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ISO 14001 Helps Buyers Push Suppliers To Clean Up Their Acts

Note to editors: Michael Lenox can be reached for additional comment at mlenox@duke.edu.

December 15, 2005

DURHAM, N.C. –- A self-regulation program intended to reduce pollution may encourage some companies to clean up their acts, but participation should not be considered a signal of superior environmental performance, according to a new study by a team of researchers at Dartmouth College, Duke University and the University of Wisconsin-Madison.

The study looked at the International Organization for Standardization’s popular ISO 14001 standard for environmental management, which was first adopted as an industry standard in 1996 and allows firms to certify that they have a process in place for managing their environmental performance.

The study, conducted by Andrew King of the Tuck School of Business at Dartmouth, Michael Lenox of Duke’s Fuqua School of Business and Ann Terlaak of the School of Business at the University of Wisconsin-Madison, was published in the December issue of the “Academy of Management Journal.”

Facilities that obtain certification tended to have previously adopted environmental management systems that reduced pollution at an above-average rate, the researchers found. These facilities appeared to certify with ISO 14001 to communicate the existence of these management systems to their buyers.

But Lenox cautions against using ISO 14001 certification as a “good housekeeping seal of approval” for a company’s environmental performance.

“Our analysis provides evidence that firms with lower environment performance, not higher, have a greater propensity to certify, thereby raising doubt that certification serves as a signal of superior environmental performance,” he said.

“It’s a bit like looking at which home owners on your street are out in the driveway working under the hood of their cars,” King said. “Such maintenance may make the cars run better, but it also may indicate which cars are older or aren’t running well now.”

The study analyzed data on pollutants emitted by 7,899 manufacturing plants between 1995 and 2001, relying mainly on information from the U.S. Environmental Protection Agency’s Toxic Release Inventory and from Dun & Bradstreet’s facilities directory. The researchers also used industry data from the federal government’s Bureau of Economic Analysis and Census Bureau of Foreign Trade, as well as demographic information from the Internal Revenue Service and the Census Department. They controlled for industry type and facility size to make the manufacturers statistically comparable.    
   
The analysis revealed that a manufacturer’s implementation of an environmental management system (EMS), a key requirement for ISO 14001 approval, is linked with significant improvement in environmental performance. However, the researchers could not prove that ISO 14001 certification itself leads to any greater performance. The performance of companies that adopted an EMS without seeking certification could not be distinguished from those that both adopted an EMS and gained certification.  

The researchers found that ISO 14001 certification may actually indicate lower, not higher, environmental performance. The authors speculate that manufacturers with poor environmental track records tend to be more likely to adopt environmental management systems and seek certification precisely because their plants need to improve. Thus, pursuit of EMS certification may indicate a company is trying to shore up a weakness rather than demonstrate an area of strength.

The researchers urge public policy makers, industry groups and others to recognize a “fundamental paradox” when crafting future standards. ISO 14001 and other certified environmental management standards can either help firms acquire “beneficial practices” or help distinguish “the wheat from the chaff,” but not both.

“Our research suggests a counter-intuitive conjecture that the more the practices included in a management standard provide direct operational benefits, the less likely certification will provide a means of signaling superior performance,” the study said.

“Understanding the tradeoffs is particularly important as firms are using ISO 14001 and the ISO 9000 quality-management standard as templates to create standards in areas as diverse as labor management and Internet security,” Terlaak said.

Nevertheless, the researchers believe the standards certification process is still meaningful. If nothing else, they said, certification shows a company’s supply chain partners that it is making efforts to improve its environmental performance.  
 
“It doesn’t necessarily say they’re cleaner on an absolute basis,” Lenox said. “But it does say that they at least have an environmental management system in place and that they are improving.”

The authors noted it may be too soon to gauge the full impact of ISO 14001, and it may take several years to see the full environmental improvements generated by the standard.