What Motivates Business Environmental Management: Sticks, Carrots or Both?

1. What Motivates Business Environmental Management: Sticks, Carrots or Both? David Ervin Professor of Environmental Studies Patricia KossAssociate Professor of Economics Cody JonesGraduate Research Assistant Portland State UniversityJune 6, 2007

2. Context for Greening Business • Environmental problems are widespread and public demand for EQ continues strong. • Regulatory compliance and enforcement costs are trending higher. • More NGOs see limits in using legislation and the courts and favor more collaborative approaches. • Increasing number of firms perceive revenue and cost rewards for being green (e.g., ISO 14001). • Net effect – More responsibility for environmental management is shifting to the business sector and NGOs

3. Key Questions • What motivations are most important in prompting “voluntary” or “business-led” environmental management (BEM) for which firms? • Does BEM improve environmental quality? • What role(s) can the public sector play in fostering cost-effective BEM?

4. Motivations for BEM • Reduce cost (waste) • Increase productivity • Mitigate or preempt environmental regulations • Access and serve ‘green’ markets

5. Motivations for BEM • Manage legal and financial risks • Improve relations with stakeholders, e.g., community, labor • Manage competitors (first-mover advantage) • Owner/CEO personal preferences

6. Oregon Business Decisions for Environmental Management • Grant from U.S. EPA Program on Corporate Environmental Behavior and Effectiveness of Government Intervention • June 2003 – June 2007 • Universities: PSU, U. Illinois Champaign-Urbana (Madhu Khanna & Cameron Speir), and Oregon State (Junjie Wu & Teresa Hall) • Comprehensive survey of BEM in Oregon • Analysis to inform public policy that furthers cost-effective BEM

7. Sample • Focused on facility level • Selected six industrial sectors • Wood products manufacturing • Food manufacturing • Electronics manufacturing • Truck transportation • Construction of buildings • Accommodation (hotels, etc.) • 1964 facilities with 10 or more employees (OR Employment Dept.)

8. Survey • Identified environmental management motivations, practices, and performance measures from literature and industry interviews • Survey structure • Environmental management motivations • Facility environmental practices • Facility environmental performance • General information, e.g., size

9. Sample Ordered Response Question Please indicate the extent each of the following factors has influenced environmental management at your facility in the last 5 years. (Please check only ONE box for each factor.) No Great Do Not InfluenceInfluenceKnow ▼ ▼ ▼ ▼ ▼ ▼ a. Customer desire for environmentally friendly products and services 1 2 3 4 5 D b. Customer willingness to pay higher prices for environmentally friendly products/services. 1 2 3 4 5 D

10. Respondents • 689 responses • 35.1% response rate (29.9 - 37.3) • Responses from 31 of 36 counties • Small facilities predominate; mean number of employees = 24 (73% < 50) • 89% privately held • 79% independent • No significant bias by facility size or geographic region

11. Some General Findings • 54% reported > 6 competitors • 42% percent sell directly into retail • 42% reported at least one 2004 regulatory inspection • 2% reported penalties, lawsuits, infractions • 13% reported some R&D capacity • 2.4% average revenue spent on env mgmt • 20% reported participating in VEPs

12. M = 2.14, SD = 1.27 Interest Groups M = 2.65, SD = 1.38 Customers M = 2.69, SD = 1.36 Competition M = 2.98, SD = 1.45 Investors and Lenders M = 3.25, SD = 1.40 Regulations M = 3.70, SD = 1.05 Upper Management Parent Company M = 3.86, SD =1.12 1 2 3 4 5 Motivations, Influences and Priorities

13. M = 3.63, SD = 1.36 High upfront expense M = 3.29, SD = 1.28 High day-to-day costs M = 3.21, SD = 1.26 Upfront time commitment M = 3.11, SD = 1.33 Uncertain future benefits M = 2.86, SD = 1.40 Risk of downtime M = 2.77, SD = 1.23 Knowledgeable staff M = 2.36, SD = 1.29 Emp. appraisals M = 2.30, SD = 1.29 Emp. rewards 1 2 3 4 5 Barriers

14. Environmental Mgmt Practices • Environmental training for employees • Internal environmental standards • Documented environmental policy • Well-defined environmental goals • Regular environmental audits • Green purchasing policy • Environmental cost accounting • Environmental standards for suppliers • 60% had implemented at least one

15. Environmental Actions • Continuous efforts • Employee awareness • Adequacy of training • Goals guide decisions • Standards above regulation • Well-defined procedures • Audits for own goals • Standards for suppliers • Public reporting • Environmental cost accounting • Employee incentives • Mean = 2.7, SD = 1.2

