4
The Environment in Business Decision Making

Federal agencies should substantially expand support for research to understand the influence of environmental considerations in business decisions. This research agenda would include studies particularly on (a) environmental performance and competitive advantage; (b) customer and investor demand for environmental performance by businesses, especially in an increasingly global economic system; (c) supply chains and production networks; (d) sectoral standard-setting; (e) decision factors in industrial ecology; (f) environmental accounting and disclosure practices; and (g) government policy influences on business decision making.

THE RESEARCH NEED

Both in the United States and worldwide, business decisions are among the dominant influences shaping environmental conditions: what materials, energy, and organisms will be extracted from the environment, in what quantities and where, how they will be transported and distributed, how landscapes and ecosystems will be transformed in doing so, and what will be done to minimize and mitigate the impacts. Business decisions also influence consumer choices, direct a large fraction of environmental research, and determine much of the development and diffusion of technological innovations.

The cumulative effect of businesses’ decisions creates many commitments that are difficult if not impossible to reverse in the short term. Consumer preferences influence these decisions in some cases, but only to the extent that they strongly affect the ability to generate profit. Government



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Decision Making for the Environment: Social and Behavioral Science Research Priorities 4 The Environment in Business Decision Making Federal agencies should substantially expand support for research to understand the influence of environmental considerations in business decisions. This research agenda would include studies particularly on (a) environmental performance and competitive advantage; (b) customer and investor demand for environmental performance by businesses, especially in an increasingly global economic system; (c) supply chains and production networks; (d) sectoral standard-setting; (e) decision factors in industrial ecology; (f) environmental accounting and disclosure practices; and (g) government policy influences on business decision making. THE RESEARCH NEED Both in the United States and worldwide, business decisions are among the dominant influences shaping environmental conditions: what materials, energy, and organisms will be extracted from the environment, in what quantities and where, how they will be transported and distributed, how landscapes and ecosystems will be transformed in doing so, and what will be done to minimize and mitigate the impacts. Business decisions also influence consumer choices, direct a large fraction of environmental research, and determine much of the development and diffusion of technological innovations. The cumulative effect of businesses’ decisions creates many commitments that are difficult if not impossible to reverse in the short term. Consumer preferences influence these decisions in some cases, but only to the extent that they strongly affect the ability to generate profit. Government

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Decision Making for the Environment: Social and Behavioral Science Research Priorities policies also influence business decisions—through regulatory mandates, property rights and liability rules, disclosure mandates, taxes and subsidies, procurement criteria, and other policies—but the primary initiative lies with businesses themselves. To date, however, the role of environmental considerations in business decision making has been seriously understudied. The dominant emphasis of environmental research in the past has been in the natural and health sciences and engineering, addressing such issues as the health risks of particular substances, the functioning of environmental processes and ecosystems and the impacts of changes in them, and technologies for pollution control. Environmental research in the social sciences to date has concentrated primarily on economics, including the measurement of economic costs and benefits of pollution control to society and the relative efficiency of regulatory mandates versus market-oriented instruments of environmental policy (Stavins, 2003); on government decision making; and to a lesser extent on individual and household environmental decision making, such as energy conservation, recycling, and environmental considerations in consumer behavior (Gardner and Stern, 2002). Over the past decade, a modest but growing body of research has begun to address environmental considerations in business decision-making (see Appendix C for a review). This research has consisted mainly of a group of literatures associated with established business research fields: environmental considerations in strategic management decisions, in operations, in organizational behavior, in marketing, in accounting, in finance, and in government policies affecting business. Two arguably new research areas also have emerged: one is the study of life-cycle analysis and industrial ecology (the study of flows of energy and materials through systems of industrial production, consumption, and waste disposal), although to date this area has been influenced more by engineers than by the social sciences. The other is the study of supply or commodity chains. Each of these areas, as well as several others, offers promising opportunities for further research. AREAS OF RESEARCH The following discussion highlights particularly promising research areas and questions. Environmental Performance and Competitive Advantage When does it pay to be green? A central question concerns the conditions under which business decisions that enhance the environment also

