How Firms can gain rightful Environmental Legitimacy

Liliana Gelabert, Assistant Professor of Economics at IE Business School

Society’s increasing concern about the natural ecosystem is placing environmental management at the top of the corporate agenda and companies have become increasingly eager to associate themselves with an environment-friendly image. This is a direct consequence of the multiple pressures firms are subject to in order to operate in an environmentally responsible fashion, as investors discount share prices of polluting companies, governments introduce policies that place a cost on emissions, and consumers consider a company’s environmental philosophy when purchasing products and services. Despite this increasing consciousness about environmental issues, stakeholders often lack of sufficient information to be able to evaluate the environmental quality of the production process of firms. As a result of this asymmetric information problem, companies make all sorts of ‘green’ efforts to communicate positive information about their current and future environmental commitment in order to shape the public opinion and gain the approval of their stakeholders, that is, in order to gain environmental legitimacy.

Many scholars have explored the relationship between these increasing institutional pressures toward better environmental management and the actual adoption of different organizational practices associated with reducing the firms´ impact on the natural environment as for instance the adoption of the ISO 14001 Management System standard, the participation in voluntary governmental programs or the development of environmental innovation among many others. However little is known about the impact of these practices on the firm level of environmental legitimacy. In a research project I am currently working on with professors Pascual Berrone from IESE Business School and Andrea Fosfuri from Bocconi University we try to address this gap. To do so, we use media accounts from the Wall Street Journal to build a measure of corporate environmental legitimacy taking into account the number of articles reflecting a “legitimating” or a “legitimacy challenging” view of the firm´s environmental stance. Then we measure the impact of different types of environmental actions on our proxy for corporate environmental legitimacy. The environmental actions considered include the development of environmental patents, the implementation of environmental pay policies, the presence of a board committee dedicated to environmental issues, the participation in a voluntary environmental government program and the launch of an environmental trademark.

Our results indicate that the impact of these environmental actions is contingent on the firm past environmental performance. Firms showing more improvements in their environmental performance benefit relatively more in terms of environmental legitimacy from the implementation of environmental actions. A possible explanation is that past improvements in environmental performance, make environmental actions more credible signals of the current and future firm environmental commitment, boosting corporate environmental legitimacy. In contrast when the firm´s environmental performance has deteriorated, communications of environmental actions may be received with greater skepticism by the broader public becoming therefore weaker signals of environmental commitment. Indeed, we find that for the 20% of the firms with worst environmental performance in our sample, the announcement of the implementation of an environmental committee or the use of environmental pay policies or the participation in a voluntary environmental government program actually decreases its corporate environmental legitimacy.

Our research also shed light on the role of environmental Non Government Organizations (NGOs) in monitoring companies, shaping public opinion and influencing corporate environmental legitimacy. In fact, we find that firms that are subject to more monitoring by environmental NGOs are more penalized in terms of legitimacy when changes in emissions do not match with environmental policies and actions communicated by the company. In these situations, environmental NGOs will likely point out and amplify the inconsistency between the announced actions and the outcomes probably accusing the firm of ‘greenwashing’. NGOs can also coordinate activist groups and social movement initiatives like protests or boycotts exercising their voice and impairing the firm’s environmental legitimacy. Interestingly we do not observe a symmetric effect when firms show improvements in their environmental performance suggesting that environmental NGOs are less likely to be engaged in spreading the positive news or  in other words, in amplifying “good examples”.

Overall, our results indicate that communicating information on environmental actions can be effective in achieving social acceptance for firms that walk the talk however it can be very detrimental if the firm has deteriorated its environmental footprint and is subject to intense scrutiny by environmental NGOs. The analysis shows that NGOs are truly activists in confronting and challenging companies for their environmental misdeed. Therefore in the presence of stringent NGOs, an environmental stance is difficult to fake, and only genuinely green credentials are effective in acquiring environmental legitimacy. This is good news since it suggests that the actions of environmental NGOs can reduce incentives for firms to use ‘greenwashing’ practices. However, the fact that NGOs are relatively ineffective at praising good environmental actions does not motivate firms to try to go beyond the minimum regulatory requirements which would also be a desirable outcome. In this sense a broader approach that not only focuses on detecting wrong behaviors but also at amplifying “good examples” could increase the influence of environmental NGOs at creating better incentives in companies´ environmental management.

Liliana Gelabert, Assistant Professor of Economics at IE Business School
 
 

[This research paper has been reproduced with permission of the authors, professors of IE Business School, Spain http://www.ie.edu/]