NTRES 454: Environmental Strategies Professor: Steven Wolf

Research brief #2 ENVIRONMENTAL MANAGEMENT SYSTEMS: OPPORTUNITIES FOR ENHANCING COMPETITIVENESS AND SUSTAINABILITY

Sarah Bellos Yawen Lu Alicia S Malvar Julien Pestiaux

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Table of contents A) Introduction A.1. Introduction to Environmental Management Systems (EMS) A.2. ISO 14000 Series A.3. ISO 14001 Standard and the Certification

B) ISO 14001 Adoption in the US B.1. Overview B.2. Impediments to Certification in the US B.3. Incentives for ISO 14001 Adoption in US B.4. What can the US experience tell us?

C) Case studies: Two European examples of beyond-compliance firms following the ISO 14001 standards C.1. Bristol-Myers-Squibb France C.1.1. Environmental performance C.1.2. Legal compliance C.1.3. Economic benefits C.1.4. Non-financial benefits C.2. Bayer Hellas (subsidiary of Bayer A.G) C.2.1. Environmental performance C.2.2. Legal compliance C.2.3. Economic benefits C.2.4. Non-financial benefits C.3. Conclusion on the case studies

D) Critiques and Recommendations CONCLUSION REFERENCES

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A) Introduction Traditionally, environmental protection departments within firms have not focused on protecting the environment; rather than concentrate on complying with the law. To make a significant difference, firms must change focus; get employees involved; build the infrastructure to support them; and make people aware, competent, understanding, and knowledgeable about environmental issues. Many firms began environmental management certification efforts in the mid-1990s due to increased global competition, customer awareness, and the potential benefits in terms of operational efficiency (Gupta and Piero 2003). Over the past several years many business firms worldwide have adopted formal environmental management systems (EMS) as procedures for systematically identifying environmental aspects and impacts of their operations, setting explicit goals for compliance, performance, and continuous improvement, and managing for them throughout these operations. EMS allows a company to integrate environmental improvements into day-to-day work at production sites. It has two basic elements: ensuring that production sites comply with environmental laws and regulations, and continually improving environmental performance through concrete actions. EMS integrates environmental considerations into and throughout all of an organization’s activities, products, and services based on established business principles, allowing operations managers to address and continually improve environmental concerns based on the “plan, do, check, review” philosophy.

A.1. Introduction to Environmental Management Systems (EMS) EMS is a management structure in which firms can identify, measure and control their environmental impacts (Bansal and Hunter 2003). It creates a system to assess, catalogue, and quantify facility environmental impacts, not simply activity by activity, but throughout an entire facility, firm, or other organization. The goal of EMS adoption is to help firms ensure that their operations articulate and achieve specified environmental goals, normally including at least compliance with environmental laws, management of other major environmental risks and liabilities, and potentially positive environmental improvements as well. An effective EMS can help a company manage, measure, and improve the environmental aspects of its operations. It can lead to more efficient compliance with mandatory and voluntary environmental requirements. Also, it can help companies effect a culture change as 3

environmental management practices are incorporated into its overall business operations. There are several EMS available in the world. ISO 14000 Series is the most popular international EMS. Similar procedural standards, varying in some significant details, were adopted in Great Britain (BS 7750) and the European Union (EMAS, the Eco-Management and Auditing Scheme). Businesses are increasingly adopting the global environmental management system in order to more effectively and efficiently manage their environmental impacts. This voluntary system, as well as all EMS, has the potential to provide facilities with a structure to minimize their environmental impact, ensure compliance with environmental laws and regulations, and address wasteful uses of natural resources. For these reasons, EMS may greatly affect the environmental performance of facilities that adopt them and subsequently impact their financial performance, as well. For firms, there are many reasons to develop EMS. The major incentives are discussed below. Competitive Advantage: Most companies believed that implementing EMS will be important in maintaining or gaining competitive advantage which was an incentive for implementing EMS. The anticipated competitive advantage may have been different among departments in the firm. For example, many companies believed that competitive advantage would be derived from improved environmental management, while upper management believed that competitive advantage would derive from external recognition. Improved Environmental Performance: Improved environmental performance is another reason for implementing EMS standard. EMS is a good way for firms to identify pollution prevention opportunities and encourage continual improvement of environmental performance. Enhanced Regulatory Compliance: Enhanced regulatory compliance is an important incentive to implement EMS. EMS provides the process whereby environmental laws and regulations are analyzed, guidance is provided, practices are implemented, and performance is audited. It is a mechanism for cost-effectively maintaining regulatory compliance.

A.2. ISO 14000 Series In the 1992 “Earth Summit” in Rio, the Business Council for Sustainable Development proposed the development of an international voluntary standard for environmental management systems by the International Organization for Standardization (ISO), a non-governmental international organization whose members are national standard bodies. “The apparent intent was to offer a strategy for achieving sustainable use of the environment by businesses 4