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Decision Making for the Environment: Social and Behavioral Science Research Priorities enhance competitive advantage and other business goals. The answers to this question are fundamental to environmental decisions both by businesses themselves and by governments choosing between regulatory and more market-oriented incentives. In the past, many businesses considered environmental performance improvement at worst a deadweight cost driven by regulatory mandates and liability risks, or at best an opportunity for cost minimization through more efficient use of materials and energy (Royston, 1979, 1980; Andrews, 1999). More recent studies have begun to document that competitive advantages can be gained through environmental protection under at least some conditions (Hart and Ahuja, 1996; Klassen and McLaughlin, 1996; Klassen and Whybark, 1999). Many of the most promising environmental improvements in business performance may result not from incremental changes at existing factories but from investments in new facilities (“ecological modernization”) and in new products and technological innovations (Hart, 1997; Hart and Milstein, 1999). New factories typically are far more efficient than older ones, including greater efficiency in the use of materials and energy and in pollution prevention and waste reduction, and many new products also include less use of toxic materials, as well as less energy and materials than older ones, although the aggregate human consumption of materials and energy nonetheless continues to rise. Van Heel, Elkington, Fennell, and Franceska (2001) identify 10 distinct dimensions of business value against which environmental performance can be measured: shareholder value, revenue, operational efficiency, access to capital, customer attraction, brand value and reputation, human and intellectual capital, risk profile, innovation, and license to operate. When environmental protection confers market advantage, does such advantage derive chiefly from external incentives, such as customer or investor demand, governmental requirements and subsidies, or social and community pressures? Or does it derive also from distinctive capabilities and resources of the firm itself, as a growing body of business research now suggests (Hart, 1995; Russo and Fouts, 1997; Prakash, 2001; Aragón-Correa and Sharma, 2003)? Further research is needed to characterize more precisely why some facilities and firms create significantly greater competitive advantage through superior environmental performance than others even in the same sector and to identify how internal capabilities as well as external pressures influence those outcomes. How do competitive advantages from environmental protection, where they exist for individual firms, influence environmental protection more generally? Do these practices gradually disseminate to other firms, reducing the initial competitive advantage of first movers but improving overall environmental outcomes? Do the high-performing firms use their competitive advantage to gradually displace poorer-performing competitors, fol-

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Decision Making for the Environment: Social and Behavioral Science Research Priorities lowing Schumpeter’s theory of creative destruction (Hart and Milstein, 1999)? Or do high-performing firms gain their competitive advantage simply in high-end niche markets, while poorer performers continue to coexist with them in other markets and with little overall improvement in environmental outcomes? To understand the overall environmental effects of environmentally protective actions by firms, it is essential that we understand not only the behavior of the most environmentally innovative and competitive firms, but also their impact—and the limits of that impact—on the environmental performance of other firms (Sharma, 2002). Why are many businesses less receptive to environmental initiatives than the evidence for business benefits suggests they should be, and under what conditions do such patterns change? Even when green practices such as waste reduction and energy conservation have demonstrated positive rates of return, businesses often have been slow to adopt them. Organizational inertia is one possible answer (Sarokin, Muir, Miller, and Sperber, 1986): environmental responsibilities often are isolated in an environment, health, and safety unit responsible only for regulatory compliance and with little influence on broader management and investment decisions. In this regard, a potential benefit of the increasing use of the ISO 14001 environmental management system standard has been its influence in mainstreaming environmental considerations into the responsibilities of all senior managers and thus increasing integration of such considerations into core business decisions. In some instances, however, when business benefits exist for green initiatives, these benefits may be smaller than those of other investment opportunities or managerial priorities (see, e.g., Feder, 1999; Greer, 2000). Better understanding of such issues may shed light on more fundamental patterns of imperfect rationality and suboptimal behavior in business organizations, in addition to their benefits for understanding businesses’ environmental performance. Customer and Investor Demand What factors affect customer and investor demand for environmental performance? Research on this question would focus on the circumstances under which influential customers and investors care about environmental performance, how such preferences influence or fail to influence business decisions that more directly affect environmental outcomes, and what brings about change in the influence of these demand factors. Customer and investor demand are key drivers of business decisions. A research literature has developed on consumer demand for green products at the level of individual choice, including related topics such as the effectiveness and value of green labeling and product certification (e.g., Thøgersen, 2002; see also Chapter 5). A modest literature also has begun to

