Bolstering Private-Sector Environmental Management

“We are ready to enter a new era of environmental policy,” Environmental Protection Agency (EPA) Administrator Christine Todd Whitman announced during confirmation hearings in January 2001. Noting that the country had moved beyond “command and control mandates,” Whitman pledged to emphasize cooperative approaches among regulators and business. Similarly, President George W. Bush believes that lawsuits and regulations are not always the best ways to improve environmental quality. As governor of Texas, he emphasized voluntary agreements with industry as an alternative to government mandates.

How will Whitman and Bush implement their environmental philosophy? One approach, mentioned by Whitman and supported by a growing number of state agencies and the EPA itself, is to create “tracks” of environmental performance. In Whitman’s home state of New Jersey in 2000, the Department of Environmental Protection launched a program called the Silver and Gold Tracks, which rewards companies that have stronger environmental programs than what is required under law. A similar program has been set up in Texas and in 10 other states, and the EPA initiated its National Performance Track program in June 2000. Although the incentives that agencies are offering vary across jurisdictions, qualifying companies are being offered greater choice in how they will meet environmental regulatory standards, reduced government oversight, penalty mitigation, expedited permitting, reduced inspection frequency, more cooperative relationships with regulators, and public recognition.

The philosophy behind performance-track programs is simple: Distinguish strong environmental performers from weak ones and give strong firms special recognition and rewards. Weak firms, seeking the incentives that agencies are offering, will emulate their environmentally stronger competitors. Instead of just punishing the bad, agencies will be able to nurture the good. Such approaches might even improve the efficiency of agency enforcement programs. If regulators know who the “bad guys” are, they can focus their enforcement resources where they will have the greatest impact.

What constitutes strong environmental performance worthy of special treatment by agencies? How does a regulator know when a firm deserves entry to the performance track? States and the EPA are answering this question in different ways, but one component is central to nearly all programs. In order to become a member of New Jersey’s Gold Track, the Clean Texas program, or the EPA performance-track program, a firm must have established an environmental management system (EMS). The implementation of an EMS is one criterion among others that agencies are using to determine which companies deserve special treatment.

An EMS represents a collection of internal efforts at policymaking, planning, and implementation that yields benefits for the organization as well as potential benefits for society at large. When people inside an organization take responsibility for managing environmental improvement, the internal regulatory strategies they adopt will presumably turn out to be less costly and perhaps even more effective than they would be under government-imposed standards. Moreover, when organizations have the flexibility to create their own internal regulatory approaches, they are more likely to innovate and will potentially find solutions that government standard-setters would never have considered. Finally, individuals within organizations may be more likely to see their organization’s own standards as more reasonable and legitimate, which may in turn enhance compliance with socially desirable norms.

The potential for EMSs to improve environmental performance and fill the gaps in our existing system of environmental regulation makes them promising new tools. Yet as the Bush administration pursues its environmental policy agenda, policymakers should bear in mind that the EMS tool by itself is not necessarily sufficient for firms to create superior environmental improvement. After all, what distinguishes superior novelists and painters is not the kind of word processors or paintbrushes they use but rather their skill, motivation, and perseverance. Similarly, firms that achieve great strides in pollution prevention and other improvements in environmental performance may well owe little or none of that success to the mere use of an EMS. Improvements may depend much more on how effectively and ambitiously an EMS is implemented, how well the organization is managed overall, and how committed the managers are to seeing that the firm achieves real and continuous environmental improvement. These factors will always be harder for public agencies to assess. Moreover, one of the key motivators for developing an EMS and using it well may be the fear of sanctions. Thus, until reliable and consistent measures of environmental performance can be developed, EMSs should be treated as complements to and not as general substitutes for traditional forms of regulation.

