Environmental Management Practices and ...

Environmental Management Practices and Performance in Canada Irene Henriques, Perry Sadorsky

Canadian Public Policy, Volume 39, Supplement/numéro spécial, August/août 2013, pp. S157-S175 (Article) Published by University of Toronto Press

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Environmental Management Practices and Performance in Canada


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Irene Henriques

Schulich School of Business York University Toronto, Ontario

Perry Sadorsky

Schulich School of Business York University Toronto, Ontario

Dans cet article, nous décrivons un modèle de déterminants de pratiques de gestion environnementale et de l’impact de ces pratiques sur la performance environnementale, puis nous le testons en utilisant des données canadiennes recueillies au niveau des unités de production. Nos résultats montrent que, tel que l’on pouvait le prévoir, les installations manufacturières canadiennes réalisent des projets environnementaux à la suite de pressions faites par les acheteurs de leurs produits ou le siège social de l’entreprise dont elles font partie. Le lien entre ces pratiques de gestion environnementale et leur impact sur la performance environnementale est curviligne. Cette performance croît à mesure que le nombre de pratiques augmente, jusqu’à un point d’inflexion. Une fois passé ce point, la performance environnementale décroît malgré l’augmentation du nombre de pratiques. De plus, dans le temps, les installations qui ont des pratiques plus poussées continue de voir des améliorations de leur performance environnementale. Mots clés : pratiques de gestion environnementale, performance environnementale In this paper, a model of the determinants of environmental management practices and the impact of these practices on environmental performance is described and tested using Canadian manufacturing facilitylevel data. Our results show that Canadian manufacturing facilities have indeed undertaken environmental initiatives as a result of pressures arising from the buyers of their products and corporate headquarters. The relationship between environmental management practices and environmental performance is curvilinear. Increases in environmental performance are observed as the number of environmental practices increases up to an inflection point. Past this inflection point, environmental performance diminishes with further increases in environmental practices. We also find that, across time, facilities with more comprehensive practices continue to see improvements in environmental performance. Keywords: environmental management practices, environmental performance

Canadian Public Policy – Analyse de politiques, vol. xxxix, supplement/numéro spécial 2 2013

CPPSpecialAug2013.indb 157

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S158 Irene Henriques and Perry Sadorsky Introduction

T

he need to provide decision-making flexibility to firms and to lower the costs of environmental protection has led many governments, industry groups, and individual companies to consider using voluntary environmental programs (VEPs) that encourage voluntary actions for pollution prevention (Morgenstern and Pizer 2007). The main theoretical reasons for firms or organizations participating in VEPs include: relief from existing environmental regulation, an opportunity to participate in the formation of new environmental regulation, a response to green stakeholders, and the prospect of gaining a comparative advantage (Morgenstern and Pizer 2007; Henriques and Sadorsky 2008).

While, to date, there has been considerable interest in the determinants of VEPs or environmental management practices (eg., Arora and Cason 1995, 1996; Darnall, Henriques, and Sadorsky 2008, 2010; Henriques and Sadorsky 1996, 2006; DeCanio and Watkins 1998; Videras and Alberini 2000; Nakamura, Takahashi, and Vertinsky 2001; Takahashi et al. 2001; Khanna and Anton 2002; Anton, Deltas, and Khanna 2004), there has been much less published research investigating the link between environmental management practices and environmental performance. Moreover, the majority of the published research investigating the relationship between VEPs or environmental management systems and environmental performance has focused almost exclusively on one country—the United States— and a relatively small number of public programs1 (Khanna and Damon 1999; King and Lenox 2000; King, Lenox, and Terlaak 2005; Gamper-Rabindran 2006; Vidovic and Khanna 2007). This paper makes several important contributions to the literature. First, while the majority of studies have postulated a linear relationship between environmental practices and environmental performance, we theorize that a non-linear relationship exists. Interestingly, a study of the US metal finishing industry (Sarkis 2006) found that individual

facilities exhibited differing returns to scale with respect to environmental practices. We suggest that increases in environmental practices do lead to increases in environmental performance (reduction in toxic emissions), but that after some point, diminishing returns set in where further increases in environmental management practices have less impact on environmental performance. Second, while most existing empirical research studies the relationship between environmental practices and environmental performance for the United States or large European countries, little is known about how environmental practices impact environmental performance in Canada. Given that environmental attitudes and awareness vary across countries, it cannot be assumed that results or relationships that hold for one country apply to other countries. Our empirical research is based on a unique data set whereby Canadian facility-level manufacturing data from a 2003 Organisation for Economic Cooperation and Development (OECD) international environmental survey (OECD 2003) were matched with facility-level data from Canada’s National Pollutant Release Inventory (NPRI) for 2004–2005. Given that the majority of Canadian facilities do not adopt certified VEPs such as ISO 14001, we sought to examine the specific environmental practices that facilities do adopt. Our results show that Canadian manufacturing facilities have indeed undertaken environmental initiatives as a result of pressures arising from the buyers of their products and corporate headquarters. We also find that the relationship between environmental management practices and environmental performance is curvilinear. Increases in environmental performance are observed as the number of practices increases; then, after an inflection point, diminishing returns set in. This has implications for environmental policy. The paper is organized as follows. We first present a brief review of the literature regarding the determinants of environmental practices and performance in Canada. We then present the model,



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Environmental Management Practices and Performance in Canada followed by a description of the data and methodology, and the empirical results. The paper concludes with some policy implications.