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Decision Making for the Environment: Social and Behavioral Science Research Priorities emerge on environmental performance and capital markets (see http://www.institutionalshareowner.com/research.html). How is the environmental performance of businesses likely to be affected by future demand for environmental performance in international and emerging markets? Even for U.S. businesses, future products and production processes are increasingly driven by global rather than merely domestic markets. Much of the modest literature so far has focused on U.S. and European markets, and even here important questions remain unanswered, such as the reasons for the apparently greater demand for environmental performance among European than U.S. consumers, the impacts of these norms on U.S. firms as well as others, and whether these patterns will continue as the European Union itself expands to less affluent and more diverse countries. Beyond the European Union, the major markets for the future will be in large emerging and industrializing economies, such as China. How will their consumers’ and investors’ demand influence environmental performance, and how will these demands both influence business decisions and change with economic growth? How will businesses be affected by the demand for better environmental performance by influential business partners, not only by household consumers, as implied above, but also by business customers, institutional procurement offices, partners in joint ventures, suppliers, insurers, financiers and large institutional investment funds, and others? Business partners may exercise different preferences than end-use consumers, driven by their own calculations of efficiency, profit, liability, reputational risk, and other business considerations. Home builders, for example, may order appliances that are low in capital cost but high in energy operating cost to the housing consumer in part because few consumers consider the energy costs of operating home appliances when they are buying a new house. Some business partners have begun to be more demanding than this consumer practice suggests, requiring explicit evidence of environmental performance as a condition of doing business, for example, through environmental risk reviews by lenders and insurers, environmental management commitments by some major corporations, and social screening criteria used by some investment and pension funds. Other business partners continue to reward price over environmental performance. In short, for some businesses, demand by major customers or other business stakeholders may be more influential than end-use consumers’ demand. A fruitful line of further research would therefore be to explore the circumstances under which major business partners have this influence and have exercised it in favor of environmentally protective preferences, and the extent to which such influence could affect other environmentally significant products and production processes of their suppliers.

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Decision Making for the Environment: Social and Behavioral Science Research Priorities Supply Chains and Production Networks Whose business decisions drive environmental outcomes? Research on this question concerns environmental decision making in supply or commodity chains, representing sequences of production decisions across multiple businesses from raw materials extraction to retail sales, consumption, and post-consumer waste management. Many of the greatest environmental impacts are driven not by the decisions of individual factories or even firms, but by decision rules embedded in larger scale chains or networks of production relationships. These chains involve significant externalities, in which the firms that cause the most serious environmental impacts—for example raw materials extraction and processing—often are not directly identifiable by consumers or investors who are interacting directly with another company in the chain. Moreover, the choices of the firms that have the most serious direct environmental impacts may be seriously constrained by the decisions of dominant firms at other points in the value chain, such as major retailers. Past research has focused primarily on the individual firm or industrial sector as the unit of analysis, but not on the larger institutional networks of decisions, incentives, and constraints. Recent research has begun to characterize influence relationships in supply chains with greater theoretical precision (Gereffi, Humphrey, and Sturgeon, 2002; Humphrey and Schmitz, 2001) and to examine their implications for environmental performance (see Appendix C for more detail). Under what conditions do the demands of dominant businesses create incentives for, or barriers to, environmental improvement by other participants in commodity chains? For example, firms operating in countries with high environmental standards may be tempted to externalize environmental impacts to other firms through relocation or contracted outsourcing (Bommer, 1999). Alternatively, such firms might pressure their suppliers for high performance as well, for reasons including efficiency in logistics, minimizing potential liabilities, or simply enhancing their public image and brand value (Vogel, 1995; Garcia-Johnson, 2000). Under what conditions do certain firms in supply chains act as weak links with respect to environmental improvement, limiting efforts of other firms in the chain to improve the environmental performance of the entire productive process? Supply chain mandates have recently emerged as a new mechanism for leveraging environmental performance improvement (Andrews, Hutson, and Edwards, 2004). The effectiveness and generalizability of such mandates, however, has not yet been well documented. Will businesses actively enforce them? How high a standard will they require? Will their effects extend beyond direct suppliers all the way to raw materials producers, the point at which many of the most severe impacts occur? These questions