16. Pollution Prevention Queries • Efforts have been made to reduce spills and leaks of environmental contaminants. • Recycling has increased and landfilling has been reduced. • Pollution prevention is emphasized to improve environmental performance. • Production systems have been modified to reduce waste. • Products have been modified to reduce environmental impacts. • Raw materials are chosen to reduce impacts. • Mean = 3.8, SD = 1.1

17. Performance Measures • Impacts queried • Wastewater and dewatering discharge • Solid waste and recycling • Hazardous or toxic wastes • Carbon dioxide (CO2) emissions • Hazardous air emissions • Electricity and natural gas (selected) • Green building/energy efficiency (construction) • Diesel and biodiesel use (transport) • Measures: outcomes, compliance, changes • Lowest response rates (from 2% to 94%)

18. Basic Economics of BEM • Choices of EM policies, practices and actions depend on their expected benefits and costs over time. • Expected benefits (monetary and non-monetary) are approximated by relative responses to various motivations. • Expected costs/risks are captured by the responses to strength of various barriers. • Environmental performance depends on the expected relative benefits and costs for each facility over time.

19. Preliminary Multivariate Analysis • Facility environmental management includes three interrelated decisions • Select environmental management policies/practices (Q 12) • Choose extent of environmental and pollution prevention actions (Q 14) • Environmental performance depends on intensity of environmental practices, extent of environmental action, and other factors (analysis underway)

20. Analytical Approach • Used principal components (PC) to estimate indices (0 ≤ I ≤ 1) for environmental policies/practices, actions, and performance • Used PC also to estimate indices for various motivations and barriers • Estimated system of equations in which pollution prevention actions depend on practices, and environmental performance depends on practices and actions • Econometric (3SLS) methods

21. Econometric Analysis of Environmental Policies/Practices

22. Econometric Analysis of Environmental Policies/Practices

23. Preliminary Findings for Environmental Policies/Practices • Upper management attitudes show the largest positive influence. • Managers over 60 and competitiveness and investor pressures also exert significant positive effects. • A composite of barriers (e.g., upfront costs) significantly decrease policy/practice intensity. • Regulatory, consumer and facility characteristics do not show significant effects.

24. Econometric Analysis of Env/Pollution Prevention Actions

25. Econometric Analysis of Env/Pollution Prevention Actions

26. Preliminary Findings for Env/Pollution Prevention Actions • Practice intensity shows a significant and positive effect on environmental action. • Regulatory pressures & inspections also exert significant positive effects. • Consumer pressures are directly associated with increased env. action. • Management attitudes, investor pressures and competitiveness exert indirect positive effects on action through environmental practice intensity. • Perceived barriers exert an indirect but negative effect on action.

27. 35 30% 30 25 22% 20% 20% 20 16% 15 10 5% 5 0 Food (311) Electronics (334) Construction (236) Transport (484) Hotels (721) Wood (321) VEP Participant (VPP) Characteristics • Participants reported higher revenues • Participants had more employees • Participants were located in 27 counties

28. Program Participants & Nonparticipants

29. VPP Performance Results • Overcompliance for at least one impact: 57% of VPPs versus 30% of NPs • Solid waste: VPPs recycled 59%, NPs averaged 44% • Energy efficient equipment in Construction: VPPs averaged 54%, NPs averaged 32% • Green building in Construction: VPPs averaged 28%, NPs averaged 9%

30. Preliminary Implications • Commitment to environmental policies/ practices is shaped heavily by upper management attitudes and other pressures, (e.g. investor pressures). • The level of environmental action is significantly influenced by regulatory effects and perceived consumer interests, apart from practice intensity. • The absence of significant effects by facility characteristics, e.g., size, when motivations and barriers are properly specified, is notable. • VEP participants report significantly more overcompliance, and higher recycling, energy efficiency, and green building efforts than nonparticipants, but the causes are uncertain.

31. Future Analysis • Checking for self-selection and non-respondent bias • Delineate ‘voluntary’ environmental practices and action, and the significant influences on them • Probe sector differences • Augment reported environmental performance with secondary data • Test the influences on environmental performance, and the relationships with environmental practices and action

32. Publications • Project Website • http://obep.research.pdx.edu/ • “Reports” • OBDEM Summary Report • Hall, Teresa, “Business Decisions for Voluntary Environmental Management: Motivations, Actions and Outcomes,” M.S. Thesis, Oregon State University, 2006. • Jones, Cody, “Voluntary Environmental Program Participation in Oregon: Summary Statistics,” MEM report, Portland State University, 2007. • Motivations for Voluntary Environmental Management (forthcoming)

33. Questions and Comments?