themselves—‘governance without governments’—whether or not they were subject to effective government regulation and enforcement.” This procedural standard was finalized in late 1996 as ISO 14001; other documents in the ISO 14000 series provide more detailed guidance on many EMS-related topics, such as environmental performance evaluation, life-cycle analysis, eco-labeling, environmental auditing and others (Andrews et al. 1999). Currently, ISO 14000 encompasses a series of standards, in addition to that on environmental management. Some standards address organizational issues and the others address products. They include environmental auditing, performance evaluation, environmental labeling, development, and site assessment. The ISO 14031 document, for example, addresses performance evaluation. It does not contain specific performance indicators, but it establishes a framework for determining the attributes needed in choosing performance indicators and establishing a subsystem for performance evaluation (Culley 1998). ISO 14000 is different from other environmental standards and initiatives because of its focus. Other programs have concentrated on what is important to the regulatory agencies and thus have focused on environmental compliance. ISO 14000 addresses and expects compliance, but its focus is on building an infrastructure within a firm that will address compliance, improve performance, and achieve environmental objectives. The ISO 14000 standards are management standards. Unlike performance standards, management standards do not specify levels of performance. Instead, management standards set guidelines on environmental management practices. For example, management standards would require that firms have an environmental policy and a management commitment to continual environmental performance improvement. However, they do not specify the level of environmental performance. The fundamental principle of ISO 14000 is continual improvement. It does not matter where an organization starts; as long as it starts, its overall goal will be continual improvement. ISO 14000 helps an organization to build structural capacity toward a logical framework to address environmental compliance, improve performance, and achieve other established environmental objectives, such as preventing the creation of pollution. The global economy is one of the primary forces driving the development and implementation of the ISO 14000 standards. Existing environmental standards and regulations are different in various countries with dissimilar levels of environmental awareness and regulations. With the increasingly globalized economy, these differences give rise to the fear of non-tariff trade barriers. Some countries have become afraid that their exports might be 5

discriminated against for environmental reasons when competing with the domestic products of importing countries. Therefore, many countries have sought to develop international environmental management standard whose adoption would allow for greater accesses to foreign markets. The managerial atmosphere needs to change from the “end-of-pipe” regulatory solution to one in which we incorporate environmental thought and consideration into the development and design of products. One of the primary reasons for ISO 14000 growth, and for trade barrier alarms, is that multinationals such as IBM are starting to demand their suppliers meet the requirements of the international environmental management system standard. The other reason, at least in Europe, is that the standard helps appease environmentally-conscious consumers (Anonymous 1998).

A.3. ISO 14001 Standard and the Certification The ISO 14001 standard provided an explicit and closely documented procedural template for EMS, which could be audited and certified by an approved third-party “registrar” as conforming to the ISO 14001 standard (Moretz 2000). At a minimum, organizations that adopted the ISO 14001 standard must demonstrate commitments to compliance with all environmental regulations and other requirements, to prevention of pollution, and to continual improvement of their EMS. ISO 14001 is not a performance standard; it is a process based standard (Tibor and Feldman 1996). Because ISO 14001 is voluntary, firms can reduce pollution at their own pace without having to compromise their competitiveness (Sheldon 1997). The standard is flexible and focuses on the firm’s processes rather than its environmental performance, so that firms of all sizes, in all sectors and in all countries can participate. A firm’s competitiveness can also be enhanced by the adoption of ISO 14001. In addition, ISO 14001 also changes corporate culture by sensitizing management and staff to the environmental implications of their operations. ISO 14001 is the specification document (Sheldon 1997). A firm must implement the elements of this specification to be registered to the standard. ISO 14001 has a requirement for setting objectives and targets in a firm’s management system for all significant environmental aspects and for the commitments made in the policy. ISO 14001 is not a regulation, but a voluntary standard. It is a system that provides the structure and tools to permit a firm to do the best job possible in meeting environmental management goals. The goals of ISO 14001 are twofold. At a corporate level, ISO 14001 is designed to help business reduce their environmental 6

impact while improving management control. At a societal level, ISO 14001 is intended to facilitate sustainable development and foster international trade by providing an internationally legitimized system of standardization. The ISO 14001 standard specifies a continuous, cyclical process for the design of environmental management systems, consisting of five elements: environmental policy development, environmental planning, implementation and operation, monitoring and corrective action, and management review (Figure 1). One of the guiding principles of ISO 14001 is continual improvement in the system. Pollution prevention is one of the best ways to demonstrate continual improvement in ISO 14001 and earn a financial return from the system. Pollution prevention focuses on reducing water, air, and solid waste emissions as well as lost time and energy. Pollution prevention seeks to increase the utilization of raw materials, thereby increasing throughput (Gupta and Piero. 2003).

Figure 1.

Environmental Management Systems Model for ISO 14001(Sheldon 1997)

Up to the end of 2002, at least 49,462 ISO 14001 certificates had been awarded in 119 countries (Figure 2). In addition, Figure 3 illustrates the numbers of ISO 14001 certification by countries. Business interest in ISO 14001 EMS is particularly notable in several international markets such as Europe and Asia, where certification may in the future be viewed as a prerequisite for trade. For this reason, many U.S. multinational corporations are interested in the potential ISO 14001 may have for their ability to operate in international markets. In some European markets, for example, trade preference is given to facilities that adopt the European 7

version of a certified EMS, called EMAS, the Eco-Management and Audit Scheme.

Figure 2. Worldwide total of ISO 14001 certificates (ISO 2003)

Figure 3. The number of ISO 14001/EMAS certification/registration of the world

B) ISO 14001 Adoption in the US B.1. Overview The US is ranked 4th worldwide in number of ISO 14001 certifications. With 3032 8

certifications, it makes up 5.6% of the total 53,620 world certifications, as of July 2003. Ahead of the US rank Japan, Spain, and Germany in the top three, with Sweden, the UK, China, Italy, France, and Taiwan following. While it seems like the US is well ranked, it is still far behind Japan, which has 12,392 certifications. There is no doubt that implementation varies significantly across countries and regions, with Asia and Western Europe leading the certification rankings. In December 1999, while Western Europe held 52% of certified facilities and Asia 36%, the US totaled 4.5% of the world ISO 14001 certified facilities. The United States moved much slower in first years of ISO 14001 certification standards, with ~70 facilities certified out of the 2, 3000 worldwide. By the end of 1998 this number started to increase, reaching 330 certified organizations by early 1999. Some have called into question whether a country’s number of certifications should serve as an indicator for the country’s actual development or performance in voluntary environmental agreements. Measuring the number of certifications in relation to other indicators, such as number of firms, population size, strength of industrial economy, or GDP may help put the ranking into perspective. The International Network for Environmental Management has created alternative rankings, which use the number of certifications in relation to its population for one ranking, and in relation to GDP for a second. Table 1 shows the rankings for the relative number of certifications to size and economic development of the country, using data from July 2003. RANK 1 2 3 4 5 6 7 8 9 10 US Rank