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Decision Making for the Environment: Social and Behavioral Science Research Priorities raise complex issues and further research questions involving the difficulty of labeling and tracking raw materials as commodities, the multiplicity and diversity of suppliers, and open-market purchasing of some product components. In short, supply chain research may shed new light on important aspects of business decision making for the environment, but it may also reveal important limits to efforts to use supply chain leverage as an alternative to direct protection of at-risk environments and ecosystems. Considerable insight may be gained from research that links issues of supply chain governance with the established research field of product life-cycle analysis (Franklin Associates, 1991). Life-cycle analysis has developed as a technical field of environmental research, evaluating the environmental consequences of a product from “cradle to grave” by identifying the impacts of each of its component processes (see http://www.umich.edu/~nppcpub/resources/compendia/CORPpdfs/CORPlca.pdf), but often without concurrent research on the supply chain decision making that determines each of these choices. Supply chain research has now advanced to the point at which promising connections could be made between these fields. Important insights are also likely to come from research on the downstream ends of supply chains, such as on the substitutability of services for some products, the logistics of returning recycled products into production processes, and the implications of emerging public policy mandates for post-consumer recycling of major classes of products (for example, the European Union’s recent mandates for product stewardship and for recycling of waste electronic products). Sectoral Standard Setting Can trade associations effectively serve as nongovernmental regulators of environmental decision making by their members? In some industrial sectors, such as chemicals and forest products, a dominant business or trade association has incorporated environmental codes of conduct or performance and certification standards into membership requirements (Nash, 2002). Such initiatives represent attempts by business communities at self-policing, perhaps to forestall government regulation but also to protect a shared reputation or “club good” (Kollman and Prakash, 2002; Potoski and Prakash, 2005). In some other sectors, trade associations have functioned as important agents of environmental performance improvement in waste reduction, pollution prevention, and environmental management more generally (for example, the Environmental Protection Agency’s Sector Strategies Program, http://www.epa.gov/fedrgstr/EPA-GENERAL/2003/May/Day-01/g10887.htm). How strong do such sectoral codes and commitments prove to be, and how effectively enforced, balancing competitive advantage for the best firms

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Decision Making for the Environment: Social and Behavioral Science Research Priorities against collective-action temptations toward the lowest common denominator? Do they affect member firms’ expectations toward their suppliers and customers? And in what other sectors might such club-good characteristics be exploited to produce better environmental performance? What are the major barriers to improved environmental performance in particular understudied but environmentally significant sectors? Buildings, for example, once constructed, are among the most significant long-term drivers of energy consumption and its environmental impacts. There is a growing body of research on cost-effective technologies for reducing those impacts (Kats, 2003), but both private and public funding for building-related research lags behind other major sectors, and green-building technologies so far have penetrated only modestly into the construction and development industries (U.S. Green Building Council, 2003). What has not yet been well studied is the role of key institutional barriers to environmental performance improvement in this sector, such as the decentralized structure of the sector, fragmented markets and regulatory jurisdictions, cost-analysis practices dominated by initial construction rather than life-cycle costs, and effective steps for reducing these barriers. Sector-specific barriers may also exist in other environmentally significant sectors, such as many service sectors. Decision Factors in Industrial Ecology What decision factors are critical to the redesign and optimization of industrial processes for environmental benefits? Industrial ecology has recently emerged as a new domain of research embracing the multidisciplinary study of industrial, technological, and economic systems and their linkages with fundamental natural systems (Socolow, Andrews, Berkhout, and Thomas, 1994; Graedel and Allenby, 2003). Foreshadowed by the work of Leontief (1966) on input-output analysis, industrial ecology seeks to understand, and in its normative application to optimize, the environmental and economic outcomes of entire industrial processes (Socolow, 1994). Frosch and Gallapoulos (1989) suggested that industrial systems could be more efficient if their material flows were modeled after natural ecosystems; since that time, the research literature on this idea and its potential applications has proliferated (Ayres and Ayres, 2002; see also the Journal of Industrial Ecology, established 1997). A recent National Research Council report concluded that analyses using material flows data have already proven useful, and that a more systematic set of material flow accounts across the economy would benefit improved public policy, the efficiency of business decision making, environmental and economic performance, and national security (National Research Council, 2004c). Much of the research on industrial ecology to date has focused on

