Environmental management: An industry classification

Abstract

In this paper, we seek to inform managers, regulators, and investors of the setting in which a firm's environmental management activity is costly and when it is profitable. To identify this setting, we classify firms according to their environmental management activities and the subsequent impact on firm operating performance. This classification has allowed us to explore four potential economic drivers of environmental management, namely competitive positioning, risk management, compliance, and pressure to overinvest. Our results show that consumer-oriented firms that are visible to the public observe a positive relation between environmental commitment and operating performance. They use environmental management as a strategy to appeal to consumers, but also feel the pressure to overinvest. Firms that are in heavily polluting, capital intensive, less visible industries, observe a negative relation between environmental impact management and operating performance. Their environmental management follows primarily from risk management and compliance motivations. When the cost of an environmental activity is high, firms are less likely to self-engage and so regulatory intervention is more likely to be warranted.