Financial and Environmental Impacts of ISO 14001 Certification

Content

1 Introduction

2 Environmental Management Systems and ISO 14001
2.1 Introducing Environmental Managements Systems and ISO 14001
2.2 Global Dissemination of ISO 14001
2.3 Potential Impacts of ISO 14001

3 Review of the Empirical Literature on ISO 14001’s Impacts
3.1 Financial Impacts
3.1.1 Qualitative Studies
3.1.2 Quantitative Studies
3.2 Environmental Impacts
3.2.1 Qualitative Studies
3.2.2 Quantitative Studies

4 Assessment of the Empirical Literature on ISO 14001’s Impacts
4.1 Criticism of Existing Empirical Literature
4.2 Suggestions for Further Research

5 Conclusion

References

Appendix

1 Introduction

Interest in environmental management has been growing strongly in the corporate world over the recent years. It has been boosted by theorists and practitioners who promised huge win-win opportunities in this area, with ecologically conscious management practices benefiting the natural environment and at the same time advancing the competitiveness of companies or even national economies (e.g., Porter 1991). Even though this win-win rhetoric has been criticized sharply (e.g., Walley/Whitehead 1994), environmental management remained an important part of many businesses’ agenda for different motives – be it in order to exploit win-win potentials or to ensure legal compliance (Andrews et al. 2001), or be it intrinsically motivated, in order to avoid doing harm to the natural environment.

One way of implementing and maintaining environmental management is by institutionalizing an environmental management system (EMS). Such an EMS constitutes a structured and systematic approach for “articulating goals, making choices, gathering information, measuring progress, and improving performance” in the environmental field (Florida/Davison 2001: 64). There is a wide array of different types of EMS’s, reaching from company specific solutions to standardized national (like the British BS 7750), multinational (like the European Union’s EMAS), or even global approaches (like the International Organization for Standardization’s ISO 14001) (Krut/Gleckman 1998).

The ISO 14001 standard achieved particular prominence as an EMS: In July 2003, more than 53,000 organizations all over the world had an EMS which was certified according to ISO 14001 guidelines (Peglau 2003; see also chapter 2.2 of this paper). Its proponents promise huge environmental and financial/operational benefits. They assume that by implementing an ISO 14001 certified EMS, a company can improve both its natural environment and its bottom-line.

In recent years, a growing amount of empirical research emerged, testing this assumption by actually scrutinizing the financial and environmental impacts of ISO 14001. It shows that there are indeed positive impacts of establishing an EMS in accordance to this standard. However, these are by far not as obvious and as clear-cut as suggested by its proponents.

This paper summarizes the current state of research on ISO 14001’s financial and environmental impacts. To this end, it reviews the existing empirical and conceptual literature on these impacts, and it evaluates this literature from a methodological point of view, giving suggestions for further research.

The next chapter briefly introduces EMS’s in general and ISO 14001 in particular. It shows the importance of ISO 14001 and offers a short review of its potential impacts as suggested by proponents and critics. Chapter 3 constitutes the main part of this paper. It reviews the empirical literature on the financial and ecological impacts of ISO 14001. In chapter 4, the existing literature is being evaluated and suggestions for improvements in further research are given. Finally, chapter 5 summarizes and concludes this paper.

2 Environmental Management Systems and ISO 14001

2.1 Introducing Environmental Managements Systems and ISO 14001

An EMS can be defined as “a formal set of policies and procedures that define how an organization will manage its potential impacts on the natural environment and on the health and safety of the people who depend on it” (Andrews et al. 2001: 54). It includes an “organizational structure, responsibilities, practices, procedures, processes, and resources for implementing and maintaining environmental management” (Sayre 1996: 47).

As indicated in the introduction to this paper, proponents of environmental management often argue that there are moral, legal, and business reasons for corporations to implement environmental measures in general and EMS’s in particular. For instance, the Global Environmental Management Initiative points at the inefficiency of traditional ways of addressing environmental issues in a reactive, ad-hoc, end-of-pipe manner, and at the growing importance of environmental regulations and standards in a global economy. Above this, it also argues that EMS’s make good business sense by reducing waste, increasing efficiency, and enabling better control of environmental risks. To deal with these issues and to realize these advantages, a structured and systematic approach to environmental management as provided by an EMS is necessary (GEMI 1996).

ISO 14001 is an international voluntary EMS standard which was developed by the International Organization for Standardization in late 1996 (Andrews et al. 2001). It describes the basic elements of an effective EMS, which include: “an environmental policy, an environmental plan, an implementation strategy, monitoring and corrective-action procedures, and management review” (Darnall et al. 2001: 92). Figure 1 illustrates how these elements play together in an ISO 14001 EMS, forming a closed EMS-loop.

illustration not visible in this excerpt

Figure 1: Elements of an ISO 14001 EMS (Darnall et al. 2001: 92)

It is important to note that ISO 14001 describes process – not performance – standards. “This is, [ISO 14001] does not tell companies what environmental performance they must achieve. Instead, it offers companies the building blocks for a system that will help them achieve their own goals. The basic assumption is that better environmental management will lead directly to better environmental performance” (Tibor/Feldman 1999).

Organizations that have an EMS in place which comprises the elements specified by ISO 14001 can be certified by independent third-party registrars as adhering to ISO 14001’s provisions. Such certifications have been increasingly used in recent years by organizations and facilities all over the world, as is shown in the next section of this paper.