The Determinants of Environmental Practices and Performance in Canada Henriques and Sadorsky (1996) develop a framework to empirically test the determinants of an environmentally responsive firm in Canada where an environmentally responsive firm is defined as “a firm having formulated a plan for dealing with environmental issues.” The empirical results found that a firm’s formulation of an environmental plan is positively influenced by customer pressure, shareholder pressure, government and regulatory pressure, and neighborhood and community group pressure. Henriques and Sadorsky (1999) set out to determine whether environmentally committed firms in Canada differed from less environmentally committed firms in their perceptions of the relative importance of different stakeholders in influencing their natural environmental practices. They found that firms with more proactive environmental profiles do indeed differ from less environmentally committed firms in their perceptions of the relative importance of different stakeholders. One of the major findings of Henriques and Sadorsky (1999) is that a manager’s perception of a stakeholder is critical to the manager’s view of the stakeholder’s importance. Another major finding of Henriques and Sadorsky (1999) is that environmentally proactive firms view regulatory, community, and organizational stakeholders—but not media—as important, whereas reactive firms view only the media as important. Proactive firms are also more willing to spend the necessary time and money to effectively manage environmental issues. Takahashi et al. (2001) examine firm participation in and the impact of the Canadian Voluntary Challenge and Registry (VCR) program. The VCR program was initiated in 1995 as a joint federal and provincial program to encourage industrial firms to

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reduce their greenhouse gas (GHG) emissions. The VCR program became a privatized, incorporated, non-profit government and industry organization in 1997 with the majority of their funding, from 1997 onwards, coming from the private sector. Participation in and commitment to the VCR program was used as a proxy for a firm’s commitment to carbon emissions reductions. The empirical results suggest that participation in the VCR program did not have an impact on a firm’s range of emission reduction goals. It therefore appears that firms participated in the VCR program more for political reasons than for environmental concerns. Henri and Journeault (2008) study the measure ment and employment of environmental performance indicators (EPIs) in Canadian manufacturing. They find that the significance of measuring EPIs increases when firms have a more active environmental strategy, are ISO 14001 certified, are large in size, and are public firms. These factors also impact the employment of EPIs. Sharma and Henriques (2005) examine how managers’ perceptions of different types of stakeholder influences in the Canadian forestry industry affect the types of sustainability practices that their firms adopt. They find that the industry and its stakeholders have moved beyond a focus on early stages of sustainability performance, such as pollution control and eco-efficiency. However, more advanced practices, such as those involving the redefinition of business and industrial ecosystems (where firms locate in a region so that they can exchange and utilize wastes generated by other firms), are in their infancy. Rather, stakeholders and firms in the industry are focused on the intermediate sustainability phases involving recirculation of materials and redesign of processes including sustainable harvesting of lumber. The impact of facility-level environmental practices on environmental performance as measured by actual toxic emission data has, to our knowledge, not been examined in Canada. The reasons why this



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S160 Irene Henriques and Perry Sadorsky may be the case include the lack of data on facilitylevel environmental practices and the fact that the Canadian emissions data at NPRI are not as easily accessible as their American equivalent.

Model Environmental Practices Decision A growing number of business-initiated actions to change corporate culture and management practices via the introduction of environmental management systems (EMSs), industry-level codes of environmental management (such as the chemical industry’s Responsible Care Program), and international EMS certification programs (such as those of the International Organization for Standardization (ISO)) is evident in Canada (Webb 2004; Henriques and Sadorsky 1996, 2008). EMSs represent an organizational change within businesses and an effort for self-regulation by defining a set of formal environmental policies, goals, strategies, and administrative procedures for improving environmental performance (Coglianese and Nash 2001). From an economic perspective, a rational firm/ facility chooses both the comprehensiveness of its EMS and its level of pollution to maximize its net benefits (Anton, Deltas, and Khanna 2004). Moreover, not all firms/facilities face the same costs and benefits with respect to undertaking EMSs, pollution control, or pollution prevention. These differences can arise from a host of sources (both tangible and intangible) from a firm’s existing capabilities to deal with environmental issues to pressures exerted on the organization by community groups, consumers, and governments (Henriques and Sadorsky 1999). We, therefore, focus our analysis on the particular environmental practices adopted by a facility. Nine environmental management practices are examined. These include whether the facility has implemented: 1) a written environmental policy; 2) environmental criteria in the evaluation and/

or compensation of employees; 3) environmental training programs; 4) external environmental audits; 5) internal environmental audits; 6) benchmarks of environmental performance; 7) a public environmental report; 8) environmental accounting; and 9) environmental performance indicators/goals. Following Anton, Deltas, and Khanna (2004), we define the comprehensiveness of an EMS as the sum of the environmental management practices adopted by that facility. Most empirical studies model environmental practices using explanatory variables consistent with the main theoretical reasons why a firm or facility would choose to implement a VEP, as outlined above. In this paper, explanatory variables are included to proxy green stakeholders (including public authorities), financial performance, competitive pressures, organizational size, and technical feasibility (see review by Khanna 2001). Our environmental practices equation is given by equation (1):

