Environmental Performance

Numerous international institutions define environmental performance as the measurable results of the environmental management system in relation to the firm’s control over its environmental aspects, aims, and environmental targets. Academic research posits environmental performance as the measurable results of the environmental management system in relation to the control that the organization has over its environmental impacts based on its environmental policy. An environmental management system identifies the organization’s environmental policy, the environmental aspects of its operations, the legal and other requirements, and a set of clearly defined objectives and targets for environmental management programs.

According to this definition, environmental management encompasses the technical and organizational activities undertaken by the firm for the purpose of reducing environmental impacts and minimizing their effects on the natural environment. Hence, environmental performance is considered a multidimensional construct that includes not only the outcomes and impacts of the company on stakeholders and the environment but also the principles of environmental responsibility and the processes of environmental responsiveness of the company that determine future outcomes and impacts.

In 1989, the Coalition for Environmentally Responsible Economics tried to define the notion of environmental performance, and since then, numerous and diverse indicators have been used to measure it. Some of them account for the pollution generated by a company; others measure greenhouse gas emissions, or carbon emissions; while still others are based on environmental data reported by the companies themselves through their annual reports, often called sustainable reports.

These indicators can refer to a level of pollution, or its reduction; relay the organization’s initiatives; or reflect various practices such as recycling or reprocessing of waste. Thus, environmental performance is measured by objective or nonobjective indicators, allowing the evaluation of the efficiency of a firm’s consumption of resources. Different measurement frameworks of environmental performance therefore integrate these indicators on internal and external axes of procedures or results to satisfy the needs of reporting, disclosure, monitoring, and management of environmental performance. Environmental performance thus seems to be a multidimensional concept dealing with both managerial and measurement dimensions. The key issue of environmental performance measurement is converting large amounts of data into managerially useful information via appropriate metrics.

This entry first presents the different environmental performance indicators, followed by the frameworks commonly used to measure environmental performance. It then discusses the main issues of environmental performance.

Measuring Environmental Performance

Environmental Performance Indicators

Objective Measures of Environmental Performance

Environmental performance is often measured by observable and quantifiable variables, reflecting the different ways in which environmental impacts can be caused by a given activity. These variables are given in physical, chemical, and biological units and expressed as either absolute or relative values. These proxies are positive when they measure the reduction of pollution and negative when they refer to the pollution produced. Furthermore, these data can measure the resources consumed during the manufacturing process or the pollution generated by a company’s activity. Finally, these indicators also reveal a company’s past behavior, thus making it easier to compare companies or activities; however, they do not allow forecasting, which would enable polluting behavior to be monitored.

These environmental indicators are often calculated on the basis of data reported by the companies themselves through mandatory or voluntary frameworks. These indicators quantify the pollution caused by their activities, the conformity to environmental regulations, the modifications of production processes, the creation of “green” products, and the company’s voluntary participation in environmental initiatives.

Generally speaking, the transparency and the validity of the databases may be inadequate since most of these reported data are not certified by a third-party organization. Moreover, these databases may not address the complexity of the environmental performance issue, leading to the use of nonobjective indicators to underline its management dimension.

Nonobjective Measures of Environmental Performance

Since environmental performance is related to the environmental management system implemented by the firm, environmental practices and activities are frequently taken into consideration when measuring environmental performance.

Therefore, nonobjective indicators are used to measure environmental performance, revealing the efforts companies make to reduce the impact of their activities on the environment. The implementation of an environmental management system, the integration of environmental objectives in the firm’s planning, the eco-design of the output or the manufacturing process, the product life cycle analysis, the development of “green” products, and the company’s voluntary participation in environmental programs are all measures of companies’ environmental performance.

The adoption of an environmental management system is often presented as an indicator of a firm’s capacity for sustainable environmental commitment, and its certification is considered as a legitimate indicator of the organizational changes involved in these policies. These nonobjective measures highlight the practices implemented by firms, their goals with regard to their environmental responsibilities, and the environmental management system set up to manage these environmental strategies and improve environmental performance. It is less a question of measuring or reducing pollution and more about giving an account of the organizational changes these environmental strategies require.

These nonobjective measures are often based on questionnaires sent out to companies and reveal companies’ compliance with regulations, the constraints of environmental reporting, the methods and tools of environmental management, the perception of the environmental strategy concerning pollution prevention, the environmental costs and savings due to the environmental strategy, staff training programs, the green supply chain, recycling and reprocessing activities, and so on.