# Certifications Japan (12,392) Spain (3,960) Germany (3,820) USA (3,032) Sweden (2, 961) UK (2,917) China (2,802) Italy (2,405) France (1,780) Taiwan (1,308) 4

Population* Sweden (3.00) Finland (6.47) Switzerland (7.17) Denmark (7.53) Singapore (9.75) Slovenia (10.05) Spain (10.11) Japan (10.23) Norway (13.40) Netherlands (13.98) 35 (91.71)

GDP** Sweden (66.5) Slovenia (119.3) Finland (147.9) Spain (182.0) Hungary (190.8) Denmark (191.6) Switzerland (203.) Estonia (219.4) Singapore (249.0) Japan (254.2) not listed top 40

Table 1. Adapted from ISO 14001 Speedometer (International Network for Environmental Management) * Population indicator shows country’s number of certificates in relation to its population, 1000 inhabitants per certificate. The smaller the ratio is, the better the ranking. ** GDP indicator shows the number of certifications to a country’s GDP, USD 1M per certificate.

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These alternative rankings, as well as a global view that US firms are slower to adopt ISO 14001 certification, call for an exploration of what the institutional environment is in US to deter more facilities from adoption of this specific certification. An objective of ISO 14001 is to provide worldwide standards that could encourage international trade across environmental standards as well as offer an “internationally accepted blueprint for sustainable development, pollution prevention, and compliance assurance” (Delmas 2002). It is therefore important to see what encourages or deters certification on a country scale.

B.2. Impediments to Certification in the US Reasons cited by US companies for not implementing ISO 14001 standards vary across facilities and industries. Some common reasons include high costs of certification, due to the extensive documentation and excess paperwork as well as employee training and high costs for a consultant and third party auditor (Babakri 2003; Sissell 1999). Design costs of the EMS were an important constraint in a 1999 survey of US certified firms (Delmas 2002). Companies cite inconsistencies in the auditors as another deterrent to certification. Bakari found for US industrial companies, a lack of available resources was also an impediment to implementation (2003). Some European government agencies assist in reducing certification cost through technical assistance; in Germany, for example, detailed, extensive information and case studies are published of companies experience in implementing EMS (Bakari 2003). Similar to the initial implementation of ISO 9000, little customer pressure was cited as a reason for hesitance in ISO14001 certification in 1998 in the United States (Hasek 1998).

Whether this barrier still

exists will be evaluated further in the section on supplier requirements.

These findings were

similar to those impediments in other countries as well. Additional reasons for low implementation in the US are due in part to the regulatory structure. Firms cited high environmental regulation as a deterrent in adopting ISO 1400 methods, because the added rules and benefits seemed irrelevant to some. Unlike some other countries, in the US having ISO 14001 is not enough for officials to grant regulatory flexibility (Sissell 1999). The EPA did not come out with an official statement about the legal benefits of registration, which seemed to leave firms waiting after the standard was set for guidance (Hasek 1998). Additionally, since regulation is higher in the US than in many other countries, companies often view environmental changes as a capital drain, rather than bringing benefits (Hasek 1998). Another possible deterrent is that during certification, regulatory violations could be discovered 10

that were not yet identified or resolved by the firm (Delmas 2002). This could lead to higher costs of certification for the firm due to legal penalties by regulators or a third party.

This

uncertainty in the behavior of US environmental regulatory institutions could be a barrier to adoption of ISO 14001 (Delmas 1998).

B.3. Incentives for ISO 14001 Adoption in US As with other firms around the world, US companies face several motives for seeking ISO 14001 certification. In some cases, external forces such as regulatory pressure, market influences and social demands are a leading cause of certification or development of an EMS. Internal drivers to incorporate a “resource-based view” of the firm can also lead to the development of an EMS, to map connections and processes between firm resources and capabilities to produce competitive success in the future (National Database on Environmental Management Systems 2003). Recent motivation for facility ISO 14001 certification in the US has come from regulatory incentives, customer and corporate demand, especially large manufacturers and parent companies, and pressure in international trade. Recent regulatory incentives at the state and federal level have likely increased ISO 14001 certification. Due to its broad applicability to different size and types of firms, regulators have encouraged ISO 14001 certification. If the standard can help firms meet regulatory objectives, less oversight maybe be required, allowing the US Environmental Protection Agency (EPA) to achieve more goals (Darnall 2002). States and the EPA have offered incentives to increased firms implementation of EMS, such as the Performance Track Program, the EMS Pilot Program, a national database, and several state specific initiatives. A major recognition of the role of EMS in public policy was the formation of the Multistate Working Group on Environmental Management Systems (MSWG). The MSWG and the US EPA worked in conjunction with over 60 participating facilities and ten state pilot programs to determine the potential of EMS for regulation. The group also created a National Database on Environmental Management Systems (NDEMS), which helps to provide empirical evidence on the individual pilot facilities and their experience adopting ISO 14001. Sharing and documenting information on implementing necessary procedures can help reduce the cost of certification for new firms. A larger scale NDEMS in the United States, similar to the extensive one noted earlier in Germany, could help give incentives to new firms and offset adoption costs (Babakri 2003). In 2000, the EPA created the Performance Track program, to assist state pilot programs 11

encouraging the development of EMS. This program recognizes organizations that go beyond regulatory compliance, meeting legal requirements and implement high-quality EMS, usually based on ISO 14001 frameworks.