Yi =a1 + bXi + ei

(1)

where: Yi = is the number of environmental practices (count); Xi = Facility size, market scope, facility business performance, international firm, TQM system, enviro R&D budget, influence of buyers, influence of community, influence of corporate headquarters, influence of ENGOs, influence of industry associations, influence of management, influence of workers, influence of public authorities, industry dummies, regional dummies; ei is a random error term. Size is a widely used control variable in studies of environmental practices. Larger facilities tend to have larger resources and capabilities, as well



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Environmental Management Practices and Performance in Canada as skills in deploying these resources, and this can enhance their ability to commit to environmental initiatives. Darnall, Henriques, and Sadorsky (2010) in their investigation of the relationship between firm size and stakeholder management also note that larger firms have greater societal visibility (Etzion 2007), which may intensify stakeholder requests that larger businesses adopt more proactive environmental practices. Consequently, the impact of facility size on the implementation of environmental practices is predicted to be positive. Facility size is proxied by the number of employees. Export orientation may be an important determinant of the adoption of environmental practices. Foreign customers are less able to monitor the environmental performance or activities of the facility or firm. Consequently, the adoption of environmental practices provides a visible signal to foreign customers of a facility’s commitment to the natural environment (Nakamura, Takahashi, and Vertinsky 2001). International trade is very important to the Canadian economy, with exports and imports accounting for 43 percent and 38 percent of gross domestic product (GDP) in 2003, respectively (Economist 2004). We predict that the greater the scope of a facility’s international market, the more likely it will undertake environmental management practices. The overall business performance of a facility influences its cost of capital and financial flexibility. Profitable organizations are more likely to pursue environmental initiatives than organizations facing financial difficulties. We predict that the greater a facility’s financial performance, the greater its ability to commit to environmental management practices. Manufacturing facilities that have environmental research and development (R&D) budgets are more likely to commit to more environmental management practices. Greater investments in environmental R&D indicate that the organization has the capacity and incentives to successfully cope with the many

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administrative and technical environmental issues manufacturing facilities may face. Foreign ownership is proxied by whether the facility’s head office is located in a foreign country (international firm). Foreign owners may, on the one hand, be less willing to contribute to the social well-being of the country in which the facility is located and, as a result, less inclined to invest in environmental protection above the level required by regulation (Nakamura et al. 2001). Foreign owners may, on the other hand, increase environmental protection practices to secure goodwill from the regulatory authorities of the host country so as to prevent discrimination or increase their legitimacy in the eyes of these authorities. We have no a priori expectation on this variable. For those companies that have already obtained ISO 9001 registration and/or follow Total Quality Management (TQM) system principles, the implementation of an environmental management system is a logical next step because it is very similar to ISO 9001 and the principles of TQM. ISO 9000, for example, has several elements that are useful for the implementation of an environmental management system—management structure, review meetings, documentation and record procedures, internal audits, and procedure for corrective action. Consequently, if a facility has a TQM system, it is more likely to adopt more environmental management practices relative to those firms that do not. Responding to green stakeholders is one of the major reasons for an organization to participate in a VEP. Green stakeholder pressures, if not properly addressed, given today’s ever media savvy environment, may adversely affect a company’s bottom line (Henriques and Sadorsky 1996). Consequently, the more pressure a facility is under to take into account the environmental impact of its actions, the more likely it will implement environmental management practices. In our analysis, the influence of various stakeholders is proxied by a manager’s perceptions



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S162 Irene Henriques and Perry Sadorsky of their importance. To proxy the importance of different stakeholders, we used the response to the following OECD question: “How important do you consider the influence of the following groups or organizations on the environmental practices of your facility?” The stakeholders included in our model are commercial buyers, community groups, corporate headquarters, industry trade associations, environmental non-governmental organizations (ENGOs), management workers, workers, and public authorities. Commercial buyers are essentially the consumers of manufactured products. The risks associated with not addressing commercial buyers’ concerns include the boycotting of the firm’s products, which will have a direct impact on the firm’s bottom line. Community groups can also exert their influence via their ability to lobby the legislative system and affect consumer buying patterns via third-party suits and negative media attention. Corporate headquarters become extremely concerned and exert influence when environmental fines begin lowering profits and environmental goals are not met. Industry trade associations become concerned and exert influence when an individual facility’s or firm’s environmental incidents begin tarnishing the industry’s environmental image (e.g., the impact of the Bhopal, India disaster on the chemical industry). ENGOs often exert their influence via the media (including social media) by bringing negative environmental behaviour to customers’ and investors’ attention (Henriques and Sharma 2005). Not addressing ENGO concerns may lead to negative media attention tarnishing the firm’s image. The potential risks that management faces include increased inability to deal with environmental issues and dismissal if the issues in question affect the facility’s bottom line or reputation. The risks associated with employees rise when the lack of training or awareness may lead employees to quit due to the reputational cost associated with working for a bad

organization. The potential risks associated with public authorities are: 1) unacceptable process and product impacts resulting in regulatory changes; 2) non-compliance penalties of all kinds; 3) product elimination, substitution, and phase-out; and 4) the banning or restriction of raw materials (Henriques and Sadorsky 1996). Finally, industry dummy variables are included to control for industry differences, and regional dummy variables are included to control for regional differences. The omitted industry category is the wood, petroleum, and chemical products sector. The omitted regional category is Ontario. We have no a priori expectation on these variables.

