Environmental initiatives pay off

Frightening reports about the state of the Earth have forced businesses to claim that they care about the environment. At the same time, public authorities are also exerting pressure by introducing stricter environmental requirements. Various types of environmental certification are in vogue, and familiar industrial names are buying climate change quotas and cruising round in electric cars.

– How do stricter environmental requirements impact on the profitability and behaviour of businesses?

– Do businesses get anything in return for introducing environmental management within their organisation and being environmentally certified?

These are two of the questions which are answered in a new book entitled ‘Environmental Policy and Corporate Behaviour’ (2007), which presents the results of a comprehensive study led by the OECD’s group for national environmental policy together with a research team from Canada, France, Japan, Norway, Germany, Hungary and the USA.

The aim of the OECD project was to map the links between the environmental policies of authorities and businesses’ commercial motives, adaptation of management systems and organisational structure in connection with the implementation of the policies.

Data was collected during 2003 and 2004 and covers around 4,200 businesses with more than 50 employees from all goods-producing sectors.

Environmental requirements have an adverse effect on profitability.
Associate professor Bjarne E. Ytterhus at BI Norwegian School of Management was the team leader for the Norwegian part of the study and has particularly looked at how the introduction of environmental management, environmental certification and other similar initiatives can affect the environmental performance and profitability of businesses.

“Stricter regulations will in themselves have an adverse effect on the profitability of enterprises. A policy-driven environmental approach is not profitable for entrepreneurs,” claims Bjarne Ytterhus against the background of the OECD project. Perhaps not such a surprising claim. The results are after all in line with the traditional view that stricter environmental requirements will increase the environmental costs of businesses and thereby reduce profitability. However, this is not the whole story. Businesses can also have commercial reasons for implementing environmental initiatives. These reasons could include a company’s desire to enhance its reputation, but they can also be directly financially motivated. Businesses give support to environmental organisations and initiatives within their local communication on the basis of a “license to operate” motive.

A better environment and greater profitability

The OECD study also shows that businesses which have their own environmental managers and invest in environmentally related research and development reduce their environmental impact and achieve greater profitability than businesses without specific environmental expertise.

“While policy-driven regulations increase costs for businesses generally, businesses with relevant environmental expertise can implement “smart” environmental initiatives which can both improve the environment and enhance profitability,” claims the BI researcher.

Bjarne Ytterhus explains the improved profitability through three factors:

1. Faster environmental adaptation than competitors (“first-mover advantages”)
2. Increased resource productivity, giving cost savings
3. Product differentiation and market benefits
The OECD study therefore gives support to the claim that “Environmental initiatives can be profitable”.