Performance track criteria require: an EMS (often ISO 14001

although other EMS are acceptable), history of sustained compliance, continuous environmental improvement, a requirement for community outreach, and public reporting (Environmental Protection Agency; ICF Consulting 2003). The program is now up to 300 facilities. In addition to having additional criteria than ISO 14001 certification, the Performance Track program gives added benefits and incentives to its members. These benefits include public recognition, being a low priority for routine inspections, streamline reporting to ease regulatory requirements, and networking between industry leaders, with an opportunity to “communicate their needs to the EPA” (Federal Register August 2002). As a low priority for inspections, the facilities can save time and resources usually spent responding to inspection requests. Streamlined reporting would ease some regulatory requirements, to reduce paperwork and also with proposed changes in regulation. One such change is allowing members 180 days to accumulate hazardous waste (or in some cases of high transport distance 270 days) without a RCRA permit

(Federal Register, August 2002). Another example of a regulatory incentive is a

reduction in the frequency of reports required in sections of the Clean Air Act (toxics provision, Maximum Achievable Control Technology Standards) that must be prepared each year to an interval twice as long as regular reporting. Some Performance Track facilities, not major source polluters, which reduce emissions through pollution prevention or process changes, can replace periodic reporting by an annual certification (Federal Register, August 2002).

In describing reasons for these Performance Track member incentives, EPA reports that the facilities deserve recognition for exceeding compliance. Additionally, by publicly reporting their auditing information, they place themselves at a greater risk of adverse public reaction if they don’t meet their goals or if problems are revealed. By meeting the entry criteria to get into the program, the facilities already are already complying with regulation. Also, saving resources from streamlined reporting and other benefits from the program may allow increased resources devoted to improving environmental performance. Finally, by offering incentives, other facilities in the US should be encouraged to improve environmental performance to qualify for membership (Environmental Protection Agency). For an example of cost savings from the program, the EPA estimates savings for “member facilities that accumulate hazardous waste up 12

to 180 days range from $14,900 to $77,100 per year, depending on the type of waste (i.e., liquid or solid) and the distance the waste is transported” (Federal Register, August 2002). Of course the decision to transport the waste is based on many factors; each facility generating hazardous waste would take advantage of the incentive only if more waste can be accumulated safely and more efficiently, at a reduced cost. In some cases, Performance Track program works to have joint incentives with existing state programs for its members. Memoranda of Agreements have been signed between the EPA and several states to work on plans to decrease regulatory burdens on top environmental performers. State specific incentives are being designed, such as streamlined permitting and reporting reductions, to work with state performance programs such as Virginia E3 and Clean Texas (Environmental Protection Agency). Another example developed with the MSWG project is Arizona’s “enforcement waiver policy,” giving forgiveness to violations discovered during participation in the project, unless the violation is criminal or poses imminent public danger (Gallagher 1999).

In addition to regulatory incentives, market mechanisms are a large influence on the adoption

of

ISO

14001

voluntary

certification.

Non-regulatory,

non-environmental

considerations that encouraging a firm to adopt EMS include meeting customer demands, increasing or maintaining competitive advantage, decreasing expenses, and improving public relations (Gallagher 1999). Firms are more likely to implement ISO 14001 if they believe the transactions costs of certification are offset by the benefits of having the certification (Delmas 2002). As multinationals begin requiring their suppliers to become certified, there are increased benefits to certification. In the US, many decisions to become certified were made by outside firms; in 1999, 31% of US certified firms were headquartered outside the US (Bansal 1999). Corporate involvement by large international firms has been at the forefront of certifying the facilities in the US. Parent companies often play a strong role in implementation of ISO 14001 at the facility level. According to Darnall (2001), at least one-quarter of corporations with certification in the US did so because of a parent company mandate. Increasingly, these and other companies have been putting pressure or requirements on their suppliers to also become certified. A change in adoption rates has occurred recently due to the requirements automakers have put on their primary suppliers to be ISO 14001 certified. The “Big Three” automakers have been behind this push beginning in 1999. Already in 2000, the 13

automobile industry was leading the US in number of organizations certified.

By putting this

same requirement on their suppliers, they can begin the focus on “making quality initiatives and environmental activities ‘cascade down’ through their supply chain” (Thornton 2000). General Motors Inc. required its suppliers to certify an ISO 14000 EMS by the end of 2002. Ford Motor Company required suppliers to certify to ISO 14001 at least one manufacturing facility by the end of 2001 and by July 2003 required certification of all supplier facilities to Ford (Babakri 2003).

Other companies such as IBM, Xerox, and Bristol-Myers Squibb have also encouraged

their suppliers to become ISO 14001 certified. In a 1999 study of 55 U.S. certified companies, a survey of incentives for adoption of ISO 14001 explored the link between certification and business advantage. The potential to gain a competitive advantage and access to markets where ISO 14001 is a requirement was significant to the firms’ adoption, while regulatory framework and stakeholders were not influential. Specific to the study, the variables ‘increased international trade opportunities’, ‘access to new markets’, ‘increased competitive advantage’, ‘and greater market share’ were found to be important reasons for certification in the US (Delmas 2002).