Environmental Performance Equation Our second equation is the environmental performance equation. Our dependent variable is measured by the average toxicity of on-site emissions in 2004–2005 per worker for each facility. The emissions equation is given by Equation 2:

EIi = a + bXi +ei

(2)

where: EIi = Emissions for facility i; Xi = Count of EMPs, count squared, facility age, off-site ratio, population density, industry dummies, and regional controls; ei is a random error term. To address the possible endogeneity that may exist between environmental management practices and environmental performance, we collected environmental performance data in the two subsequent years following the survey of the environmental practices (OECD 2003).2 We hypothesize that the relationship between environmental management practices, which are essentially administrative innovations, and



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Environmental Management Practices and Performance in Canada environmental performance is curvilinear. Our reasoning is built on the concept of diminishing returns to scale and learning. As facilities begin to adopt environmental practices, and presumably become serious about improving environmental performance, increases in environmental performance (reductions in emissions) occur fairly rapidly as the easiest initiatives are done first (e.g., reduce, reuse, and recycle). In other words, the low hanging fruit is reaped first (Hart 1995). However, at some point, diminishing returns to effort (i.e., environmental management practices) begin to set in. Environmental performance improvement in the middle stages of undertaking environmental management practices slows or even deteriorates because the fundamentals of combining multiple practices are poorly understood. Sarkis (2006), in his investigation of the metal finishing industry’s adoption of the National Finishing Strategic Goals Program, found that individual facilities exhibited differing returns to scale with respect to environmental practices, with the majority of facilities exhibiting decreasing returns to scale. He argues that increasing or decreasing returns to scale in program adoption may occur, depending on how well the performance is related to the environmental and risk management practices. He states: “In the case where the facility is adopting environmental practices without good strategic reasons tying the decision into managerial policy and organizational direction, such adoption may in fact hinder the performance of many practices” (Sarkis 2006, 370). We include count and count squared to account for the non-linear relationship. A facility’s age is used as a proxy for the age of a facility’s equipment and technology. In general, the older the equipment, the less environmentally efficient it is, ceteris paribus. It is also important to recognize that capital equipment depreciates and wears out across time and eventually has to be replaced. Older facilities that have recently replaced capital equipment are more likely to be environmentally more efficient. Given these two opposing effects, the impact of facility’s age on environmental performance is difficult to predict a priori.

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The population density variable takes into account the idea that more populated areas are more likely to be more effective at lobbying facilities to increase their environmental performance. The NIMBY (not in my backyard) phenomena are also greater in more populated areas (Arora and Cason 1999). The ratio of off-site to total emissions is included as an explanatory variable in order to measure any substitution or complementary effects that may exist between on- and off-site emissions. A facility’s onsite emissions may be lower because a decision has been made to ship more pollutants off-site where they are treated, recycled, or disposed of. If such activities are the result of the facility internalizing the externality, then we would expect an increase in the ratio to reduce on-site emissions. In this case, on-site and off-site emissions are substitutes. If, however, the firm is increasing its off-site and on-site emissions simultaneously, then we would expect an increase in the ratio to increase on-site emissions. In this case, on- and off-site emissions are complements. Industry dummy variables are included to control for industry differences, and regional dummy variables are included to control for regional effects. The omitted industry category is the wood, petroleum, and chemical products sector. The omitted regional category is Ontario. We have no a priori expectation on these variables.

Data Two sources of data were collected to undertake this research. First, data were collected using a survey instrument. The data are part of an international environmental OECD project3 examining the links between environmental policies and facility-level, as well as firm-level environmental management, investments, innovation, and performance (Johnstone 2007). The initial sample comprised 1,033 Canadian manufacturing firms whose production facilities had at least 50 employees. The list of



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S164 Irene Henriques and Perry Sadorsky firms was taken from the Dun & Bradstreet database (2002), which listed manufacturing companies from across Canada. These firms were sent a survey, in both French and English, in March 2003. Given that the organizational unit under study was the facility, firms that had many production facilities were asked to answer the questionnaire with reference to the facility at which they were located or with which they were most familiar. The last responses were received in October 2003. During the survey period, several follow-up mailings were also conducted in May and June 2003 to prompt responses. In total, 256 facilities responded, giving us a response rate of 25 percent. Titles of respondents included: president; vice-president; environmental health and safety director; environmental administrator; vice-president operations; plant manager; corporate financial officer; human resource manager; and finance manager. In order to verify that companies with environmental management systems were not the only respondents, we monitored the responses to one of the many questions regarding environmental management practices, namely, whether the company had implemented an EMS. We observed no significant bias in the pattern of responses. In fact, of our 256 respondents, 46.1 percent had not implemented an EMS, 31.6 percent had implemented an EMS, and 22.3 percent were in the process of implementing an EMS. The average facility had 425 employees, with an estimated average annual sales value of Can$220 million and an estimated annual R&D expenditure of approximately Can$9 million. At the firm level, the average number of full-time employees was 23,991, with an estimated annual sales value of Can$8.6 billion and an estimated R&D expenditure of Can$320 million. Although the OECD study did collect environmental performance data, these data were a self-reported five-point Likert scale (1=significant decrease to 5=significant increase) measuring changes in environmental impacts per unit output. Clearly, third-party data on actual emissions are preferable.

