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Pollution Prevention: The Role of Environmental Management and Information

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Objective:
Environmental Management Systems (EMSs) that encourage firms to regulate themselves from the inside and make efforts at reducing waste are an appealing concept to policy makers and to many firms. Regulatory agencies, seeking cost-effective and less adversarial approaches to environmental protection, are launching programs to motivate firms to implement EMSs by offering financial and regulatory incentives and public recognition. Firms are adopting such systems with the expectation of realizing win-win gains as they reduce waste, improve process efficiency and improve relations with stakeholders. Stakeholders are increasingly receiving environmental information about firms through the Toxics Release Inventory (TRI) and through corporate reports. However, the extent to which EMSs and information provision are motivating firms to be innovative and make changes in their operating practices by adopting pollution prevention (P2) methods is not known. Since public policy incentives are typically focusing on inducing the means for pollution control (adoption of EMSs) rather than the ends (actual performance improvement) they do not necessarily guarantee P2 and improvements in environmental performance. Additionally, the joint impact of EMSs and P2 on firm profitability is yet to be systematically examined.

Approach:
The first part of this research will develop a theoretical framework to examine the extent to which current public policy efforts providing public recognition and regulatory benefits to induce EMS adoption lead to innovative source reduction of pollution. In this framework "green consumers" are assumed to observe a firm's EMS (because of public policy efforts) and are willing to pay a price premium for products of such firms. Additionally firms obtain regulatory relief and technical/financial assistance by adopting an EMS. Conditions under which EMS adoption simply provides insurance against stakeholder pressure and does not lead to innovation or pollution reduction and conditions under which such initiatives are social welfare enhancing relative to potential mandatory regulations will be analyzed. The second part will develop testable hypothesis to empirically examine the factors motivating a sample of S&P 500 firms to adopt an EMS and/or P2 practices and its implications for their toxic wastes. Instrumental variable methods that control for endogenous adoption decisions will be used. In the third part, event study methods and multivariate regressions will be used to examine the impact of provision of information about toxicity of chemicals on investors and on returns to firms. We will also investigate the sources of economic benefits (through the demand side or supply side) that EMSs and P2 activities are providing firms, whether these are having a mitigating effect on stock market reactions to TRI and whether claims that pollution prevention pays are valid.

Expected Results:
This research will enable us to determine the types of firms more likely to be innovative and adopt P2 voluntarily and the barriers to it faced by other firms. It will show if provision of information about the volume and toxicity of toxic releases, P2 activities and EMSs as well as policy incentives to adopt EMSs are effective in achieving reduction in waste generation using innovative methods. These findings will be used to offer recommendations for whether public policy efforts can be made more cost-effective if redirected to reward actual outcomes of voluntary initiatives rather than participation alone, about the type of firms towards which such policy initiatives should be focused and about the value of information about toxicity of pollutants and P2 activities. The detailed firm-level database we compile will be useful for future researchers.

Supplemental Keywords:
toxic releases, S&P 500 firms, total quality environmental management, voluntary initiatives. , Economic, Social, & Behavioral Science Research Program, RFA, Scientific Discipline, Sustainable Industry/Business, Corporate Performance, Economics & Decision Making, Economics and Business, Social Science, Sustainable Environment, Technology for Sustainable Environment, cleaner production/pollution prevention, decision-making, EMS, behavior change, benefits assessment, corporate compliance, corporate culture, corporate decision making, corporate environmental behavior, cost benefit, decision making, environmental behavior, environmental evaluation, environmental management strategies, environmental management systems, environmental management systems (EMS), outreach and education, pollution prevention, pollution prevention assessment

Metadata

EPA/NSF ID:
R830870
Principal Investigators:
Khanna, Madhu
Deltas, George
Joshi, Satish
Technical Liaison:
Research Organization:
Illinois at Urbana, University of
Michigan, University of
Funding Agency/Program:
EPA/ORD/Corporate Performance
Grant Year:
2002
Project Period:
January 1, 2003 to December 31, 2005
Cost to Funding Agency:
$286,539
Project Status Reports:
2003
Objective:
The objective of this research project is to examine whether and to what extent the adoption of total quality environmental management (TQEM) is fostering pollution prevention (P2) activities and its implications for the environmental and economic performance of firms. These issues will be investigated using a sample of Standard and Poor’s (S&P) 500 firms that emit toxic releases. The specific objectives of this research project are to:
    1. Develop a theoretical framework to examine the incentives provided by the market for firms to produce greener products and its implications for the ability of the market to achieve social optimality. The researchers will examine the implications of consumer preferences for product quality and social welfare and the supplementary regulatory policies needed to achieve social optimality.
    2. Empirically examine the extent to which TQEM and information provision have been effective in motivating the adoption of P2 activities and whether P2 adoption is improving environmental performance. The investigators will examine if P2 adoption is occurring in response to adoption of TQEM and information provision about toxic releases and P2 activities and the types of P2 activities being adopted. This analysis will control for differences in various firm- and industry-specific attributes and direct regulatory and market pressures to adopt P2.
    3. Examine the implications of TQEM and P2 for the economic performance of firms. The researchers will examine the sources of economic benefits, such as higher market share and higher price earnings ratio, abnormal changes in stock market returns for firms that adopt TQEM and/or P2, and whether stock market reactions to the environmental information in the Toxics Release Inventory (TRI) are influenced by information about the toxicity of releases and about TQEM and P2 activities.

