Environmental Policy and Corporate Behaviour

Environmental Policy and Corporate Behaviour

Edited by Nick Johnstone

For the last 30 years, analysis of the inner workings of the firm has been largely absent from economic assessments of environmental policy. Recent work has highlighted the importance of understanding a firm’s commercial motivations, decision-making procedures and organizational structure when designing and implementing public environmental policies. Environmental Policy and Corporate Behaviour responds to this need, investigating the many internal challenges faced by firms seeking to implement new policies and achieve significant and long-lasting environmental progress.

Chapter 6: Understanding the Relationship between a Facility’s Environmental and Financial Performance

Nicole Darnall, G. Jason Jolley and Bjarne Ytterhus

Subjects: business and management, management and sustainability, economics and finance, environmental economics, public sector economics, environment, environmental economics, environmental management


6. Understanding the relationship between a facility’s environmental and financial performance Nicole Darnall, G. Jason Jolley and Bjarne Ytterhus I. INTRODUCTION An understanding of how a company’s environmental performance affects its financial prospects, and how the stringency of the environmental policy regime might constrain a company’s financial opportunities, are issues of considerable concern to policy makers. Collectively, organizations spend millions of dollars annually when installing mandated pollution-control technology, applying for environmental permits, and monitoring and reporting their environmental impacts (Portney and Stavins 2000). These costs create an incentive for companies to reduce their environmental impacts below minimum reporting thresholds. Doing so also benefits organizations by improving their operational efficiencies. At the same time, regulators can achieve greater environmental improvements without additional monitoring and enforcement. However, questions remain about the extent to which the stringency of the environmental regulatory regime diminishes a company’s financial performance. Other uncertainties relate to whether or not more efficient companies may be the ones that actively reduce their impacts on the natural environment. As such, a company’s superior financial outcomes may be mistakenly attributed to its improved environmental performance, when financial performance is related more to the fact that a company is more efficient from the outset. These issues have been ignored by many prior studies (for example, Stanwick and Stanwick 2000; Russo and Fouts 1997; Levy 1995; Hart and Ahuja 1996; Cormier et al. 1993; Arora and Cason 1995). Moreover, previous research has not explored how the stringency of the...

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