Posts Tagged ‘environmental regulation’

The Story So Far

The idea that environment initiatives will systematically increase profitability has tremendous appeal. Unfortunately, this popular idea is also unrealistic. To anchor win-win situations as foundations of a company’s environmental strategy is dangerous because environmental costs in most companies are skyrocketing with no economic payback in sight. To achieve truly sustainable environmental solutions, managers must strike a balance between business and environmental concerns, recognising the fact that win-win situations only come few and far in-between.

Evolution of Environment Management

First Era (1970 – 1985)
Companies faced with new regulations of high technical specificity did little more than comply with the regulations and often fought them.

Early Second Era (1985 – late 1980s)
A shift in the regulatory context and the maturing of the environment movement created for managers to look beyond the narrow, predominantly technical approach.

Late Second Era (late 1980s – present)
The emergence of the win-win mind-set is a direct result of the extraordinary success that companies achieved in reducing pollution. Therefore, many jumped to the conclusion that continued environment action could more than pay for itself.

Why win-win won’t work

  • There is little specific guidance to managers. Proponents of the environment movement (e.g. Porter) argued their case on the macro level. What managers really need is specific guidance at the micro level.
  • Win-win situations are not easy and cannot be assumed that they can carry on indefinitely.
  • Win-win situations will become increasingly scarce as environmental challenges become increasingly more complex and expensive.
  • Even without additional regulations, however, progressively tighter standards within current regulations will push corporate environmental spending higher.
  • Distribution inequity of environmental cost among companies. There is a definite risk of the classic ‘free-rider’ problem.
  • The growing array of choices available to managers is only further complicating matters.

The Search for Solutions

Let’s look at the key problems corporations face today in terms of making environmental decisions.

  • Presently, there is a lack of framework for managers to follow.
  • There is a lack of literature that tackles the full range of issues. Present environmental text can only offer a one-dimensional prescription (i.e. effective environmental management) to achieve competitive advantage.
  • Companies do not take environmental issues into their ‘core’ business plans.
  • Other matured organisational functions (e.g. Quality Management, Accounting) have too narrow a focus to be able to encompass the whole range of environmental issues.

The Pragmatic Path – A Value-Based Approach

Instead of focusing on win-win situations, companies would be better off focusing on the ‘trade-off zone’, where environment benefit is weighed judiciously against value destruction. Within this framework, environmental issues can be broken down into three broad categories: strategic, operational and technical.

  1. Strategic issues

Some environmental issues are strategic because their impact on value is high enough to put core elements of the business at risk or to fundamental alter a companies cost structure, and because managers have considerable discretion about how to respond.

  • Decision type – lead or lag
  • Decisions to lead or lag are characterised by the Catch 22 irrationality.
  1. Operational issues

Management’s task with these issues is to ensure that minimum expenditures achieve maximum environment impact.

  • Step One – Understanding the what’s and the why’s of spending.
  • Step Two – Maximise impact with minimum cost.
  1. Technical issues

Systems should be created to track and disseminate emission information to managers so that they can make informed everyday decisions on trade-off between cost and environment.

  • A proactive role with a system in place versus a reactive one when one use an external audit.

Summary

For all environmental issues, shareholder value, rather than compliance, emissions or costs, is the critical unifying metric. The advantages are threefold, they are:

  • Environmentally sound
  • Practical, as it is formed with business experience
  • It is more likely to be truly sustainable over the long run.

The reasons are not only simple, but more importantly, sustainable. In short, as much as each shareholder wants to save the world, each environmental decision must ‘make sense’ for the business first. And as elegant as win-win might sound, in the real world… things are just not as simple.

Note: This paper was presented in a seminar.

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