For more information about ISO 14001, the standard’s requirements, and implementation guidelines see e.g. Schoffman/Tordini (2000), Harrington/Knight (1999), Woodside et al. (1998), Cascio et al. (1996), and Tibor/Feldman (1996).

2.2 Global Dissemination of ISO 14001

As Table A (see appendix) shows, the number of organizations and facilities with an ISO 14001 certified EMS increased sharply over the last few years. In July 2003, there were 53,620 ISO 14001 certifications worldwide, up from 10,569 in June 1999 (Peglau 2003; Steger 2000).

ISO 14001 has a stronghold in Japan, with 12,392 certifications in July 2003. It is also very prominent in many European countries, including Spain (3,960), Germany (3,820 certifications), Sweden (2,916), the United Kingdom (2,917), and Italy (2,405). In China (including Hong Kong), there were 3,069 certifications in July 2003.

As for the U.S., the importance of ISO 14001 increased sharply over the last few years. The number of American certifications climbed from 480 in June 1999 to 3,032 in July 2003.

These numbers indicate that business leaders expect some kind of positive effects from implementing and certifying an ISO 14001 EMS. Insofar, they are in line with a big portion of the conceptual literature on ISO 14001’s impacts, where proponents of the standard focus on its positive effects both on the environment and on the bottom-line. The next section briefly reviews this non-empirical literature, and it addresses some common criticism about ISO 14001.

2.3 Potential Impacts of ISO 14001

The International Organization for Standardization itself articulated a number of benefits which it claims to result from implementing ISO 14001. These include (Johannson 1997: 26):

- “Assuring customers of commitment to demonstrable environmental management;
- Maintaining good public/community relations;
- Satisfying investor criteria and improving access to capital;
- Obtaining insurance at reasonable costs;
- Enhancing image and market share;
- Meeting vendor certification criteria;
- Improving cost control;
- Reducing incidents that result in liability;
- Demonstrating reasonable care;
- Conserving input materials and energy;
- Facilitating the receipt of permits and authorizations;
- Fostering development and sharing environmental solutions; and
- Improving industry-government relations.”

To summarize, these points focus on the business effects of ISO 14001. They refer to improved relations with important stakeholders (e.g., customers, communities, investors, regulators), improved marketing opportunities, and increased process efficiency.

Other authors cite similar potential advantages of an ISO 14001 EMS (e.g., Clements 1996; Fielding 1999), often adding diverse additional benefits like the enhancement of technology development and transfer (Marcus 1997), better compliance with regulations respectively reduced regulatory oversight (Sasseville et al. 1997), improved quality, and higher management confidence and employee commitment (Clements 1996). In addition to that, it is sometimes argued that ISO 14001 – in spite of its voluntary nature – may become a de facto requirement to do business in certain markets (comparable to ISO 9000ff.), be it due to customer pressures or due to government adoption of the standard (Montabon et al. 2000; Tibor/Feldman 1999).

Environmental benefits are mentioned less often, probably due to ISO 14001’s process-oriented character. However, some authors claim ISO 14001 provides incentives for pollution prevention initiatives and helps organizations to achieve environmental excellence, balancing environmental and economic interests (Sayre 1996; Tibor/Feldman 1999).

Practitioners seem to share these optimistic views about ISO 14001. In 1996, the consulting firm Arthur D. Little performed a survey in 260 North-American companies (mostly with more than $1 billion in annual sales), asking managers about their expectations concerning ISO 14001. Of the 150 respondents, 61 percent stated that meeting the standard could offer competitive advantages for their company. 48 percent said that failing to meet the standard could constitute a non-tariff trade barrier. And 35 percent stated complying with ISO 14001 might improve their company’s environmental performance or reduce their environmental management costs (Anonymous 1996; Begley 1996). According to a survey by Global Environmental Management Systems, top environmental executives, consultants, and registrars see the biggest potential benefits of ISO 14001 in terms of marketing and trade opportunities, improved quality management, and liability premiums and interest rate reductions. The top three potential weaknesses of the standard as seen by these practitioners are costs, the lack of environmental performance criteria, and the lack of public awareness about ISO 14001 (Burdick 1997).

There is also some anecdotal evidence on the positive impacts of ISO 14001 (all examples in this paragraph are cited from Morrow/Rondinelli 2002). For instance, Ford Motor Company claims millions of dollars in savings and substantially reduced environmental impacts resulting from ISO 14001 certification of its plants worldwide. And ABB Automation reports reduced costs of energy and of hazardous waste handling and disposal and better communication of its environmental achievements to its customers. And finally, Honda Transmission Manufacturing of America in Ohio claims reduced costs associated with environmental and safety incidents and substantial improvements in waste production and energy consumption. However, due to the anecdotal nature of these reports, they are of limited value for the purpose of this paper. It is not possible to objectively judge the quality of the evidence presented, and it cannot be determined whether the impacts claimed are actually caused by ISO 14001 certification. Thus, such anecdotal evidence will be disregarded in the remainder of this paper.

There is criticism of ISO 14001 as well, with opponents of the standard not sharing the optimistic assumptions presented above. For instance, they argue that ISO 14001’s potential benefits do not apply to all organizations equally, depending on a company’s specific circumstances, e.g. its reputation or the industry it works in (Sasseville et al. 1997).

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