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Decision Making for the Environment: Social and Behavioral Science Research Priorities technological and engineering factors in particular manufacturing sectors (Allenby, 1992, 1999; Graedel and Allenby, 2003; U.S. Congress Office of Technology Assessment, 1992). As yet there has been far less research into the business decision-making processes and other factors affecting the implementation and wider potential of applied industrial ecology. A promising topic for further research would be to examine systematically the instances in which industrial ecology innovations are well established and to identify the decision factors, social processes, and other circumstances that were essential to successful implementation. From the findings, researchers could develop a theoretical model for predicting other sectors and circumstances in which such successes could be successfully introduced. There is a substantial increase in analytical complexity, however, when decision making moves from the regime of traditional pollution-control technologies, such as air scrubbers and water treatment plants, to core production technologies. The most obvious difference is the degree to which the technologies involved are coupled to other technologies (Shapiro and Varian, 1999). In the case of an air scrubber, for example, one can generally change technologies without affecting any of the underlying manufacturing technologies, which are only loosely coupled. But eliminating a major process material—lead solder in electronics manufacturing, for example—has far more complex implications, since the technology associated with such a material is more tightly coupled to other technologies in the design and manufacturing process and significantly affects product performance. Nonlead solders may require more stringent cleaning of the underlying copper substrate, for example, which could necessitate changing from water-based to chlorinated-solvent cleaning systems; the latter would have potential health impacts that aqueous cleaning systems do not, posing air quality issues as well. Moreover, the bond that is formed by the new joining technology might not be as robust, requiring changes in physical design and in the use environment. And at the end of the product’s life, care must be taken that the new formulation does not degrade recycling economics or technologies. Some metals “poison” copper, for example, so that it cannot be reused in electronics, and such metals must be avoided in solder formulation (Allenby, 1992). The reality of such couplings among technologies creates a form of technological lock-in. Once a new technology is integrated into the design, manufacturing, use and disposal cycle, a subsequent change will be much more difficult to implement, for further change in any single technology may affect others as well. Core technologies thus evolve at different rates, reflecting the complexities of material substitution at industrial scale (National Research Council, 1999f). When the electronics industry was challenged to shift from chlorofluorocarbons and chlorinated solvents to aque-

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Decision Making for the Environment: Social and Behavioral Science Research Priorities ous cleaning systems in components manufacture, it was able to do so in a few years. But the shift away from lead solder has already taken a decade and a half and is not yet complete. Similarly, one can readily build a hydrogen-based car today, but the technology system required to get the hydrogen to it on a mass market basis doesn’t exist: the gasoline engine is locked in by the fuel manufacture and distribution infrastructure. Change therefore takes much longer, is more complicated and difficult to achieve, and has much more potential for unanticipated consequences as it ripples through the coupled technological, economic, and social systems (Bijker, Hughes, and Pinch, 1987). These observations suggest two promising directions for social science research. First, there would be significant value in research that provides environmental decision makers with a greater understanding of technological systems and their evolution. Second, research that studies the technological context in which environmental decisions are made, including the reflexive relationship between environmental requirements and subsequent technological evolution, could be valuable not only for making environmental decisions more informed and effective, but also for anticipating whether particular choices will either create net environmental value or generate systems effects that reduce or even outweigh environmental benefits. Environmental Accounting and Disclosure Practices How can environmental performance best be measured and reported for use in business decision making? It is a truism among business executives that “what gets measured, gets managed.” Environmental issues pose important challenges to traditional accounting and management information practices. Some environmental impacts of a firm’s activities represent significant hidden costs and unrecognized opportunities for economic benefit (for example, regulatory compliance and waste management costs, worker’s compensation and other insurance liabilities). Others represent significant but often unrecognized hidden liabilities, such as contaminated sites or toxic substances in products, as well as unrecognized opportunities for economic gain. Research to identify such costs and business opportunities more explicitly, and to attribute them more specifically to the processes that generate them, would represent logical extensions of recent innovations in management accounting, such as activity-based costing and full-cost accounting. There are significant unresolved issues associated with such changes, however, that also require research. Appropriate measures must be developed for estimating and charging such costs, and standards developed regarding which environmental costs should be formally recognized and disclosed to

