symbolic cooperative strategies —or sometimes even to identify such firms— under what conditions would firms undertake substantive cooperation rather than symbolic cooperation?
In this paper, we identify the factors that explain different types of cooperative behavior within VAs. We analyze three types of cooperative behavior: non-cooperation, symbolic cooperation and substantive cooperation. Participation in VAs may serve only a symbolic purpose, since it may allow firms to participate in a VA to maintain greater legitimacy without substantive implementation of the VA requirements. That is, firms may participate in a VA without actually improving their environmental performance. Consequently, we refer to participation in the VA without performance improvement as symbolic cooperation. Participating firms that undertake substantive actions to reduce their emissions must have accomplished organizational or technological changes that allow such reductions. Thus, for these firms, participation in a VA is coupled with practical changes at the operational level. We refer to this type of participation as substantive cooperation.
To test our hypotheses, we collected data from different sources. From the DOE, we used the Climate Challenge “participation accords” and “letters of commitment” to identify participating firms. (Utilities with more than 50,000 customers develop individual participation accords while those with fewer than 50,000 customers submit letters of commitment.) We also used data on utilities’ characteristics and environmental performance from the U.S. FERC Form Number 1 ( DOE, FERC Form 1, 1994-2000), the EIA (Forms EIA-860, EIA-861, and EIA-906), and the EPA Clean Air Market programs website. After merging these databases, we retained 133 investor-owned electric utilities, representing 61% of the total U.S. electricity production by utilities from 1995 to 2000 and 81% of the CO2 emissions emitted by the electric sector during that period. Out of these 133 firms, 82 participate in the Climate Challenge Program. Our sample includes 46% of the total 124 signed agreements with the DOE. (An agreement can represent several firms. Non-utilities generators are not included in our analysis because they are not part of the Federal Energy Regulatory Commission (FERC) Form 1 database.)
To isolate the impact of a VA on environmental performance, it is necessary to correct for endogeneity that arises, because the decision to participate in a VA and the performance outcome are likely to be influenced by the same observable and unobservable factors. In other words, the decision to participate in the program is likely to be influenced by the same observed and unobserved factors that determine emissions. Thus, to compare emission outcomes between participants and non-participants of the Climate Challenge Program, we needed to correct for this potential endogeneity problem. To address this issue, we used a two-stage estimation model that determines simultaneously the outcome of program participation (here, CO2 emission rate) and the determinants of a firm’s participation decision.
Results
In our study, we find that substantive cooperation is more likely to be pursued by firms that entered the program at its initiation, while symbolic cooperation is more likely to be adopted by late joiners. That is, early joiners did reduce their emissions significantly more than non-participants. We demonstrate that this difference in behavior can be explained by the different pressures and incentives that early and late joiners face. On the one hand, early joiners are subject to a higher level of coercive pressure from regulatory agencies than late joiners and non-participants. The incentives to cooperate may also be higher for early joiners who have undertaken important environmental investments prior to the creation of the program and may get credit for these earlier efforts through the program. On the other hand, late joiners tend to be environmental laggards that may seek to be associated with high environmental performers. For these firms, cooperation is only symbolic, and they do not reduce their emissions significantly more than non-participants.
We also find that firms that entered the program at a later date and that cooperated only symbolically jeopardized the overall effectiveness of the program. When we add the efforts of late joiners and early joiners, we find that the overall emissions reductions of the program are not significantly different compared to non-participants.
Free-riding behavior may not be problematic for the viability of a voluntary program if it is limited to a small number of participants, and if the result of their free-riding action is compensated by the good behavior of other participants. In that case, the program may still have an overall positive benefit. That is, participants have reduced their emissions significantly more than non-participants. However, free-riding behavior can detract the overall effectiveness of the program. It is therefore important to test the impact of free-riders on the overall effectiveness of the program. The problem of free-riding certainly exists within other collective cooperative political strategies, but here we could actually measure its extent.
Several previous studies suggest that initial adopters with strong reputations can intensify pressure on other organizations to imitate adoption.
Policy Implications
1. The importance of the organizational structure of the firm to understand response to stakeholder pressure.
Our research shows that firms respond to stakeholders’ pressures, but that the response varies not only according to the type of pressure exerted but also according to the organization of the firm. Basically, we find that that firm’s organizational structure is key in explaining why organizations adopt heterogeneous environmental management practices. On the one hand, firms that have influential departments, such as legal departments, will be more likely to be receptive to pressure from non-market constituents, such as regulators. On the other hand, firms that have influential marketing departments will be more receptive to pressure from market constituents, such as customers. Because of these differences in organizational structures, and therefore receptivity to the pressure, firms subjected to similar pressures may adopt different practices. These results differ from previous research, which tended to see the firm as a black box.