B.4. What can the US experience tell us? While it shows the EPA and other regulatory bodies are attempting more flexible programs, the US firms are still slower to move than other countries in adopting ISO 14001. Many firms still believe the regulatory arrangement in the US is adversarial to industry and are hesitant to undertake the auditing process that would produce a detailed document of their facility for public and regulatory scrutiny. For some firms, certification is popular to increase trade opportunities, satisfy buyer or parent company requirements, or demonstrate environmental stewardship. Since facilities already deal with a regulatory framework and some already have an EMS, the current experiences have not proven any major regulatory improvements. In the US, ISO 14001 certification and the EPA EMS programs has centered on top environmental performers. However, the greatest environmental benefits could possibly occur when EMS are adopted by firms with lower environmental performance, to capture ‘low-hanging fruit’ with the basics of pollution prevention and improved system design. The EPAs Performance Track program shows that in the US, firms often need more enticement than simply the ISO 14001 certification. The state and federal incentives can make a big difference for firms, especially if they can capitalize on benefits such as the hazardous waste 14

accumulation extension. Increases in these benefits seem likely to encourage companies to go beyond even ISO 14001 certification to a program such as Performance Track. There are still additional problems in US implementation of ISO 14001. A lack of consistent accreditation across the country is noted, due to accredited registrars in the US differing in experience and taking inconsistent approaches in the content and scope of certification. According to Morrison, et al., the certification role is not consistently applied or rigorous, lacking the credibility needed for use in public policy. This could undermine the significance and integrity of the certification process if there is not an assurance that the certified facilities have withstood a certain level of scrutiny by qualified auditors (Morrison 2000).

Additionally,

ISO 14001 has no meaningful public reporting requirement. This makes it inconsistent with other best practices and principles of corporate environmental responsibility, such as the Chemical Manufacturers Association’s Responsible Care Program, of which its members must be part. This lack of transparency does not allow an opportunity for public scrutiny and assessment of companies’ environmental management practices or performance by outside interests. The success of an EMS depends on many different criteria, none of which will be the same for each facility. Since every management capability, compliance level, technology use, employee capability, regulatory structure, market, and industry type size is different (in addition to many unnamed factors), one cannot generalize what the impact of ISO 14001 adoption will be on environmental performance, costs, or compliance. Case studies and more research can help explore what benefits result for the facilities adopting ISO 14001 certification as well as for the public and the environment.

C) Case studies: Two European examples of beyond-compliance firms following the ISO 14001 standards A wide variety of environmental issues face European Union Members. The European Environment Agency legislates in different areas encouraging firms towards several different strategies today: waste management; noise pollution; water pollution; air pollution; nature conservation; natural and technological hazards; international cooperation (EU environmental regulations website Dec 2001) The European Environment Agency has come to play an increasingly important role in recent years. At present, emphasis is being placed on diversifying environmental instruments and, 15

in particular, on introducing environmental taxes (the "polluter pays" principle), environmental accounting and voluntary agreements. We are concerned with the latest in this paper. As we have discussed in class, no progress can be made unless environmental legislation is actually implemented, and effective implementation involves introducing incentives for economic operators: businesses and consumers. We will now turn our attention to two case studies analysed from an extensive study in the European context (Alexopoulos et al. 2002). Such case studies are the object of important limitations, however: it is not at all clear what the outcomes might have been without certification. This will be a recurrent theme in this text: companies often say that they were already taking actions to improve their EMS, even without certification, and that certification has only speeded up the process to a certain extent. Also, environmental performance in this text is understood as the measurable results of the EMS as based on the organisation’s environmental policy, objectives and targets and are thus directly related to the company’s practice and ways of measuring.

We argue it would be highly beneficial to have harmonized ways of measures

across different companies: this could trigger competitive advantages in the business world as companies would be able to argue their case better in regard to other companies. Both companies in the case study are in the chemical or pharmaceutical industries. These are an interesting choice for a case study because they produce various types of wastes during their production and maintenance. An EMS can help them reduce emissions to air, water, and soil but can also identify ways to recycle waste or reduce its generation at the source, reducing the cost of its disposal. An EMS can even result in increased product yields, reduced raw material needs, and reduced liability associated with hazardous waste management.

We would like to assess whether companies who decided to follow the ISO 14001 standards: 1. Achieve an actual improvement in their environmental performance 2. Improve their environmental performance beyond legal compliance 3. Experience economic benefits, thus earning back the investments and maintenance costs associated with their EMS 4. Experience non-financial benefits. If all or some of these factors are achieved, it is also of great interest to know to what extent and why this occurs. These four factors are believed to be important if such standards are to take

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off in the business environment. It is clear that costs and benefits of an EMS can be evaluated in various aspects. The actual implementation and maintenance costs can be compared to the cost savings through implementation of profitable environmental measures. Additionally, adoption of a certifiable EMS is linked to competitive strategies: indeed, companies could argue that they have benefited from a positive influence in their market position or enhancement of a positive environmental image. In a world in which the importance of environmental issues is increasing, one of the crucial criteria for investors to consider in their decision-making is the environmental performance of a company. The objectives of environmental improvement are based on the environmental impacts of organisational activities that have been identified as priorities for attention. It is felt that continual improvement can only be achieved through careful consideration of these priorities and setting of explicit objectives. As seen in previous sections, this concept of continual improvement is a key objective of ISO 14001. However, as seen recurrently in our class, without the implementation of profitable measures, continual improvement is very difficult to achieve. Clearly, if companies are not able to at least recover the cost of implementing and maintaining their EMS or if its costs weaken their market position they may not feel like improving their environmental

performance

beyond

compliance.

As

Prakash

(2000)

explains

it,

beyond-compliance is different form over-compliance. In the latter, firms seek to comply with the law but due to different factors deliver more than the legal requirement. For example, adopting uniform technologies across facilities that face varying environmental regulations can result in over-compliance. In contrast, beyond-compliance policies specifically propose to exceed the requirements the law. (Prakash, 2000) This can involve different tools, but is often achieved through the adoption of new management systems, such as the one proposed by the ISO 14001. This section will look more closely at two practical examples of companies from France and Greece which voluntarily decided to adopt an Environmental Management System and to certify through the ISO 14001 standards.