We therefore collected the third-party environmental performance data from the NPRI database. The National Pollutant Release Inventory is Canada’s legislated (mandated under the Canadian Environmental Protection Act (CEPA) 1999), publicly accessible inventory of pollutants released, disposed of, and recycled by industrial, institutional, and commercial facilities across the country. The data allow persons or organizations to identify and monitor sources of pollution in Canada, as well as to develop indicators for the quality of air, land, and water. Information collected through the NPRI is used by Environment Canada in its chemicals management programs, and is made publicly available to Canadians each year. The first report of Canada’s National Pollutant Release Inventory was released in 1995, containing pollutant release, transfer, and recycling information reported for 1993. Since its establishment, the NPRI has been expanded to provide more comprehensive information on sources of pollution in Canada. The most significant expansion occurred in 2002 when Criteria Air Contaminants (CACs), the main pollutants that contribute to poor air quality, were added to the NPRI. In addition, certain reporting thresholds at which pollutants must be reported have been reduced, the number of pollutants listed on the NPRI has nearly doubled, and the number of facilities required to report to the NPRI has grown significantly, from approximately 2,000 in 1996 to over 8,600 in 2005. Our analysis focuses on on- and off-site toxic substance releases from 2004 to 2005. Since both reported releases and number of facilities remained relatively consistent during this period, we are confident that the data obtained during this period were not adversely affected by changes in reporting criteria. The NPRI requires facilities that meet certain criteria to report information on their discharges and off-site transfers of over 300 toxic substances to Environment Canada (Environment Canada 2006). Facilities covered by NPRI are required to



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Environmental Management Practices and Performance in Canada report on-site releases to various media (air, water, and land), as well as off-site transfers for disposal, treatment, storage, or recycling. 4 Over 8,600 facilities were required to report to the NPRI in 2005 (Environment Canada 2006). One of the biggest problems with pollutant release data is that it reflects releases of noxious emissions, but does not reflect the level of exposure the public or the ecosystem sustains (EPA 2002). While some researchers have attempted to mitigate this shortcoming by estimating the toxicity level of chemical emissions using EPA toxicity thresholds (King and Lenox 2002; Russo and Harrison 2005), these weighting systems are not without limitations (Toffel and Marshall 2004). The main problem is that these systems do not account for the medium to which the chemical agent is released (e.g., air, water, or land). To address this drawback, we follow Harrison and Antweiler’s (2003) approach and use the EPA’s Chronic Human Health indicators (CHHI) to adjust for toxicity. CHHI scores each chemical based on chronic health effects based on inhalation and oral releases (EPA 2012). We employ inhalation toxicity scores for on-site releases to air and oral toxicity scores for on-site releases to water and land. For off-site disposal and recycling, no toxicity adjustment was undertaken because we have no way of knowing if any chemical was released, and if it was the medium in which the chemical was released. Emissions data were collected for 2004 and 2005. These data were then matched with the OECD Canadian survey data and resulted in a matched sample of 110 facilities. The natural logarithms of average (2004–2005) on-site toxicity adjusted emissions per worker are used as the dependent variable in the environmental performance equation. The nine environmental management practices examined include whether the facility: 1) implemented a written environmental policy (EMPWRIT); 2) implemented environmental criteria in the evaluation and/or compensation of employees (EMPEVAL); 3) implemented environmental training programs (EMPTRAIN); 4) implemented external environmental audits (EMPEAUD);

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5) implemented internal environmental audits (EMPIAUD); 6) benchmarked environmental performance (EMPBNCH); (7) implemented a public environmental report (EMPRPRT); 8) implemented environmental accounting (EMPACCT); and 9) implemented environmental performance indicators/goals (EMPINDIC). Figure 1 shows how many facilities had implemented each of the nine practices. Implementing an internal audit (90 facilities) and implementing a written environmental plan (90 facilities) were the most popular environmental practices. By comparison only 34 facilities reported implementing an employee evaluation based on environmental criteria or implementing a public environmental report. Figure 2 depicts the distribution of the straight sum of the number environmental management practices (count) for each facility, which ranges from zero (no environmental practices adopted) to nine (all practices adopted). The frequency distribution shows that 17 facilities had implemented eight environmental management practices, while five facilities had implemented two environmental management practices. The independent variables used to test our environmental management practices and environmental performance equations, as well as information as to how these variables were measured and their expected signs are summarized in Table 1.

Empirical Results on the Determinants of E nvironmental P ractices Count regression models are used to investigate the determinants of environmental practices (Wooldridge 2002). In the first instance, a Poisson count model was employed. However, a regression-based test for overdispersion (Cameron and Trivedi 1990) rejected the adequacy of the Poisson model and the environmental practices equation was estimated using a negative binomial regression model (Table 2). Standard errors which are robust to an incorrectly specified distribution function are calculated.



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S166 Irene Henriques and Perry Sadorsky Figure 1

Number of Individual Environmental Practices 100 90

90

90

80

76

73

70

65

62

60 50

43

40

34

34

30 20 10 0

EMPACCT

EMPBNCH

EMPEAUD

EMPEVAL

EMPIAUD

EMPINDIC

EMPRPRT

EMPTRAIN

EMPWRIT

Source: Authors’ calculations.