Progress Summary:
The researchers have developed a theoretical framework to examine the effect of market pressures stemming from environmentally conscious consumers in motivating firms to produce greener products. This general framework recognizes that consumers care not only about the environmental attributes of products, but also about other brand-specific characteristics of products. Firms compete with each other to differentiate their products by their attributes and gain market share. The investitgators examine whether these market-based incentives for environmental product differentiation, arising from environmentally aware consumers, would achieve the socially optimal levels of product greenness. They also examine the type of firm that is more likely to choose to produce a greener product, that is, whether firms that already are considered high-quality firms by consumers are more likely to produce a greener product. They examine the effects of different types of policies to induce the production of greener products on firm profits and social welfare. The policies examined here include increasing consumer awareness about the environmental attributes of products, uniform and differentiated product quality subsidies, and cost-sharing subsidies.

The researchers have compiled data on environmental management practices adopted by the S&P 500 firms. These data were obtained from the Investor Research Responsibility Center in Washington, DC, for 1994, 1995, and 1996. These data are supplemented by detailed and broad-based parent company-level data on toxic releases and P2 activities from the TRI, financial performance data from Research Insight, and data from the U.S. Environmental Protection Agency on a number of Superfund sites for which firms are held potentially responsible and on the number of times firms were inspected and civil penalties were levied. For the first part of our empirical analysis examining the extent to which TQEM adoption is leading to P2 activities,

As a first step in their empirical analysis, the researchers examine the factors motivating TQEM adoption, and then use instrumental variable methods to examine the effects of TQEM adoption on various types of P2 activities. They classify the P2 activities being undertaken by firms into three categories: good operating practices; waste, spill, and leak prevention; and process and product modification. Their analysis so far shows that TQEM does motivate P2 activities directed towards waste, spill, and leak prevention as well as P2 activities directed towards product and process modification. It has only a weak effect, however, in motivating P2 activities that represent good operating practices. Additionally, firms that were producing larger hazardous air pollutants in the past, that were inspected more frequently, that reported a larger number of chemicals to TRI, and that had a higher sales-asset ratio were more likely to adopt P2 activities. They find that TQEM adoption and a firm’s innovativeness, measured by its research and development expenditures, are substitutes in motivating P2 activities targeted towards process and product modification. This implies that adoption of an environmentally friendly management system is less effective in motivating process and product modification among highly innovative firms that likely are to be undertaking such efforts in any case.

Future Activities:
There are three major research objectives for the next year. First, the researchers will extend our theoretical framework to consider the case where consumers cannot perfectly observe the environmental attributes of products. Firms may adopt TQEM to provide a signal of their environmental stewardship to consumers. The investigators will analyze the incentives for firms to produce greener products in this case and whether TQEM adopters are more likely to produce a greener product. They also will examine whether government incentives targeted towards inducing TQEM are more or less effective than incentives provided for actually improving product greenness. Second, They will complete the event-study analysis. They will be estimating the abnormal stock market returns obtained by firms following the release of the TRI to the public. They then will analyze the extent to which the magnitude of these abnormal returns is influenced by the toxicity of the chemicals released by firms and by their adoption of TQEM and other environmental management practices. Third, theywill extend our analysis about P2 to examine the implications of P2 for the environmental performance of firms. They intend to undertake this analysis at the facility level rather than the parent-company level. To do that they are compiling data on toxic releases and P2 at the facility level.

Supplemental Keywords:
toxic releases, good operating practices, process and product modifications, waste, spill and leak prevention, technological innovativeness, information disclosure, SIC codes 13, 20, 26, 28, 29, 33, 34, 36, 37, 38, 45, 48, 49, 50, 51, 54, 59, 72, 73, Economic, Social, & Behavioral Science Research Program, RFA, Scientific Discipline, Sustainable Industry/Business, Corporate Performance, Economics & Decision Making, Economics and Business, Social Science, Sustainable Environment, Technology for Sustainable Environment, cleaner production/pollution prevention, decision-making, EMS, behavior change, benefits assessment, corporate compliance, corporate culture, corporate decision making, corporate environmental behavior, cost benefit, decision making, environmental behavior, environmental evaluation, environmental management strategies, environmental management systems, environmental management systems (EMS), outreach and education, pollution prevention, pollution prevention assessment

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