C.1. Bristol-Myers-Squibb France BMS France is mainly working in the fabrication and sale of drugs. It has about 300 employees working on the site that was studied in Epernon. The parent company net sales are estimated at about €1.0 billion in 2001. It became ISO 14001 certified in 1999 but had actually

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operated an EMS since 1991. Their EMS was certified to the ISO 14001 standard by the French certification body ECOPASS. The company is not certified to the ISO 9001 standard but maintains a quality and HSE system. A team of 14 people have environmental responsibilities on the site. Initially, the main driver for ISO 14001-certification was a strong desire for independently acknowledged environmental credibility. BMS France primarily wished to prove credibility to its employees, but also hoped to show its efforts to external stakeholders. From the outset BMS France expected an improved environmental reputation.

C.1.1. Environmental performance The environmental aspects deemed as significant are categorised as energy consumption, water consumption, water pollution, air pollution, soil pollution. BMS France uses weighting criteria to determine which impacts are significant. The criteria used involve the sensitivity of the surrounding area to the event in question, global quality of the site or/and quality of components used in relation with the area, historical frequency of the event, the degree of operational control, and current compliance. If the product of the above weighted factors is larger than 20 the aspect is considered significant. Objectives and targets are quite broad and focus partly on legislative compliance. They are mainly based on significant aspects and impacts. According to the BMS France representative data collected demonstrates that the site is achieving satisfactory environmental performance that reaches corporate expectations. (Alexopoulos et al, 2002) The interviewed representative concludes that improved environmental performance is, to a small extent, due to the commitment to continual improvement made through ISO 14001 certification. The interviewee believes the pace of improvement is advanced through ISO 14001-related activities.

Results for the years 2000 and 2001 include the following: • Water consumption dropped by 11% • Incinerated waste decreased by 3.5% • Emissions to water were minimal and always below the legally prescribed threshold.

C.1.2. Legal compliance

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The site must comply with specific standards that we will not be included in this text. The Epernon site's compliance record is fairly good: from a count of 83 legal requirements, conformity with 15 required confirmation and non-conformity existed for 3. This performance record is mainly due to monthly monitoring of legal requirements. Environmental managers keep an annual ‘permanent dictionary’ of legal environmental requirements that is updated monthly. However, according to the BMS France representative, public authorities never conduct compliance inspections. BMS France has previously surpassed the legal thresholds for waste, emissions to air and water; however this occurred prior to certification.

C.1.3. Economic benefits BMS France appears focused on costs and economic benefits. Environment related investments and therefore ISO 14001 implementation costs have been estimated at €100,000 every year since 1995. Certification costs totalled approximately €15,000 per year while maintenance audits cost reach about €2,000 per year. In terms of economic benefits, their ISO 14001-certified EMS brings mainly cost avoidance (i.e. avoidance of the cost of mismanagement). The ISO 14001-certified EMS also brings cost reductions through better waste management. (In 1999 waste treatment costs totalled approximately €90,000 and today reach only €35,000.) ISO 14001 certification also helps to maintain the requirement for a simpler ‘notification’ licensing procedure rather than that of ‘authorisation’ (in which costs reach about €400,000). The firm did not set out to gain a competitive advantage through certification, but after 3 years of certification they are attempting to identify an approach to utilise ISO 14001 as a tool to increase the company’s competitiveness.

C.1.4. Non-financial benefits According to the BMS France representative, ISO 14001 certification has improved performance management and provides a precise and very useful framework within which to operate. ISO 14001 activities facilitate the access to and organisation of documents and tracking of legal requirements. ISO 14001-related activities also enhance internal communication, employee access to the environmental program and relations with public authorities.

BMS France has attempted to publicise their certification through external seminars but the ISO 14001 certified EMS is not yet viewed as a tool for communication with the public. 19

C.2. Bayer Hellas (subsidiary of Bayer A.G) Bayer Hellas mainly works in the production, packaging and distribution of crop protection chemicals It has about 45-60 employees depending on the season and its net sales are €29,411,765 (2001). It became ISO 14001 certified in 1999. Bayer Hellas has employed an EMS since its foundation. All staff members have responsibilities related to the environment, and employees receive relevant training. The drivers for ISO 14001 certification were to gain greater control of factory processes, improve organisation of existing guidelines, and aid the creation of new guidelines to improve environmental performance. ISO 14001-certification was also viewed as a declaration of interest in environmental issues.

C.2.1. Environmental performance Bayer Hellas considers the most significant aspects of their processes to be (in no particular order) air emissions, wastewater and solid waste. The criteria used for evaluation of aspects include the quantity of material emitted, the severity of the impacts on the environment and the ability of the company to influence impacts under normal operating conditions. Based on the significant aspects they develop targets in the form of Environmental Management Programs. Each program is specific for each aspect and the timeframes vary. Program results are reviewed at the end of each year. According to the interviewee the most significant programs are already complete and could possibly have taken place without certifying to the ISO 14001 standards.

In the 2001 review of the EMS, Bayer Hellas reported the following notable results of these programs: • Recycled 35% of the paper without toxic components (did not recycle more as no accommodating market exists). • Initiation of a new project in 2002 to reduce resource intensity and transport impacts by decreasing the amount of plastic in bottles by 1 %.

C.2.2. Legal compliance

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Bayer Hellas monitors compliance with environmental and other regulations. External laboratories and both an internal and external technical team conduct monitoring exercises with a frequency of once in 15 days to once a month (depending on aspect monitored). The aspects monitored include biological oxygen demand, chemical oxygen demand, air emissions and waste. Compliance inspections from public authorities rarely occur. An internal audit is performed annually and involves all areas of the site. Based on the results of this audit, any necessary corrective action is taken. According to the 2001 review, inspections took place in two areas and no incidents of non-compliance were recorded.