Figure 2

Distribution of the Number of Environmental Practices 18

17 16

16

15 14

14 12

11 10

10

6

8

8

8 6 5

4 2 0

0

1

2

3

4

5

6

7

8

9




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Table 1

Description of Variables Used in the Analyses Variable Name

Description of Dependent Variables

Benchmark (EMPBNCH)

Benchmarked environmental performance in 2003 (0=no; 1=yes)

External audit (EMPEAUD)

Implemented external environmental audits in 2003 (0=no; 1=yes)

Employee evaluation (EMPEVAL)

Implemented environmental criteria in the evaluation and/or compensation of employees in 2003 (0=no; 1=yes)

Performance indicators (EMPINDIC)

Implemented environmental performance indicators/goals in 2003 (0=no; 1=yes)

Internal audit (EMPIAUD)

Implemented internal environmental audits in 2003 (0=no; 1=yes)

Public report (EMPRPRT)

Implemented a public environmental report in 2003 (0=no; 1=yes)

Employee training (EMPTRAIN)

Implemented environmental training programs in 2003 (0=no; 1=yes)

Environmental accounting (EMPACCT)

Implemented environmental accounting in 2003 (0=no; 1=yes)

Written report (EMPWRIT)

Implemented a written environmental policy in 2003 (0=no; 1=yes)

Count

Sum of the EMS practices variables above (maximum=9, minimum=0)

Toxicity adjusted on-site releases per worker

Natural logarithm of (CHHI toxicity adjusted average on-site emissions 2004–2005 per number of full-time employees in facility)

Variable Name

Description of Independent Variables in Environmental Practices Equation

Facility size

Natural Log of number of full-time employees in facility

+

Market scope

Scope of facility’s market (0=local; 0=national; 1=regional; 1=global)

+

Facility business performance

Assessment of overall business performance over past three years (1=revenue has been so low as to produce large losses; 2=revenue has been insufficient to cover costs; 3=revenue has allowed us to break even; 4=revenue has been sufficient to make a small profit; 5=revenue has been well in excess of costs)

+

International firm

Is head office located in foreign country? (0=no; 1=yes)

?

TQM system

Does facility have a Total Quality Management (TQM) system? (0=no; 1=yes)

+

Environmental R&D budget

Does facility have an environmental Research and Development (R&D) budget? (0=no; 1=yes)

+

Influence of buyers

Influence of commercial buyers (0=not important; 0=moderately important; 1=very important)

+

Influence of community

Influence of community groups (0=not important; 0=moderately important; 1=very important)

+

Influence of corporate headquarters

Influence of corporate headquarters (0=not important; 0=moderately important; 1=very important)

+

Influence of ENGOs

Influence of ENGOs (0=not important; 0=moderately important; 1=very important)

+

Influence of industry trade associations

Influence of industry trade associations (0=not important; 0=moderately important; 1=very important)

+

Influence of management

Influence of management employees (0=not important; 0=moderately important; 1=very important)

+

Influence of workers

Influence of workers (0=not important; 0=moderately important; 1=very important)

+

Influence of public authorities

Influence of public authorities (0=not important; 0=moderately important; 1=very important)

+

Industry dummies

Omitted category is wood, petroleum, and chemical products

?

Regional dummies

Omitted category is Ontario

?

Expected Sign

... continued



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S168 Irene Henriques and Perry Sadorsky Table 1

(Continued) Variable Name

Description of Explanatory Variables in Environmental Performance Equation

Expected Sign

Count Count squared

Sum of the EMS practices in 2003 (maximum=9; minimum=0) Sum of the EMS practices in 2003 squared (maximum=81; minimum=0)

Facility age

Natural log of number of years facility has been in business

?

Off-site ratio

Natural log of (total off-site emissions/ total emissions)

?

Population density

Population density of the area in which facility is located

–

Industry dummies

Omitted category is wood, petroleum,and chemical products

?

Regional dummies

Omitted category is Ontario

?

curvilinear

Source: Constructed by authors.

The estimated coefficients on influence of buyers and influence of corporate headquarters are each positive (as expected) and statistically significant at the 5 percent and 1 percent levels respectively. The influence of the community, ENGOs, industry associations, management, workers, and public authorities were not significantly different from zero. The estimated coefficients on facility size, international firm, and environmental R&D budget are each positive (as expected) and statistically significant. Facilities in the food, beverage, and textile sector undertook fewer practices than the wood and textile sector, while facilities in western provinces tended to adopt more practices than their Ontario counterparts. The overall fit of the regression model is good for a cross section analysis (Table 2). The Wald chi-square statistic for all slope coefficients jointly constrained equal to zero is rejected at the zero percent level of significance.

Relationship between Environmental Practices and Environmental Performance Regression and stochastic simulation techniques are used to analyze the relationship between

environmental practices and environmental performance. We estimate the environmental performance equation by ordinary least squares (OLS). We present results for average 2004–2005 toxicity adjusted emissions per worker as well as 2004 and 2005 toxicity adjusted emissions per worker (Table 3). The estimated coefficient on the count variable is negative and statistically significant, suggesting that increases in the comprehensiveness of a facility’s EMS as measured by the number of environmental practices adopted reduces the average on-site toxicity adjusted emissions per worker. The estimated coefficient on count squared is positive and statistically significant. Together, these imply that the relationship between average toxic emissions per worker and environmental practices is U-shaped. For two of the regression specifications we find that older facilities produce more emissions per worker than newer facilities. The ratio of off-site emissions to total emissions is positive and statistically significant, indicating strong evidence that off-site transfers are not substitutes but complements. Facilities with high ratios of off-site to total emissions have higher levels of on-site toxic average