The growth of standards

An EMS is a set of internal rules that managers use to standardize behavior in order to help satisfy their organizations’ environmental goals. Managers establish a policy or plan; implement the plan by assigning responsibility, providing resources, and training workers; check progress through systematic auditing; and act to correct problems. In some cases, organizations include interested community members in their planning and use independent auditors to help monitor and certify their environmental performance. The role that an EMS will play within a firm will vary across different organizational settings, in part because managers confront different business issues and community demands. The role will also vary because of the broad and varied standards or guidelines that firms use in creating EMSs.

Some major trade associations have developed EMS standards for use by their members. Notable examples in the United States are the American Chemistry Council’s Responsible Care program and the American Forest and Paper Association’s Sustainable Forestry Initiative. In addition, since the early 1990s, national standards organizations in various countries have been developing their own guidelines for how EMSs should be implemented. The European Commission has developed a standard for EMS implementation known as the Eco-Management and Audit Scheme. And in 1996, the International Organization for Standardization adopted the ISO 14001 standards. More than 15,000 organizations worldwide have formally registered their EMSs as adhering to the ISO standard. Many more organizations have adopted EMSs based on the ISO standards without officially registering them.

The EMS standards developed by trade associations and standards organizations establish different environmental objectives for managers, call for different levels of monitoring, and impose different sanctions on firms that do not measure up. The ISO standard only requires that EMSs be designed in such a way that firms can work toward the goal of regulatory compliance and seek to make improvements, not that the firm actually achieve environmental excellence or even full compliance with existing laws. However, ISO 14001 does demand strict consistency between what a firm says it intends to do with respect to managing its environmental impacts and what it actually does. ISO also requires that managers monitor their progress at regular intervals, and it makes available an optional registration process through which firms can have accredited third-party auditors verify that their EMSs meet ISO’s basic requirements.

EMS standards are flexible, allowing firms to adapt their EMSs to their own organizational capacities and needs. This flexibility contrasts sharply with the rigidity usually associated with government regulation. Existing regulations typically require firms to adopt specific technologies or methods designed to protect environmental quality, even if alternative technologies or methods might be cheaper. Because such standards fail to account for differences in firms’ marginal costs, similar environmental outcomes could probably be achieved in many cases at lower cost. In addition, current regulatory standards provide few incentives for firms to exceed the minimal level of compliance. Many people accept that it is time to move beyond the blunt strategy of first-generation environmental regulation, while acknowledging that those regulations have significantly improved environmental quality in the United States.

An EMS in action

The case of Louisiana-Pacific (LP), one of the largest North American manufacturers of building products, illustrates some of the ways in which EMSs can help organizations achieve environmental goals, as well as address some of the limits of current regulatory approaches. In the early 1980s, the EPA filed a suit against LP for unlawful releases of volatile organic compounds. The EPA suspected that managers at one of LP’s facilities had tampered with air pollution controls, and the firm became the target of a criminal investigation. Realizing the potential for liability, LP hired a corporate environmental manager, Elizabeth Smith, to bring all of the company’s facilities into compliance. Smith quickly realized that she needed a corporate governance structure that could drive environmental responsibilities down into the plants. What she needed, she discovered, was an EMS.

Smith began by identifying the company’s regulatory responsibilities and assigned an environmental manager position to each plant. She then created a reporting structure for environmental compliance that began within each plant and worked its way up to the company’s board of directors. These steps established an institutional structure for environmental management within the corporation with dedicated lines of responsibility.

At each plant, Smith and her environmental managers organized teams of hourly workers for the purpose of developing standard operating procedures that would be incorporated into the company’s EMS. With the assistance of environmental experts, the teams reviewed their plant’s existing waste, air, and water permits and then identified the different job functions that were key to ensuring that these permit requirements would be met. Workers with key roles in compliance then wrote standard operating procedures for their jobs, and the corporate staff established extensive training programs to ensure that all employees were informed of these job tasks. Furthermore, the plant teams developed “consequence programs,” ensuring that the standard operating procedures would have bite.