The first implication is that if regulators want to push firms to go beyond compliance, they will need to communicate with various representatives of the organization. Our research shows that marketing departments may play an important role in promoting the adoption of environmental management practices. Firms tend to view pressures exerted by their customers, suppliers, and competitors—stakeholders within their market environment—as business drivers. Such pressures are typically channeled through an organization’s marketing department, whose objectives are to grow market share and profits. Here, adopting “beyond compliance” environmental practices that are demanded by customers or are already implemented by competitors is more likely to be culturally framed as an indicator of superior management and risk-mitigated business partners. When framed this way, adopting such management practices is more likely to be viewed as garnering rewards. We therefore show that market pressures can be a strong force driving firms to adopt environmental practices beyond compliance.
Our research also shows that organizations that were more receptive to institutional pressure from non-market constituents (controlling for the amount of pressure exerted) were less likely to adopt ISO 14001. Stakeholders within a firm’s non-market environment (regulators, nongovernmental organizations [NGOs], local communities, and the media) may tend to view environmental issues as negative externalities, where the facility “gets away” with imposing costs on society. In this frame, environmental management is viewed as unproductive; a zero-sum game where field constituents and firms compete to avoid bearing these costs. This debate is typically settled by the government, either via the courts or by the imposition (or not) of increased regulatory scrutiny or additional laws and regulations. Accordingly, such issues are typically addressed by organizations’ legal affairs departments. In this cultural frame, adopting additional environmental management practices is more likely to be viewed as avoiding sanctions from failing to meet these constituents’ expectations of legitimate organizational behavior (e.g., full legal compliance, conducting expected levels of community outreach). In such a context, any practice that is marked by some uncertainty about its potential benefits will be looked at with suspicion. This may explain why we found that organizations that were more receptive to pressure exerted by non-market constituents were less likely to adopt ISO 14001.
Indeed, some stakeholders view the standard as a procedural smokescreen . Environmental regulators and activists have focused on the standard’s lack of environmental performance requirements as a significant impediment to claims that adopting ISO 14001 is a significant and praiseworthy achievement . Furthermore, implementing ISO 14001 and conducting the routine audits the standard requires may uncover regulatory violations, evoking concerns of potential liability that discourages some firms from adopting . In a recent survey of firms in the United States, the majority of respondents noted two related factors inhibiting their adoption of ISO 14001: uncertainty about regulatory agencies’ potential “utilization of environmental management system (EMS) audit information;” and “potential legal penalties from voluntary disclosure.” In the case of ISO 14001, the ambiguity in the law regarding the benefits of the standard leaves room for environmental lawyers to provide their own interpretation of the standard’s potential value. Because it is part of the mission of lawyers to be conservative to protect their clients, it is likely that they will highlight the potential drawbacks of adopting the standard. For example, the U.S. environmental law literature is replete with articles on the risks of adopting ISO 14001 for corporations . Similarly, Legal Affairs departments’ focus on liabilities and risk management makes them especially likely to consider the risk that adopting ISO 14001 reduces the firm’s ability to credibly deny environmental wrongdoing in the face of a media exposé . In order to favor the diffusion of such practices, it is therefore necessary to reduce the potential “perceived” risks that may be associated with the standard.
In conclusion, this research has important policy implications. It stresses the importance of pressure from both market constituents, such as customers, and non-market constituents, such as regulators and the local community as a driver to adopt beyond compliance environmental management practices. Our research suggests that policy makers can leverage both pressures but that to be effective, they will have to understand the organizational structure of companies and make sure to target the appropriate contact within the organization. We show that otherwise, some firms could be impermeable to such pressures.
2. Motivations to adopt environmental management practices vary according to the practice analyzed.
While most of the existing literature typically focuses on a specific type of environmental management practice, in our project, we studied an array of environmental management practices. These included whether: (1) the facility adopted and communicated an environmental policy; (2) employees received environmental training; (3) employee performance reviews incorporated environmental performance; (4) procurement decisions incorporated environmental concerns; (5) the facility participated in government and industry-initiated voluntary environmental programs; (6) the facility conducted internal and external audit; and (7) the facility was ISO 14001-certified. We found that the market and institutional motivations to adopt these practices varied greatly. Firms chose practices that responded to specific stakeholder pressures. For example, firms would participate in government-led voluntary programs to try to influence pending legislation, or they would green their supply chain to respond to customer pressure. In this context, firms are adopting a variety of practices to respond to a variety of stakeholders, including non-market stakeholders such as regulatory agencies and environmental NGOs. These results are important because they enable policymakers to learn which stakeholder will be more effective in getting firms to adopt specific practices.
3. Effectiveness of voluntary agreements and the dynamics of adoption of environmental management practices (EMPs).
We find that participants of the Climate Challenge Program did not reduce their emissions significantly more than non-participants. This therefore questions the effectiveness of VA s without sanctions for free-riders.