C.2.3. Economic benefits The only available financial data concerned the cost of certification (€3,500) and the annual cost of evaluation from the certification body (€1,500). The interviewee did not have more data available, and it was not clear whether such data exists. Without these data, or at least a qualitative statement, it is difficult to assess the possible economic benefits of the implementation of ISO 14001 in Bayer Hellas. According to the interviewee, the company does not promote the certificate as a competitive strategy because they do not think that the public has a strong interest in their environmental performance. However, a different department, which addresses marketing issues, may retain this sort of information.

C.2.4. Non-financial benefits The ISO 14001-certified EMS appears to greatly aid communication of environmental issues within the company. Training and information distribution programs are conducted as part of the EMS. The system also appears to have improved communication with external authorities such as the fire department. Representatives conducted a visit in which information regarding Bayer Hellas’ safety measures was distributed.

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C.3. Conclusion on the case studies The 2 following tables (Alexopoulos et al, 2002) are useful in getting a fuller picture of the situation across several European countries and in summarizing many of the different concepts that appeared in the previous 2 case studies. The first table (Table 2) summarizes observations on environmental performance. The causes listed remind us of some important concepts that were mentioned. First of all it doesn’t seem at all clear that the ISO 14001 requirements themselves are driving environmental performances. As Bansal and Hunter put it, “We found that the firm’s commitment to corporate social responsibility and quality were not significantly different between certified and no-certified firms. These findings suggest that early adopters of ISO 14001 leaned towards reinforcing rather than reorienting their firm strategy, which calls into question the ultimate reach of ISO 14001.” (Bansal, Hunter, 2003) Economic benefit seems to be a strong incentive, as well as directives from parent companies. Some benefits seem to be noticed, among them an improvement in energy efficiency.

Table 2: Case study observations of environmental performance (Alexopoulos 2002)

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The second table (Table 3) summarizes which causes and benefits were felt to be at work in each country that was studied according to economic benefits. The first two points on causes highlight the fact that it is not yet clear whether it is ISO 14001 that actually triggers economic benefits for the companies. However, whether or not this was the case, it is clear that a strong environmental management system allows for economic benefits, ISO 14001 certified or not.

Table 3: Economic causes and benefits in case countries (Alexopoulos et al, 2002)

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D) Critiques and Recommendations ISO 14001 is a voluntary environmental management and procedural standard that has its own limitations and weaknesses. Based on the work above, we gathered these critiques and proposed our recommendations as follows:

1. Firms are subject to environmental audit by ISO certified auditors. Critics argue that this is too procedural. Efforts are largely driven by the requirements of the certification service or the external auditor. We recommend strengthening the ISO 14001 third party certification process by ensuring that the auditing is carried out with a strong environmental focus (Godshall, 2000) and capitalizing on the instructions and recommendations from the auditors to improve the EMS. Godshall gives a thorough overview of Bayer Pharmaceuticals certification process in Berkeley, and says “the approach of the auditors reduced the possibility that Bayer could develop a paper EMS without actually changing and improving the company’s environmental performance. However it must be kept in mind that the company’s efforts to create an actual system may have been largely driven by the requirements of the certification service that Bayer chose.” (Godshall, 2000)

2. It is hard to compare environmental performance when there are gaps in data and inconsistencies in measurement standards. This makes it difficult for stakeholders to assess the value of such standard. We recommend a harmonization of data and standards that will also increase incentives for firms to be certified.

We also recommend that like the practice of the European

environmental management (EMAS), firms would be required to release any real measure of environmental performance through public dissemination of environmental statements: “Environmental statements must accurately summarize the findings and conclusions of the more detailed internal audits.” (Delmas 2000, p. 15).

This

observation is not as relevant to cases in the U.S. where ISO 14001 EMS is not as widely practiced as compared to cases in Europe and Japan.

Thus, this recommendation is

useful to facilitate U.S. firms’ adoption of ISO 14001 certification. 24

“Applicable

government agencies and relevant industry actors should require EMSs to clearly define a procedure to assess environmental performnce which requires preparation and public dissemination of environmental statements designed for the public and written in a concise, non-technical form (Delmas 2000, p.17)

3. EMS adoption will only be successful if firms feel secure and protected with clear regulatory behavior. We recommend that the institutional environment clearly outline policies that protect firms from subjective evaluations and costly recourse for regulatory violations observed in an environmental audit. Policies must be designed to have less punitive damages and more developmental measures to attract firms to be certified.

4. There is no incentive by government as proven by lack of compliance inspections as shown in the two European cases. We recommend more compliance inspections performed. This will also be a driver for other firms to be certified. Indeed, more compliance inspections can provide a pool of knowledge that can be consulted by companies seeking for certification. It is easier for a firm to adopt ISO certification in an environment where it is able to benefit from the experience of other firms that have been certified within the same industry. This can be a learning experience for the U.S. as firms initiate certification process.

5. Industry experiences in environmental management facilitate successful initiation and adoption of ISO 14001. Along the same lines as the previous recommendation, we would encourage stable cooperation between industries and regulatory agencies to create this culture of support. This is particularly witnessed in the experiences of ISO 14001 in Europe and Asia.

6. Critics say that the standard does not include any specification regarding life cycle assessments, which causes firms to be lax and passive in active research for innovative and lucrative solutions to environmentally sensitive components of the production process. Moreover, it does not push firms to investigate their relationships with supplies and 25

distributors and analyze if their links are environmentally sound. We recommend that a more comprehensive design can be integrated in the process to be sensitive to these elements and linkages and provide incentives and structures for improvements that can lead to more beneficial and lasting environmental benefits.

7. There is lack of research data useful for measurements and analysis of ISO 14001 EMS as an effective environmental strategy We recommend continuous training, education and research on this field to continually improve the standard and its design, implementation and evaluation. Comprehensive knowledge management is needed through a disciplined and structured procedures and practices.