It is possible that the new emphasis placed on compliance, combined with substantially new work routines, patterns of reporting, and reward systems, may be changing the culture in some of the company’s facilities. New procedures established through an EMS have also resulted in some cost savings. For example, new standard operating procedures at LP’s plant in Hines, Oregon, now provide for using wood planer shavings in the manufacture of fiberboard products. Planer shavings from this facility had previously been disposed of at a cost of the company, but now they earn the company revenues as inputs to saleable products.

In recognition of LP’s EMS and what LP managers have described as the company’s commitment to responsible environmental management, the Oregon Department of Environmental Quality recently accepted LP’s Hines facility into its “achiever tier,” a category that includes only a handful of other facilities. The state promises to review the Hines facility’s environmental permits on an expedited basis and may offer regulatory flexibility when managers seek to make process changes.

The reasons for expecting that EMSs can bring about positive change are appealing. Systematic management leads to better environmental outcomes than haphazard management. EMS adoption may change the culture of firms by creating a new awareness of the relationship between business activity and the environment. EMSs provide managers with a structure for identifying changes that improve both environmental and business performance. Some early empirical research seems to support these arguments, but there are several reasons why private and public decisionmakers might at least initially be skeptical about the potential for EMSs.

Much of what we currently know about EMSs has been drawn from the study of firms that have adopted EMSs on their own–firms run by people committed to improving their company’s environmental performance. Researchers understand much less well the role of EMSs in firms lacking such commitment. Only a handful of studies have examined involuntary EMS adoption. A recent study of the Responsible Care program, which the American Chemistry Council requires its members to adopt, found that firms were reducing their environmental releases no more quickly than comparable firms that do not use this approach. A second study found that managers’ responses to Responsible Care varied widely and depended in part on the extent to which strong environmental performance was thought to be important for achieving strategic and business objectives. Managers at some companies said Responsible Care was mainly a paperwork exercise that required little in terms of organizational changes, worker training, or senior management attention. Others, in contrast, saw Responsible Care as a new approach that required them to rethink virtually every aspect of their business, elevating environmental protection to a much higher level.

Genuine, lasting cultural change is difficult to bring to any organization. In a number of firms, the Responsible Care EMS appeared to serve primarily as a reinforcing mechanism, not a tool for fundamental cultural change. This result may not be surprising, because significant organizational change often requires challenging employees to abandon old values without undermining productivity and morale. Such change may also entail challenging existing patterns of specialization and knowledge within the organization, requiring new sharing of decisionmaking authority over domains that previously had been assigned to specialists focused on the environment or on production, but not on both. Although these obstacles do not make changing organizational culture impossible, they may well require an exceptional kind of organizational leadership that is not readily found or easy to create. An EMS alone may not be enough to make dramatic changes in a well-entrenched corporate culture.

Finally, at many companies, achieving higher levels of environmental performance requires substantial investment. Even if there is some low-hanging fruit that managers can easily pick in the process of implementing an EMS, such gains ultimately could be overshadowed by the total costs of a firm’s environmental programs. After all, if the ground were littered with extra money, managers presumably would have already noticed it and picked it up. Managers may still need to confront real economic costs in many cases to make significant strides in environmental performance.

Choices for policymakers

Legislatures and regulatory agencies throughout the country are currently considering and implementing programs designed to encourage firms to adopt EMSs. There has been a veritable explosion of interest in programs that offer financial and regulatory incentives to firms that implement EMSs. Early indications from EPA Administrator Whitman and President Bush suggest that the new administration might well rely on these approaches even more than their predecessors. What policy options should the administration consider in order to encourage systematic environmental management?

One possibility would be to offer firms that implement an EMS relief from existing regulatory requirements. Although EMSs have yet to be proposed as a total substitute for environmental regulation, some of the performance-track programs seem to be headed in that direction by offering limited regulatory flexibility and fewer enforcement inspections. There are, however, at least two reasons to resist any inclination to rely on EMSs as a substitute for traditional forms of regulation.