Environmental Performance Frameworks

Several frameworks have been developed either by institutional organizations, such as the International Standard Organization (ISO), the Global Reporting Initiative, and the Eco-Management and Audit Scheme (EMAS), or by academic research reinforcing the assumption that environmental performance is the output of environmental management practices.

In 1992, the British Standard Institution published the world’s first environmental management systems standard, which supplied the template for the development of the ISO 14000 series in 1996. In 1999, the ISO 14031 certification proposed a framework to measure environmental performance based on two types of indicators: (1) indicators of environmental performance, which are divided into (a) management indicators, which supply information related to the efforts made by an organization to improve its environmental performance, and (b) operational indicators, which supply information about the results of these environmental management practices, and (2) environmental condition indicators, which supply information related to the local, regional, and national environmental contexts.

The Coalition for Environmentally Responsible Economics and the Tellus Institute with the support of the United Nations Environment Programme created the Global Reporting Initiative in 1997. It released an “exposure draft” version of the Sustainable Reporting Guidelines in 1999, the first full version in 2000, and the second version released at the World Summit for Sustainable Development in Johannesburg in 2002. The measurement framework of the Global Reporting Initiative is based on two principles: (1) the environmental policy of the organization, outlining management’s commitment, the environmental strategy adopted, and the environmental management system implemented, as well as the aims, and (2) the environmental performance, properly speaking, summed up by the key indicators.

The EMAS is a voluntary environmental management instrument developed in 1993 by the European Commission. It enables organizations to assess, manage, and continuously improve their environmental performance. Entered into force in January 2010, EMAS III requires registered organizations to report on key performance indicators in six key environmental areas: (1) energy efficiency, (2) material efficiency, (3) water, (4) waste, (5) biodiversity, and (6) emissions.

Academic research has proposed several measurement frameworks for environmental performance, insisting for each of these on the need to satisfy the requirements of reporting to stakeholders and to internal management. Environmental effectiveness can be viewed through four dimensions: (1) fixed goals, (2) competitive advantage, (3) communication and internal training of staff, and (4) conformity to regulations. Therefore, the environmental performance can be positioned on two axes (internal/external and procedures/results), which leads to four dimensions: (1) organizational systems, (2) relations with stakeholders, (3) conformity to regulations, and (4) environmental impacts (see Figure 1).

Figure 1 Dimensions of Environmental Performance

Source: Adapted from Table 1: Corporate Environmental Performance Matrix, p. 30, in Henri, J.-F. & Giasson, A. (2006). Measuring environmental performance: A basic ingredient of environmental management. CMA Management, 80(5), 28–32. That table was adapted from Ilinitch, A. Y., Soderstrom, N. S., & Thomas, T. E. (1998). Measuring corporate environmental performance. Journal of Accounting and Public Policy, 17(4–5), 383–408.

It appears that the integration of the environmental strategy with the core business strategy of the firm leads to improvement in environmental performance. In that context, environmental performance is measured through five categories: (1) general management of the company, (2) the consumption of resources, (3) the production process, (4) the production achieved, and (5) financial and nonfinancial results.

The aim of most of these analytical frameworks is to allow companies to satisfy both the obligation of reporting environmental information to external stakeholders and the desire to manage their environmental performance internally. All these frameworks insist on the interdependence of the objective and nonobjective indicators for improving environmental performance. The first highlights to what degree environmental practices bring about a reduction in pollution caused by the firm. Conversely, the latter focuses on the management of the environmental issue and the goals that have to be reached.

Five Main Issues Concerning Environmental Performance

Academic researchers have extensively studied environmental performance over the past 40 years, and their studies have highlighted five main issues illustrating the different uses of these indicators.

Environmental and Financial Performance Relationship

This issue has been extensively studied by academic researchers and questioned by managers over the years. Through empirical studies, academic research first tried to reassure the shareholders, the principal providers of financial resources for the firm. Objective indicators of environmental performance have been widely used by researchers to verify how much environmental performance improves financial performance.

In light of these studies, it seems that the relationship between environmental and financial performance is positive, even if some studies tend to prove the opposite, while others maintain that it is impossible to prove. Despite a number of limitations, such as the diversity of environmental performance indicators or the variety of research methods, it seems that environmental performance improves financial performance to a certain degree.