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Table 2

Negative Binomial Regression Model—Determinants of Environmental Practices Coefficient

Robust Standard Error

Facility size

0.123***

0.039

Market scope

0.197

0.149

Facility business performance

0.023

0.034

International firm

0.163**

0.084

TQM system

0.047

0.113

Environmental R&D budget

0.188**

0.083

Influence of buyers

0.171**

0.087

Influence of community Influence of corporate headquarters Influence of ENGOs

–0.083

0.101

0.320***

0.098

–0.076

0.154

Influence of industry associations

0.120

0.134

Influence of management

0.073

0.109

–0.015

0.100

Influence of public authorities

0.080

0.117

Food, beverage, and textiles a

–0.294*

0.161

Metals, machinery, and electronics a

–0.106

0.108

Influence of workers

Western provinces b

0.230**

0.105

Quebec and east b

0.048

0.111

Constant

0.247

0.344

–21.473*

13.317

lnalpha_cons

Number of observations Wald chi2(18)

110.00 66.30

Prob > chi2

0.00

Pseudo R2

0.09

Log pseudo-likelihood

–245.57

Notes: For definitions of abbreviations, see Table 2. a Omitted category is wood, petroleum, and chemical products. b Omitted category is Ontario. *** p < 0.01; ** p < 0.05; * p < 0.10. Source: Authors’ calculations.



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1.027

0.847

0.652

0.687

0.893

0.000

0.911

0.015

0.047

0.409


–2.206**

–0.169

0.422

–0.664

–3.080***

–0.001***

8.079***

0.027*

0.107**

–0.902**

Coefficient 2004


Notes: a Omitted category is wood, petroleum, and chemical products. b Omitted category is Ontario. *** p < 0.01, ** p < 0.05, * p < 0.10.

3.04

1.329

Constant

Root MSE

–0.303

Quebec and east b

0.56

0.581

Western provinces b

R-squared

–0.345

Metals, machinery, and electronics a

0.00

–2.914***

Food, beverage, and textiles a

Prob > F

–0.001***

Population density

26.07

6.190***

Off-site ratio

F(9, 100)

0.028*

Facility age

110.00

0.111**

Count squared

Number of observations

–0.939**

Count

Coefficient Average 2004–2005

Environmental Performance Regression—Toxic Emissions per Worker 2004–2005

Table 3

3.03

0.51

0.00

21.57

110.00

1.043

0.795

0.648

0.666

0.809

0.000

1.261

0.014

0.046

0.415


–2.637**

0.205

1.122*

–0.299

–2.497***

0.001***

8.783***

0.019

0.115**

–0.974**

Coefficient 2005

3.06

0.50

0.00

19.67

110.00

1.044

0.831

0.614

0.675

0.842

0.000

1.361

0.016

0.046

0.400


S170 Irene Henriques and Perry Sadorsky


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Environmental Management Practices and Performance in Canada emissions per worker. We also find that the greater the population density of the site in which the facility is located, the less its toxicity adjusted emissions per worker—that is, the better its environmental performance. At the industry level, the food, beverage, and textile sector emits less than the wood, petroleum and chemical products sector. In order to ascertain the impact that a change in the number of practices (count) has on the expected value of toxicity adjusted emissions per worker across time, we ran 1000 Monte Carlo simulations (King, Tomz, and Wittenberg 2000) using our emissions regression results for 2004 and 2005 respectively.5 Holding all variables at their means, we simulated what the value of 2004 and 2005 toxic emissions per worker will be when a facility moves from zero to one environmental practice, one to two environmental practices, and so on until eight to nine environmental practices. Both count and count squared are the explanatory variables that change when evaluating the difference. Table 4 presents our simulation results. The last column in Table 4 lists the environmental practices most cited for each count result. For 2004 and 2005, our results suggest that environmental emissions per worker decrease at a decreasing rate as the number of practices increases until an inflection point is reached. After the inflection point, emissions increase. In 2004 the inflection point is between three and four practices. The four most common practices cited were: a written environmental policy, internal environmental audits, benchmarking environmental performance, and environmental training programs. In 2005, however, the inflection point is between five and six environmental practices. Here environmental performance improvement in the middle stages of undertaking environmental management practices slows or even deteriorates. Our results suggest that more may not be better. In fact, researchers in total quality management obtain similar results using cross-sectional data. Dow, Samson, and Ford (1999) in their examination of the quality performance of

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total quality management practices suggest that discretion needs to be applied as to why the practices are being adopted and what the likely benefits are. If too many non-essential practices are attached to an overall quality improvement agenda, this may disillusion people and undermine support for the overall program (Dow, Samson, and Ford 1999, 25). Our results suggest that there may be a learning process that occurs across time as facilities find the best ways of combining multiple environmental practices in order to increase environmental performance (reduce emissions). As facilities begin to gain a deeper understanding of the environmental practices across time, environmental improvements begin to accelerate and attention is placed on those activities that reap the greatest improvement per unit effort, enabling environmental performance to further increase. In other words, facilities begin to employ practices more strategically as the costs and benefits of the practices employed become evident. Our simulations suggest that this may indeed be the case.