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Decision Making for the Environment: Social and Behavioral Science Research Priorities investors and the public, and at what point, in order to provide an accurate and appropriate picture of the company’s assets, liabilities, and performance (Kirschner, 1994). Because these research areas focus on management and financial accounting, they are distinct from other research that focuses on counting environmental resources as capital assets in national income accounts (Ahmad, El Serafy, and Lutz, 1989; National Research Council, 1999c). Implicit in any effort to improve environmental accounting practices is the need to develop credible measures of the impacts of environmental performance on economic performance. There is a modest but growing body of empirical work on this subject (e.g., Dowell, Hart, and Yeung, 2000; Hart and Ahuja, 1996; Klassen and McLaughlin, 1996; Klassen and Whybark, 1999; Levy, 1995; Russo and Fouts, 1997; van Heel et al., 2001). Early results suggest positive linkages among environmental, social, and economic performance outcomes, but the numbers of studies remain relatively small and the research is not yet systematic in its coverage of entire sectors or economies and relatively short-term in its time span. More systematic investigation of such measures would be useful, particularly in sectors subject to significant environmental impact and high variation in environmental performance among firms (see Appendix C for further discussion). A related research need concerns the standardization of environmental disclosure practices. Environmental performance information to date has been reported primarily in voluntarily prepared environmental and sustainability annual reports, and it is not consistent or comparable across firms. Recent initiatives have sought to promote standardization and greater quality control of this information (Global Reporting Initiative, www.globalreporting.org), on the ground that such standardization would be in the interest not only of the public but also of firms (a single reporting format would be more efficient for all firms and would offer competitive advantage and benchmarking opportunities for superior performers). There remain important unresolved questions for research regarding the design of reporting standards. Key questions include the appropriate measures and range of indicators to be generally used and approaches to aggregating them into overall indicators of environmental performance. As practical matters, both the verifiability of such measures and the potential liabilities associated with underreporting, overreporting, or inaccurate reporting also remain unresolved concerns. Government Policy Influences on Business Decision Making What are the net overall incentive effects of government policies on business decisions affecting the environment? Substantial research litera-

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Decision Making for the Environment: Social and Behavioral Science Research Priorities tures already exist on the direct effects of regulations and economic incentives, such as environmental taxes, charges, and tradable permits (Stavins, 2003), as well as the direct effects of information disclosure requirements (Tietenberg, 1998). There also is a growing literature on the effects of government-supported voluntary initiatives, in which the government offers technical and informational assistance, certification standards, favorable public recognition, and/or increased regulatory flexibility in exchange for commitments by the firm to reduce its environmental impacts beyond what is required by regulation (Andrews, 1998; Mazurek, 2002; Harrison, 2002). Far less research has been conducted, however, on the enhancing or offsetting effects of other government policies that also affect business incentives. For example, in the United States both regulations and tax advantages favor end-of-pipe pollution-control technologies over innovation in production processes, whereas technology policies often lack explicit environmental criteria. A recent workshop report by the Organisation for Economic Cooperation and Development argued that decisions about technological innovation lie at the heart of business decision making about improving environmental performance and concluded that one of the most important public policy challenges is to coordinate the technological incentives of environmental policy with the environmental effects of innovation policy (Organisation for Economic Co-operation and Development, 2000:22, 14). Norberg-Bohm (2000), after reviewing the literature on environmental policy influences on green innovation by businesses, concluded that research on the combined effects of multiple policy mechanisms on business decision making would be particularly useful. When policy incentives are used to promote green innovation, under what conditions do they have the undesired effect of locking in and privileging particular technologies? Both government regulatory and procurement standards and standards set by business organizations are vulnerable to strategic behavior by businesses to lock in mandates that favor their own interests and products (Pashigian, 1985). The modest amount of research and the more extensive anecdotal experience on this subject needs to be consolidated into empirically based principles by which performance-based policy instruments intended to favor better environmental outcomes also create incentives for open competition in further innovation. What are the global effects of shifting government standards on business decision making? In the 1970s and 1980s, U.S. standards were the dominant approach adopted (whether or not enforced) by many countries and assumed by most transnational businesses worldwide. Increasingly, however, the European Union has moved into this norm-setting role (Vogel, 2003), and China is now emerging as an important enough production

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Decision Making for the Environment: Social and Behavioral Science Research Priorities location and potential consumer market that its standards are also likely to play a major role. As an example, the United States and the European Union have developed different systems for reviewing the risks from new chemicals. The European Union has specific testing requirements, but the requirements are imposed only after the volume of production of the chemical reaches a specified level. The United States has no specific testing requirements, but the requirement to submit any available data on the chemical is imposed prior to the chemical being manufactured. This difference may put a premium on trying out a new chemical in Europe. However, a proposed European Union regulation, the REACH initiative, would put the burden of proof of safety on chemical manufacturers and could substantially change the calculation for manufacturers. Other examples involve differing norms for content and recycling of electronic products and for introducing genetically modified food crops. Changes in the leaders in standard setting may create important shifts in business expectations, in competitive advantage among businesses operating in these markets, and in worldwide norms for environmental decision making by businesses. They may also produce a gradual convergence of regulatory expectations, but little is yet known about whether the likely convergence would be either environmentally beneficial or economically efficient. More systematic research could shed light on these important issues. RATIONALE FOR THE SCIENCE PRIORITY Likelihood of Scientific Advances Over the past several decades, the implications of environmental considerations for business decision making have become more widely recognized by leading business decision makers than by the research community. Yet because of the paucity of systematic research, decisions by these business leaders have been based largely on anecdotes and driven by a focus on limited elements of these implications—regulatory constraints, cost burdens, and liability risks, for example—rather than by analysis of the full range of opportunities for adaptation and innovation that could benefit businesses as well as the public. Significant scientific advances can now be anticipated in this priority area for several reasons. First, research over the past decade has begun to produce solid theoretical, methodological, and empirical foundations for such investigations, beginning with a research agenda posed by the Greening of Industry Network over a decade ago and continuing with the emergence of a productive and growing community of scholars since (Fischer