In fact, pollution prevention activities that are carried out within the framework of an environmental strategy imply that the production processes should be modified to reduce energy consumption; production costs would thereby be reduced too, leading to competitive advantages. Moreover, the sale of environmentally friendly products allows companies to obtain a leading position in the emerging markets for “green” products and, to some extent, to influence environmental regulation as an expert in this field. These positive benefits from a proactive environmental strategy are often called a “win-win” hypothesis. What is good for the environment is good for the business too. Nevertheless, this relation has to be placed in a long-term context since it relies on very heavy investments, which initially tend to penalize profitability before eventually serving the interests of the companies. Some authors have pointed out that the lack of a theoretical background does not allow for efficient testing of the link between environmental and financial performance and makes the measurement of environmental performance unreliable.

Communicating and Monitoring Environmental Performance

The academic field underlines the association between the reporting of environmental performance and the management control system of this performance for companies that interact with external actors. Environmental performance indicators may have an external value for environmental communication purposes or an internal value for corporate environmental performance. This corresponds to two logics of the representation of environmental performance. In this context, environmental information is often used as an objective indicator of environmental performance, notably in empirical studies that measure evolutions in the share value following an environmental incident or environmental disclosure through mandatory frameworks. Divulging environmental information may help reduce investors’ negative reactions, allow for better access to resources, improve the conditions of exchange with trading partners, and thus create an increase in income. Environmental information can also be used as a nonobjective indicator of environmental performance within the framework of questionnaire-based studies or case studies relating to firms’ environmental communication as shown in their annual reports or on their websites.

A significant increase in the environmental disclosure in companies’ annual reports can be interpreted as a way of managing public impressions. The need to reassure worried stakeholders induces companies to disclose very detailed reports that lead stakeholders to give approval more quickly to a polluting industrial activity. Indeed, environmentally sensitive companies may use environmental disclosure to maintain or increase their legitimacy or, in other words, their license to operate. The optimistic tone adopted by companies in their annual reports or on their websites may mask poor ecological performance and hence does not allow the classification of firms according to their environmental performance. The environmental performance of a firm usually is negatively related to the environmental reputation score (worse-performing companies make more extensive disclosures). Voluntary environmental disclosure appears to be an effective tool for reputation risk management. Indeed, large companies tend to channel their environmental disclosure more toward the discussion of strategies and policies than toward providing meaningful performance information. Only the audit and/or certification of environmental information by an independent organization could confirm the correlation between environmental communication and environmental practices.

Managing Environmental Performance

This issue is less a question of making quantitative measurements of the pollution produced by a company than of giving an account of organizational modifications contingent on these environmental initiatives. The academic research tries to identify the dynamic and inimitable organizational capacities that enable the company to gain a strong competitive advantage through a proactive environmental strategy. This competitive advantage relies on the company’s capacity to bring together all its resources (human, financial, material) by applying knowledge and know-how within the framework of an environmental strategy. It allows firms to invest in new and unexplored markets for green products in advance of their competitors and sometimes even influences future regulations by presenting their expertise to the regulation authorities. This research theme is based on nonobjective indicators that highlight environmental innovations, staff training, setting up a dedicated department, and planning the rollout of environmental practices. In the win-win opportunities context, the first role of an environmental management system is to tease out these “green” opportunities and encourage their exploitation. What savings they bring and the extent to which they are economically worth pursuing directly involve management control systems. Furthermore, companies may not implement some environmental practices regardless of their environmental benefits (e.g., zero emissions, avoidance of new nonrenewable raw materials, and transport only by using nonfossil fuels) because they require expensive investments, significant changes in manufacturing processes, or even new production technologies. Therefore, a greater understanding is needed of how the management control system enables managers to measure and manage environmental performance with respect to the costs of these initiatives.

Institutional Pressures Related to Environmental Performance

The increasing institutional pressures underlie how much the firm is at the heart of a set of relationships with partners who include shareholders as well as actors interested in its activities and decisions. The roles of government, civil society, certification organizations, the media, and other companies are a determinant in the introduction of environmental actions and the disclosure of environmental information. Among these pressures, environmental regulations require companies to regularly communicate information on their ecological footprint and greenhouse gas monitoring to satisfy environmental standards. These regulations, known as command-and-control or end-of-pipe laws, require companies to measure the consumption of energy in the production process and monitor the pollution generated. The regulations subsequently concentrate on framing the environmental characteristics of products to make them less polluting when they are used or consumed by the customers. It appears that environmental strategies and practices are deeply influenced by external stakeholders and institutional pressures from regulators, competitors, and nongovernmental organizations.

Environmental Performance and Global Performance

Recently, academic researchers have studied environmental performance jointly with global performance in the context of increasing institutional pressures for integrated reporting. This research stream mainly mobilizes objective indicators referring to the positive consequences of the company’s environmental strategy on the global performance of the firm. In that context, the “win-win” hypothesis seems to be validated, and good management of the environmental issue is profitable for the company, in the broadest sense of the word. Furthermore, this last theme recognizes that external issues such as environmental challenges or relationships with local communities or nongovernmental organizations influence the value created within the organization.