Policy Implications and Conclusion We sought to examine the relationship between environmental practices and environmental performance in Canada. Facility size and the influence of both buyers and corporate headquarters are factors that exert a positive and statistically significant impact on the number of environmental practices, as are whether a facility has an environmental R&D budget and whether the firm is international. Persons who wish to influence facility-level environmental efforts may want to target a facility’s buyers and corporate headquarters. Interestingly, the influence of public authorities does not appear to affect the number of practices undertaken. This may be due to the fact that the majority of facilities viewed public authorities as having an important influence. We posit and empirically verify a U-shaped relationship between the number of environmental management practices and environmental



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S172 Irene Henriques and Perry Sadorsky Table 4

Simulation Results: Change in Expected Emissions per Worker as Number of Practices Increases Holding All Other Variables at Their Means Environmental Practices Most Cited by Respondents in 2003

Change in Expected 2004 ToxicityAdjusted Emissions per Worker

Change in Expected 2005 ToxicityAdjusted Emissions per Worker

0 to 1

–64.372

–38.692

• Implemented a public environmental report

1 to 2

–22.814

–12.935

• Implemented a written environmental policy • Implemented internal environmental audits

2 to 3

–8.471

–4.051

• Implemented a written environmental policy • Implemented internal environmental audits • Implemented external environmental audits

3 to 4

3.631

–1.078

• Implemented a written environmental policy • Implemented internal environmental audits • Benchmarked environmental performance • Implemented environmental training programs

4 to 5

2.565

–0.651

• Implemented a written environmental policy • Implemented internal environmental audits • Implemented environmental training programs • Implemented external environmental audits • Implemented environmental performance indicators/goals

5 to 6

3.633

1.821

• Implemented a written environmental policy • Implemented internal environmental audits • Implemented environmental training programs • Implemented external environmental audits • Implemented environmental performance indicators/goals • Benchmarked environmental performance

6 to 7

30.020

5.794

• Implemented a written environmental policy • Implemented internal environmental audits • Implemented environmental training programs • Implemented external environmental audits • Implemented environmental performance indicators/goals • Benchmarked environmental performance • Implemented environmental accounting

7 to 8

50.726

19.957

All practices except the implementation of a public environmental report

8 to 9

74.138

56.215

All practices

Change in Count from




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Environmental Management Practices and Performance in Canada performance. In other words, there are diminishing returns to environmental practices. Viewing environmental practices as administrative innovations, we observe that the first practices adopted give rise to large environmental improvements as suggested by Sarkis (2006). However, after some point diminishing returns to effort begin to set in. As other practices are added, environmental performance is reduced as facilities must learn how to combine different environmental practices. One very interesting result is the finding that on-site emissions and off-site emission transfers are not substitutes, but complements. In other words, it appears that off-site transfers are not a way for facilities to reduce emissions (internalizing the externality), but rather an activity which coincides with greater on-site emissions. Given that on-site and off-site emissions move together, an environmental policy that targets on-site emissions will also affect off-site emissions. What do diminishing returns to environmental performance mean for environmental policy? Our results suggest that environmental policy should focus on encouraging facilities that have no or very few environmental practices to adopt more environmental practices. This could be achieved by enacting environmental policy that encourages internal environmental audits, environmental benchmarking, environmental performance indicators, and environmental training programs. Public information sessions could be used to achieve this. For those facilities with limited resources, such as small and medium sized enterprises, subsidizing courses on environmental audits, environmental benchmarking, and environmental training programs would be a good public investment.

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Humanities Research Council of Canada. We thank Khalid Khan for expert research assistance. We also thank Catherine Liston-Heyes and this issue’s guest editors for their comments. We benefitted, as well, from the comments of seminar participants at the SSHRC-CRC workshop on “Innovative Approaches to Environmental Policy in Canada” at the University of Ottawa. 1 Examples are the 33/50 Program of the US Environmental Protection Agency (EPA); and industry programs, such as the US Responsible Care program or ISO 14001 of the International Standards Organization (ISO). 2

To determine whether we needed to estimate the model using two-stage least squares, we ran a Hausman test for endogeneity. According to Wooldridge (2002, 118), the potentially endogenous variable (in our case the number of practices) “can be continuous or binary, or it may have continuous and discrete characteristics; there are no restrictions.” Ordinary least squares (OLS) regression models for Equation (1) were estimated for the count of environmental practices and the count squared of environmental practices. The residuals from these regressions were retained and included in the performance equation. We found that the estimated coefficients on the residual variables were not significant in all performance equations (2004, 2005 and 2004–2005). We therefore cannot reject the null that count is exogenous. 3 The

countries in the project include Canada, France, Germany, Hungary, Japan, Norway, and the United States. In this present study, only the Canadian data are used. The authors were part of the OECD research team. 4

See Harrison and Antweiler (2003) for an excellent description of the limitations of NPRI (which also apply to all pollutant release and transfers registers). 5 We

use the Clarify 2.1 program developed by King, Tomz, and Wittenberg (2003) and designed for use with the Stata statistics package to undertake the stochastic simulations. The program draws M=1000 sets of simulated parameters from a multivariate normal with mean equal to the vector of parameter estimates and variance equal to the variance-covariance matrix of estimates.

Notes The authors thank the Organisation for Economic Cooperation and Development’s (OECD’s) Environmental Directorate for partially funding this research, which was also supported by a grant from the Social Sciences and

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