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Decision Making for the Environment: Social and Behavioral Science Research Priorities and Schott, 1993; Sharma, 2002; also see Appendix C). Many of the topics proposed would build directly on theoretical foundations that have now become available, such as on supply chain governance, industrial ecology, and the resource-based theory of the firm. Second, the topics proposed offer opportunities to link and integrate bodies of research that have so far developed separately, such as supply chain governance and life-cycle analysis, and to extend research that has developed in a U.S. domestic context to the increasingly global economic and institutional context in which many environmental outcomes now are shaped. These linkages are likely to lead to new insights. Third, many businesses themselves have become more actively interested in these questions and more willing to share with researchers the information necessary to conduct empirical research on them. Examples include large-scale surveys, detailed case studies, and some studies involving extensive access to internal documents as well as publicly reported data (e.g. Andrews et al., 2001). Potential Value Research on environmental considerations in business decision making is of direct interest to several user groups. First, it is of interest to many businesses, particularly leading firms in economic sectors that have significant environmental impacts, as well as other aspiring firms seeking to benchmark themselves against their competitors and against “best-in-class” firms in their industries (see, for example, the web site of the World Business Council for Sustainable Development, a voluntary association of self-identified leading firms in environmental and social performance, www.wbcsd.org). Second, such research is of interest to many sectoral trade associations, business research organizations, and others that serve subgroups of the business community. Several trade associations, for example, have mandated environmental codes of conduct as membership criteria (e.g., the American Chemistry Council and the American Forest and Paper Association); others have sought to assist small enterprises in their sectors to improve their environmental performance (metal plating, dry cleaning, and automotive repair shops, for example). Such interest is particularly evident in sectors in which environmental performance is less a matter of competitive advantage and more an issue of widely shared costs, liability, or potential reputational damage to the industry as a whole (Kollman and Prakash, 2002). These sectors and associations have an interest in the credibility of their environmental codes and in inducing compliance with them. Third, such research is of direct interest and value to government agencies, particularly to many that have begun to promote voluntary approaches

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Decision Making for the Environment: Social and Behavioral Science Research Priorities to environmental performance improvement by regulated businesses. Essential to such initiatives—and indeed to more effective regulation and other public policy incentives for environmental performance improvement—is obtaining a more accurate understanding of the factors actually influencing business decision making, and of their variation across firms and sectors, so that public policy incentives can be more accurately, reliably, and efficiently designed to achieve their intended effects in improving environmental quality. Fourth, such research is also important for informing the interested public about which environmental performance claims by businesses can be relied on and about which businesses are in fact improving their performance as opposed to merely burnishing their images or outsourcing damaging activities to less visible suppliers. This science priority provides a valuable agenda for government research agencies. In recent years, the Environmental Protection Agency’s National Center for Environmental Research has begun to support research on a number of questions related to business decision-making affecting the environment under its STAR (Science To Achieve Results) Economics and Decision Sciences program (see http://es.epa.gov/ncer/science/economics/). It has specifically noted as priorities research on motivations for corporate environmental behavior and on behavioral responses by businesses to government interventions (such as regulatory compliance and implementation of voluntary programs), among other areas. Most research so far under this program has been limited to regulatory compliance behavior, environmental performance measurement, and performance changes associated with voluntary initiatives, such as environmental management systems. This science priority would expand the research under this or related programs to address other promising topics as well. The National Science Foundation also has demonstrated interest in research on business decisions affecting the environment. Its program for decision, risk, and management science supports research in management science, risk analysis, societal and public policy decision making, behavioral decision making and judgment, organizational design, and decision making under uncertainty, including particularly work on judgment and decision processes; risk perception, communication, and management; organizational performance; and modeling of managerial processes. The NSF program on Human Dimensions of Global Change includes explicit research priorities on innovation and diffusion processes related to global environmental change, resource use and management, anticipatory and reactive adaptation and mitigation, economic issues including international trade patterns and global sectoral models, and environmental accounting. All these areas would allow for research on environmental considerations in business decision making. This science priority would expand the focus

