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Why Companies Reduce Environmental Management Practices after Environmental Accidents - Ideas for Leaders

Why Companies Reduce Environmental Management Practices after Environmental Accidents

Idea #829

Why Companies Reduce Environmental Management Practices after Environmental Accidents

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KEY CONCEPT

In response to serious spill and pollution accidents, many companies reduce their environmental management practices, shifting resources to the accident response but in the long-term, significantly hampering their environment performance.


IDEA SUMMARY

The economic, social, and environmental impacts of a spill and pollution (SP) accident can last for years. At the company level, SP accidents will generate negative publicity, damage share price and market values, and hurt the company’s reputation—in addition to potentially costing a company millions of dollars in clean-up costs and other expenses. Between 2015 and 2019, U.S. companies lost $500 billion in market value because of SP accidents.

To prevent accidents and fulfil their social obligation to be environmentally friendly, companies adopt environmental management practices (EMPs) that include techniques, policies, and procedures intended to minimize the negative impact of the company’s activities on the environment. Only about 20 percent of companies can be considered ‘sustainability leaders’—companies with a high commitment to addressing sustainability issues reflected in an exemplary sustainability record. Nevertheless, a study that reviewed company responses to spill and pollution accidents showed that the remaining 80 percent of companies followed the lead of sustainability leaders, steadily adopting new EMPs every year—although not at the pace of sustainability leaders.

When an SP accident occurred, however, the impact on the adoption of environmental management practices differed greatly among companies.

Sustainability leaders stayed on course with their steady annual increase of EMPs. For non-sustainability leading companies, however, the response to a spill or pollution accident varied depending on the severity of the accident. If the accident was less severe, non-sustainability-leading companies escalated the adoption of EMPs. In other words, each year, these companies started adopting more EMPs than they had in the previous year. Accidents served as a spur encouraging these companies to step up their sustainability efforts.

If on the other hand the accident was severe, non-sustainability-leading companies went in the other direction, deescalating the number of EMPs they adopted (that is, each year, adopting less EMPs than in the previous year). This de-escalation continued for up to 3 years—and even once the de-escalation stopped, according to the study’s data—the companies would take a number of years to recover their environmental management practices.

What explains these varied responses to accidents?

For companies that were sustainability leaders, an accident, serious or not, did not alter the pace of their EMP adoption for the following reasons:

  1. Decision-makers in these firms had substantial experience and expertise in the domain of sustainability. As a result, they were confident of the measures that the company was already taking concerning the impact of their activities on the environment.
  • Sustainability leaders had superior capabilities and trained resources dedicated to sustainability, reducing the cost of adopting new EMPs. Thus, the financial impact of an SP accident did not require them to divert EMP adoption resources.
  • Reducing their level of environmental practices went against the culture and values of these companies.

For companies that were not sustainability leaders, the response varied based on the severity of the accident for the following reasons:

  1. A serious SP accident will severely tax a company’s resources, not only to pay for clean-up, but also to cover the large fines and the financial damage (e.g., lower market values) that are bound to follow.
  • A serious SP accident will also require companies to investigate the root causes of the accident—an investigation that would include reviewing the company’s environmental management strategies.
  • Escalating the number of EMPs, while a logical reaction to an environmental accident, is costly. Minor accidents will leave resources intact to cover the additional costs. Serious accidents may leave companies with no choice but to divert resources for environmental management from EMPs to the spill response and investigation.

The study was based on collected information related to 442 U.S. publicly traded manufacturing firms between the years 2002 and 2013. The information included data on EMP adoption, SP accidents, other environmental accidents, and the severity of such accidents, as well as firm sustainability and financial performance.


BUSINESS APPLICATION

This study confirms that companies are making an effort to meet their environmental responsibilities, adopting new EMPs each year. Unfortunately, many companies de-escalate EMP adoption following an SP accident, and according to the research, fail to recover from this de-escalation in future years.

 

This study cautions company leaders to carefully assess the long-term risks that might accompany their immediate response to a serious accident. While resources have to be managed in the wake of a costly accident, every attempt must be made not to sacrifice environmental management practices that can prevent such accidents from re-occurring—especially for firms that are not sustainability leaders to begin with.


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FURTHER READING

The Impact of a Spill or Pollution Accident on Firm Environmental Activity: An Empirical Investigation. Rick Hardcopf, Rachna Shah, Suvrat Dhanorkar. Production and Operations Management.  March 9, 2021.

https://onlinelibrary.wiley.com/doi/abs/10.1111/poms.13392

 

 

Further Relevant Resources:
Rick Hardcopf’s profile at Huntsman School of Business

https://huntsman.usu.edu/directory/hardcopf_rick

 

Rachna Shah’s profile at Carlson School of Management

https://carlsonschool.umn.edu/faculty/rachna-shah

 

Suvrat Dhanorkar’s profile at Smeal College of Business

https://directory.smeal.psu.edu/ssd14


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Idea conceived

March 9, 2021

Idea posted

Oct 2022
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