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CONCLUSION ISO 14001 is a voluntary strategy and a procedural standard environmental strategy. In theory, when ISO 14001 EMS is implemented, it assures that the firms adopting it will be in conformance with all environmental regulations, but may even go beyond the existing regulatory standards for some regulated activities and stumble upon and/or scientifically lead to improvements and achievements in non regulated impacts as well. Ideally, ISO certified facilities would not merely control their pollution and reduce wasteful use of resources but also prevent them through discovery of new opportunities thus saving money while improving the environment. In the process, the transaction costs of acquiring the certification are supposed to be offset by the advantages the certification will ultimately bring to the firm. Firms would only adopt such practice if the benefits of enhancing its environmental performance and gaining competitive advantage in certain markets would minimize the risks of transactional costs and certification procedures. The recommendations toward enhancing the incentives toward the adoption of ISO 14001 are analyzed according to its nature of being both a voluntary and procedural strategy. As a voluntary strategy, ISO 14001 must respond to the perceived risks and doubts of firms through institutional support and incentives. The process of acquiring the certification might be costly if there are uncertainties about the commitment of the regulatory agencies to the standard. For example, if an EMS auditor under ISO 14001 discovers in the certification process that a certain practice of a firm is non-compliant with environmental regulation then he does not commit to interpret these audits in a positive way and may even use these information to incriminate the firm then the potential liability costs of the companies increases which becomes a major obstacle to the adoption of ISO 14001.

It would only be positive if there were less

punitive consequences attached to these situations and more of a developmental process would be encouraged. The EPA has recognized this weakness and is moving from a strict command-and-control approach toward more open communication and flexible programs. The EPA has recognized this weakness and is moving from a strict command-and-control approach toward more open communication and flexible programs. It is proposing more innovative approaches as it recognizes the industrial commitment and advancement in the area of pollution prevention. These could properly be considered when rendering decisions on prioritizing

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enforcement goals, defining what penalties will be sought for specific actions, and negotiating settlements (Delmas 2000, p.14). “There can also be some practical measures that can be promoted by regulating agencies such as (1) easing administrative enforcement requirements on ISO 14001 certified sites; (2) providing technical and/or financial assistance to already certified firms and (3) providing exemptions to certified firms’ company sites from frequent inspections and reporting requirements” (Delmas 2000, p.15).

The critical importance of having a good

relationship between regulatory agencies and industry have contributed to appeasing firms’ fears of transaction costs linked to the adoption of the EMS certification as proven by the cultural elements in Europe. Since ISO standard is in nature a process standard rather than a product standard, it can be identified as an intangible resource that is difficult to find any real measure of environmental performance. “True to the well-known axiom, you can’t manage what you don’t measure”, ISO 14001 requires an organization to have procedures to monitor and measure, on a regular basis, the key characteristics of its operations and activities that can have a significant impact to the environment as part of the checking and corrective active portion of its EMS” (Delmas 2000, p.7). This would make it easier for consumers to put a value on a resource, as there are currently no precise environmental variables useful in making comparative judgments about organizational performance issues. However, ISO 14001 EMS can have a more direct signal to other stakeholders like investment and insurance agents that the management of a certified firm is environmentally sound especially for firms where process standards have a special value to the industry like the electronics and chemical industry where process manufacturing and pollution prevention are core components of business advantage. These firms are far more attractive to insurance underwriters and gain better rates than those who do not have environmental policies to handle environmental risks. Thus, the lack of “tangible” results in proving the firm’s environmental performance, “stakeholders belief in the benefits of ISO 14001 standardization and their commitment to promote it is crucial for the success of ISO certification in a certain industry. Furthermore, if this is achieved, then the certified firms can transform its certification into a competitive advantage (Delmas 2000, p.8).

Certification can also function as an entry barrier for

certain companies and countries that demand corporate professionalism and change of values by requiring certification in its business dealings and requiring preparation and public dissemination of environmental statements.

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It is acknowledged that the lack of information and gaps in documentation and significance determination require knowledge management. “For an EMS to be successful in putting environmental policy into practice and in enabling the facility to reach its targets and objectives, all facility employees must be knowledgeable about the system. In addition, the public will likely be less skeptical and perhaps more supportive of a facility’s environmental efforts if it is provided information about EMS” (Gallagher, Darnal, et al., 1999). The relationship between ISO 14001 EMS and the environmental performance of facilities that implement them is yet to be fully identified, determined and improved. In this line, continuous research, education and training are imperative measures not only for those directly involved in this process like environmental managers and ISO accredited auditors but also each one of us who all have a stake in our environment. Although environmental gains through ISO 14001 certification are not yet as apparent, it has the potential to offer firms legitimacy among regulators and the public. There are other compelling reasons that make this a worthwhile strategy aside from environmental benefits such as meeting customer demands, maintaining a competitive advantage, reducing costs, and improving public relations. “Registration aside, EMS provides considerable internal benefits-assurance to management that environmental impacts are structured and controlled, improved processes for continual improvement, better cost control, conservation of input materials and energy, and a source of evidence for reasonable care and regulatory compliance (Jackson & Belmont, 1999). The institutional environment is another element of great importance that would help glue all the positive aspects of this strategy together. The implementation of credible policies and standards in protecting companies from transactional costs in the process of environmental audit; and improved public disclosure of environmental performance are both critical incentives to push firms to adopt ISO 14001 EMS. It also allows stakeholders to better compare firms’ performances and to propel the demand for certification. In the end, ISO 14001 are only foundations and cannot be effective environmental interventions without these support structures and continuous learning for improvement in design, implementation, measurement and evaluation.

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