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Decision Making for the Environment: Social and Behavioral Science Research Priorities on business decision making in the above research programs. Research on these questions would also be valuable in other countries, as indicated by interest in these questions among agencies in the United Kingdom and European Union (see http://remas.ewindows.eu.org/index.htm/REMAS/reports/relatedreports.htm#brit). Likelihood of Use The research proposed here could produce not only advances in scholarly understanding but also practical improvements in the environmental performance and in the efficiency and competitiveness of businesses. Poor environmental performance often represents economic waste and other forms of competitive disadvantage as well, particularly in the face of rising community expectations and regulatory demands in major markets, such as the European Union (Vogel, 2003). It is true than many firms are far more preoccupied with immediate profitability than with environmental considerations and that many are unlikely to pay attention to research, except perhaps market research related to their own products. But these generalizations do not apply to many of the leading firms in key industries, which are keenly interested in ways to improve their environmental performance. Many of the leading firms are also major transnational corporations that can promote wide dissemination of research findings through their influence on their subsidiaries, suppliers, and business customers, on their peers in the same and other sectors, and even on government decision makers and the news media. There is good evidence that leading companies are actively interested in information related to environmental performance. A recent survey by the Conference Board, for example, found that more than half the responding firms explicitly reported environmental performance at least annually to their board of directors; well over half tied their compensation of plant and operations managers to environmental performance, and more than 40 percent did the same for executives and senior managers. Nearly half also had a mechanism in place to drive design processes toward minimizing overall environmental impacts in product or process development (Lowy and Wells, 2000). More than 40 percent of these firms believed that effective environmental governance added value to their operational efficiency as well as their corporate image, and 28 percent reported increased value to their competitive position. The Conference Board survey also found that companies identified as leaders by their peers in other firms were 2.5 times more likely than other firms to leverage their organization’s core business competencies to address strategic environmental concerns; those identified leader organizations were 1.5 times more likely to consider their environmental expertise itself a core

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Decision Making for the Environment: Social and Behavioral Science Research Priorities competency in formulating their overall business strategy than were the other respondents. Nearly 90 percent of peer-identified leaders (compared with 38 percent of other respondents) had mechanisms in place to drive design processes toward minimizing overall environmental impacts during the product or process concept development stage while addressing customer needs. Two-thirds of the leaders (compared with 37 percent of the others) subjected all product designs to a final environmental review and approval prior to market introduction. And leaders were more likely to have mechanisms in place to minimize life-cycle impacts of specific product or process designs through such techniques as design for environment or life-cycle analysis. Leading firms tended to see environmental challenges as opportunities for product development, whereas other respondents tended to see them as regulatory threats. Leading firms also far more consistently reported increases in value to their corporate image (86 percent), access to their communities (57 percent), public opinion (43 percent), and business opportunities (43 percent) (Lowy and Wells, 2000). The findings of this survey suggest strongly that at least leading firms would have a strong interest in the results of research such as that proposed here, and that such firms also are recognized as benchmarks and potential role models by others. Having such research supported by government agencies would increase the credibility of the results. Moreover, for many of the research questions raised here, studies sponsored by private-sector organizations, if conducted at all, may not address issues of public interest as effectively as government-supported research. The recommended research may also be used by government decision makers, many of whom have shown interest in improving their understanding of business decision making in order to design more effective and efficient programs for environmental performance improvement. Examples include the recent proliferation of government-sponsored voluntary initiatives (Mazurek, 2002) at both the state and federal levels, as well as increased use of market-oriented and disclosure-based incentives as policy tools intended to promote improved environmental performance by businesses (Stavins, 2003; Tietenberg, 1998). Finally, an additional reason for government use of this research is the increasing pressures for environmental performance improvement—and improved management and decision making more generally—on the part of many government-operated business enterprises themselves, such as water and wastewater treatment utilities, hospitals, military facilities, and others. For example, presidential Executive Order 13148, issued April 22, 2000, requires formal environmental management systems for all appropriate federal facilities.