First, policymakers should not use the mere presence of an EMS as the metric for differentiating among firms and deciding who gets special regulatory treatment. EMSs can take many forms and are as different as the many organizations that implement them. EMSs allow managers to choose the impacts they consider to be most important and the level of resources they will provide. As shown by the Responsible Care experience, managers can use EMSs to improve their environmental performance at their own pace, in their own way. They will interpret EMS requirements from the perspective of their own business goals and strategies.

Second, reduced regulatory oversight may actually weaken the EMSs that firms implement, because incentives for using EMSs aggressively to achieve positive outcomes may be reduced. The available research indicates that the need to comply with environmental regulations is a primary factor motivating managers to adopt EMSs, as borne out in the case of LP. Policymakers should think carefully, therefore, about weakening regulatory requirements for EMS firms.

Because traditional regulation appears to be a key motivator for firms to adopt EMSs, policymakers could require that firms adopt EMSs. Managers of firms with strong environmental performance might respond to such a mandate by formalizing and standardizing their existing practices. Managers of firms with poor environmental performance might use the EMS to think about their environmental impacts for the first time, take responsibility for setting and achieving environmental goals, involve employees in establishing new routines that protect the environment, and institute new systems for reporting and recordkeeping. For lower-performing firms, the process of instituting an EMS might jump-start their progress toward better environmental performance.

On the other hand, an agency mandate for broad EMS adoption might lead to a variety of less desirable responses from firms, perhaps similar to the varied ways in which some firms in the chemical industry have responded to Responsible Care. Although some lagging firms might find designing and implementing an EMS an opportunity to improve their performance, others might consider a mandated EMS as largely a meaningless paperwork exercise. Managers who are told to adopt EMSs might choose trivial goals for their systems, or adopt ambitious goals but fail to provide the resources necessary to achieve them. The costs associated with complying with such a mandate would also need to be taken into account.

More research is needed before we know whether an EMS can motivate strong environmental performance. We do not know yet whether it is the EMS or managers’ commitment to make environmental improvements that is key to fostering sound, responsible environmental management. If a commitment to make environmental improvements is a necessary precondition for an EMS to be effective, public policy should support and promote such commitment and not worry as much about whether a firm has an EMS.

To establish a causal claim that EMS adoption leads to environmental or efficiency gains, it will be necessary to systematically compare the outcomes achieved by firms with and without EMSs and to try to control for other factors that affect organizational performance. Policymakers should invest in such comparative studies. One way to do this would be to examine the EMSs that large private-sector firms are increasingly requiring their suppliers to adopt. EMS mandates usually apply to all suppliers of a certain size or type, regardless of the strength or weakness of their environmental programs. By examining EMS adoption in these diverse organizations, researchers could gain insight into how firms would be likely to respond to government-imposed EMS mandates.

Until more is known, policymakers should not use EMSs as a substitute for traditional regulation or mandate their use. But policymakers can still pursue a variety of options for promoting systematic environmental management that fall in between using them as a substitute for regulation or mandating their use. By providing technical assistance to firms interested in EMS implementation, agencies can shift some of the costs of EMS development to government. The EPA is already providing EMS technical assistance and training to industries such as metal finishing.

Policymakers can also publicly recognize EMS firms with certificates of participation, product labeling, or government-sponsored publicity. Public recognition gives firms a distinction that they can use to differentiate their products and demonstrate to employees and local communities that they practice exemplary environmental stewardship. The behavioral effects of such recognition are far from well understood, but it takes little effort to offer recognition.

Government could also promise not to request information about violations of environmental regulations that managers discover in their EMS audits. Many states have already adopted “audit privilege” legislation. Strengthening such privileges can reduce a potential disincentive for EMS adoption.

EMSs can properly be considered as valuable complements to the current regulatory system and as potential tools for stimulating further improvements in environmental performance. Through private firms’ increased use of EMSs, as well as serious efforts to study their impacts, policymakers can learn how to better adapt government regulation to fit a world of increasingly more systematic private environmental management.