When Going Green Means Staying in the Black

By Dr. Chris H. Stinson
Texas, The Business School Magazine, 1996/97
College of Business Administration and Graduate School of Business, The University of Texas at Austin

Many corporations now consider explicit environmental issues when evaluating both ongoing programs and strategic planning for the future. Traditionally, an Environment, Health & Safety (EHS) Department was responsible only for ex post legal compliance with EHS regulations and laws, not for factoring current and future environmental costs into operations analysis and planning.

This traditional approach is rational in a world where EHS laws and regulations are changing relatively slowly and where there is little public concern with a firm's legally-permitted environmental impacts. However, this limited charge is not recommended today for several reasons:

• Valuable expertise will be missing from new process and product design decisions.
• Public perceptions of a firm's environmental commitments and impacts can affect a firm's ability to obtain financing, to secure insurance, or to undertake other legal activities.
• EHS laws and regulations change frequently.
• Accounting systems using out-of-date costing methods can obscure the magnitude of environmental costs. Here "environmental costs" describes costs that arise from satisfying corporate environmental objectives, including compliance with current and anticipated local, state, and federal environmental regulations.

Several recent reports indicate that many firms tend to underestimate the existing environmental costs associated with specific products and product lines, and so a comprehensive, activity-based costing approach is commonly recommended for understanding existing environmental costs. Measuring and reporting the full life-cycle costs of products and their components probably will be an increasingly important component of strategic planning.

Future costs are obviously more problematic to estimate, but several approaches to tracing changes in these costs have been proposed (including estimating future insurance costs, the future economic impacts of current wastes and emissions, and the expected mitigation costs associated with future expansion). For strategic planning, firms need to predict and anticipate:

• Future laws and regulations (including changes in environmental taxes) arising from governmental bodies,
• The impacts of requirements from non-governmental organizations (e.g., the World Bank is currently incorporating estimates of current and future pollution into some of its analyses),
• The cost or responding to pressures from consumer groups and environmental organizations, and
• The cost of complying with "voluntary" standards that may affect international trade.

Incorporating Environmental Issues Into the Corporate Decision-Making Processes

Many industries face the contemporary challenge of expanding the role of EHS engineers from the traditional, compliance-focused orientation to include a prospective orientation. Compliance is still important as a basic tactic, but compliance without the strategic evaluation of environmental impacts and costs often will lead to incomplete (and potential excessively expensive) strategies.

Incorporating environmental issues into the strategic planning process requires that firms do more than merely comply with existing laws and requirements. As a consequence, managers responsible for cost control and strategic planning must increase the extent to which they consider life-cycle impacts of their products on the social and ecological environment. Simultaneously, environmental engineers will need to increase their consideration of how environmental issues explicitly affect the firm's core businesses. Neither strategic planners nor environmental engineers can afford to assume that other groups within the firm will take the initiative in controlling and planning for environmental costs.

In addition, society and corporate boards have increasingly higher expectations for corporate environmental performance, as manifested in the following six initiatives: the CERES principles, the "Responsible Care® Program, the ICC (International Chamber of Commerce) Business Charter's Environmental Management Principles, the British Standards Institution (BSI) Standard BS7750, the European Community Eco-managment and Audit Regulation (EMAR) and--especially--the ISO 14000 series of standards.

The implementation of these initiatives reflects a widespread and increasing public sophistication regarding corporate environmental impacts. In all likelihood, corporations will continue to experience pressure to include environmental issues in their strategic decision-making. Furthermore, the potential diversity of international environmental requirements rewards companies that can establish internationally-focused management systems. These environmental management systems will be more and more important in establishing a firm's public acceptance and competitive position.

Some firms have used information about environmental performance not only in internal planning but also in external publications. In part, this is done to manage public and private (e.g. regulatory) perceptions of the firm. Because of concern about negative response to private and public information about a firm's environmental performance, some firms may be reluctant to publicly report this information (beyond what is required for compliance per se).

However, a pure compliance-oriented reporting strategy may be insufficient if competitors are regularly making more extensive disclosures voluntarily. Consequently, many firms benchmark their environmental disclosures (both in the annual report and, if applicable, in separate environmental reports) against the disclosures of other firms. To date environmental reports have been released by at least 70 firms from the United States, Canada, Europe, and Japan; some companies even have World Wide Web (WWW) sites that detail their environmental practices.

Modifying Decision Support Tools to Improve Strategic Consideration of Environmental Issues

Total quality management programs, and the energy with which they have been accepted by U.S. industry, provide an effective model to be applied in the environmental arena. Total quality management efforts have been accompanied by well-accepted performance standards and guidelines, such as those specified in the Malcolm Baldrige National Quality Awards and ISO 9000 quality standard. Local and state programs have emulated Baldrige, and a support industry has grown around process improvement, reengineering, and continuing education. One important step could be including environmental performance as an additional Baldrige Award criteria.

Another lesson from the quality movement is the necessity of involving the entire supply chain in the process. Supply and distribution relationships, raw material sources, even service providers and customers have a role to play in an integrated, life-cycle based environmental management process. Environmental programs are not the exclusive domain of environmental engineers.

Summary and Conclusions

For many years, industry in the United States has advocated voluntary solutions to environmental concern, while environmental interest groups and government regulators have chosen instead to pursue a policy of mandating the responsibilities, actions, and even the approaches of private business--sometimes even the specific technology to be used. These regulations typically have come from legitimate concerns for threats to human health and sensitive ecological systems.

Nonetheless, some regulations have been ill-conceived and politically motivated, thereby creating significant administrative inefficiencies, raising the cost of doing business, and threatening the international competitiveness of U.S. industry.

Some representatives in the new Congress are promoting a different philosophy of government regulation. The Administration and the U.S. House of Representatives recently have supported requiring cost-benefit analysis of new federal rules. At the same time, there have been federal, state, and local government initiatives to eliminate unfunded federal mandates and to reassert local control over a wide variety of matters ranging from transportation policy to education to the environment. These changes, if they succeed, will have a profound impact on industry's environmental strategy and management practices.

However, industry must define the scope and nature of these efforts--seizing the initiative and forming a framework of individual company action and industry collaboration that will prevent pollution, improve process efficiency, and ultimately improve cost structures while at the same time maintain product quality. Through these actions, industry also has the opportunity to "reinvent" itself in the eyes of many who have otherwise been adversaries. At the international level, competitive pressures in the global marketplace will require firms to develop universally-applied standards of care. By taking the lead, industry can communicate the message that performance-oriented efforts do work, and that industry is capable of sustaining effective environmental management.

Excerpted from a research paper titled "Strategic Business Opportunities and Effective Environmental Management Systems," written by: Steven Pedersen, MCC (Microelectronics and Computer Technology Corporation) and Christopher H. Stinson, Assistant Professor of Accounting, University of Texas at Austin.

For a copy of the original manuscript and other related articles, please write to Chris Stinson, Dept. of Accounting B6400, GSB, UT Austin, Austin, Texas 78712 or e-mail cstinson@mail.utexas.edu