We also find important differences between early and late joiners of the program. While early joiners did incur significant changes in their emissions, as compared to late joiners (who joined after the initial signing ceremony of 1995), late joiners did not make such changes. It is important to look at the adoption of EMPs in a dynamic matter, as the number and quality of initial adopters may impact subsequent adoption. Our findings, based on the Climate Challenge Program, differ from previous analyses. While previous studies had shown a positive relationship between the number and the quality of initial adopters and subsequent adoptions, we show that this might not be always the case. Scholars have shown that adoption of management practices by highly regarded firms supports imitation behavior because initial non-adopters may wish to associate themselves with these first adopters. Our results show that even if non-adopters decide to join the program to be associated with “high quality” early joiners, it does not mean they will commit to the same type of actions within a program. Therefore, the quality of early adopters does not guaranty the quality of the participation of later adopters. We have to look at other factors to explain this type of cooperative behavior.
These results suggest that policymakers who wish to design effective Environmental Agreements need to identify the factors that trigger substantive versus symbolic cooperation within a VA. It is common for environmental agencies to encourage a group of very well known and successful organizations to take the lead in participating in voluntary programs, hoping that these firms would set the example. Our findings suggest that this strategy might not always be effective, because followers might only collaborate symbolically and jeopardize the overall effectiveness of the program. Other approaches, such as voluntary agreements, that differentiate the best performers from the rest of the participants should be encouraged as well as approaches that sanction participants who do not comply to the rules of the program.
4. Environmental differentiation.
We find that economic deregulation in the electric utility sector provided opportunities for environmental differentiation via the offering of green power. Environmental product differentiation consists of offering products that provide greater environmental benefits, or that impose smaller environmental costs, than similar products. These products may be costlier than traditional products but they allow the firm to command a price premium in the marketplace or to capture additional market share. The environmental differentiation literature argues that one way of creating willingness to pay for public goods is to bundle them with private goods . For example, many consumers are willing to pay a premium for organic food products that benefit directly their health and may taste better than non-organic products. Speaking of Toyota’s entry in the hybrid automobile market, an industry observer opined that “if you want to wear your green credentials on your sleeve, the Prius is the way to go.” Thus, the Prius produces a private benefit to the wearer as others see his or her pro-environmental behavior. Green electricity does not offer private benefits—other than the warm glow of altruism—because green and brown electricity are identical once they reach the consumer, and because the product’s use is within the household of the consumer.
How can such a lack of private benefits be overcome? One way is to use the public policy process to create the benefit. Consider first how this is playing out in the case of sustainably harvested lumber. Like electricity, lumber represents a case where it is difficult to bundle private and public goods: green lumber does not have physical characteristics that differ from brown lumber. It is therefore hard to imagine that mainstream customers will be willing to buy green lumber certified by the Forest Stewardship Council (FSC) at a 10–20% premium. At this point, policy-driven government purchases of green building materials still constitute most of the demand for FSC-certified lumber. But as sales volumes rise and the supply chain for FSC lumber matures, it is likely that the price of FSC lumber will become competitive with non-FSC lumber, delivering private benefits.
A similar mechanism could occur in the electricity market. Green consumers still represent the minority of consumers, and change may come from recent public policies calling for requirements of minimums of green energy consumption by state-owned facilities. In the short- term the effect of such mandates may be to increase the cost of green power via growth in demand. But over the longer term, these purchases can bring the costs of green power to competitive levels, because broadened demand will create scale economies and learning curve effects for manufacturers and bring down costs. In this way, demand for green power will expand and private benefits will appear. But this process is quite circuitous compared to the more straightforward provision of private benefits seen in organic produce and other consumer product markets, where the private benefit is obvious and relatively immediate.
5. Future research.
Our research showed the importance of market pressure—and more specifically, of customers— in driving the adoption of EMPs. However, more research is needed to understand how policy makers can leverage such potential. We still have a limited knowledge of customers’ preferences for green products. Further research could provide more details on the mechanisms that get customers to value greener practices or greener products. As we mentioned, customers will be more attracted to green products that bundle private benefits to the public good. But how much private benefit is necessary? Do perceptions of these benefits vary with the information provided in the eco-label? Do these perceptions vary if this information is mandated by the government or if it is voluntary?
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Delmas M, Toffel M. Stakeholders and environmental management practices: an institutional framework. Business Strategy and the Environment 2004;13(4):209-222. |
R829687 (2004) R829687 (Final) |
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Delmas M, Russo MV, Montes-Sancho MJ. Deregulation and environmental differentiation in the electric utility industry. Strategic Management Journal 2007;28(2):189-209. |
R829687 (Final) |
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Supplemental Keywords:
environmental management practices, survey questionnaire, institutional environment, market pressure, efficiency, environmental performance, environmental differentiation, deregulation, renewable energy,, RFA, Scientific Discipline, Sustainable Industry/Business, Corporate Performance, Economics and Business, Social Science, Environmental Law, environmental policy case studies, corporate environmental policy, enforcement strategy, policy making, corporate compliance, government intervention, environmental compliance determinants, information dissemination, audit policies, Porter hypothesis, government-industry interaction, enforcement impact, environmental behavior, corporate environmental behaviorProgress 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.