This use of environmental indicators both to manage performance and to communicate it to external stakeholders can be seen as the first stage toward integrated reporting. Integrated reporting brings together material information about an organization’s strategy, governance, performance, and prospects in a way that reflects its commercial, social, and environmental context. The goal of integrated reporting is to provide financial and extrafinancial information about companies in one standardized and audited annual report and therefore an insight into a company’s sustainable performance, value, and impact today and its prospects for the future.

Conclusion

An increasing number of companies use objective and nonobjective indicators to measure their environmental performance, with the aim of managing this performance internally and reporting the information to institutional stakeholders in conformity with regulations. In addition, the joint use of objective and nonobjective indicators by managers underlines the interdependence of these indicators to measure environmental performance in line with its definition.

Nevertheless, we can see that the research questions as well as the context of the studies have determined the different uses of environmental performance indicators. The numerous empirical studies of the relationship between environmental performance and financial performance have made academic research digress from the main question—how to measure the impact of corporate activities on the natural environment. The same goes for the academic research studying environmental disclosure as a way for companies to gain or maintain their legitimacy. These studies have used environmental indicators not to measure the negative externalities caused by companies but rather to determine the financial consequences of environmental practices or the extent to which companies are practicing “greenwashing.”

The different theoretical backgrounds chosen by researchers clearly influence the way the environmental issue is studied. The stakeholder perspective highlights the conflicting pressures that come from internal (customers, employees, stockholders) or from external (regulators, environmental activists, nongovernmental organizations) stakeholder groups. Institutional theory suggests that rules, customs, or beliefs guide and constrain the behavior of organizations. Hence, studies in these academic streams have often posited the environmental commitment of companies as an answer to stakeholders’ demands or institutional constraints in a reactive way.

Environmental performance is a multidimensional concept that is difficult to measure. Its definition is ambiguous by nature since it refers to the management of environmental performance as well as the results of management. Yet these two notions are independent of one another. The management of environmental performance does not systematically lead to a reduction of pollution caused by the company. Some environmental practices induce financial incomes, allowing companies to increase their profitability without reducing the impact of their activities on the natural environment. Hence, companies that sell their polluting permits on the carbon emissions market can manage their environmental performance and increase their financial performance without reducing their carbon footprint.

Furthermore, companies may take advantage of this multiple definition of environmental performance. They may disclose significant information about their environmental management practices through their annual reports, while the results of these practices are inadequate in reducing the pollution caused by their activities. The lack of audit of the environmental results allows companies to disclose their environmental management practices with the goal of maintaining or increasing their legitimacy. Thus, the ambiguous definition of environmental performance prevents not only a clear understanding of this issue but also the development of a theoretical foundation.

In addition, some issues such as environmental communication and institutional pressures allude to external pressures on companies, resulting in environmental disclosure to satisfy the increasing demand of the stakeholders. How do companies deal with these two opposing practices? Is it possible to satisfy the aims of improving environmental performance as well as external disclosure of this performance to the stakeholder that provides the company’s resources?

Environmental performance refers to numerous practices such as ISO 14001 certification, recycling practices, eco-design, eco-conception, environmental management system implementation, and modification of the manufacturing processes to make them more efficient. The diversity of these practices shows that managers’ perception of the environmental issue determines the degree of the organization’s commitment to this issue. Therefore, managers’ knowledge and awareness of this issue are as significant as company characteristics of size, activity sector, country, and financial profitability to explain the diversity of environmental management practices. Furthermore, this commitment depends on the level of return on investment that managers expect to gain from environmental practices. The relationship between environmental performance and financial performance influences environmental practices and enhances an organization’s diversity.

There is no doubt that environmental performance is quantified with the aim of measuring the relationship between environmental and financial performance and determining its significance. Nevertheless, the issue has evolved little by little toward a more managerial dimension of environmental performance, as shown by the increasing use of nonobjective indicators in conjunction with objective indicators. This may highlight a significant change in the way of analyzing the environmental performance issue. Indeed, after studying why companies implement environmental strategy and how far this affects financial performance, it seems that the actual issue is more about how companies address the consequences of climate change that affect their own corporate business strategy. Even in developed countries, the increasing scarcity of certain natural resources obliges companies to modify their manufacturing process to make them more energy efficient and, through this, less polluting.