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Assessing environmental performance
Despite an apparent diversity of awards and sponsors, there are remarkably few credible, independent, or objective sources of information about firms' environmental performance. The two principal sources of data in the U.S. are:
• Regulatory Agencies
• Business Media and Mass Media
Several agencies of the U.S. government have been empowered by legislation to collect and disseminate information about the environmental performance of firms. The agencies are part of a regulatory web in the U.S. that now requires firms to compile and report on a regular basis certain key measures that demonstrate the impact of these firms' operations on the environment. These government agencies are responsible for maintaining the data in useable form. The two key agencies in the regulatory web are the Environmental Protection Agency (EPA) and the Securities and Exchange Commission (SEC). The quality and availability of their data varies.
Among the most visible of databases is the Toxic Release Inventory (TRI) created as part of the U.S. Congress's Emergency Planning and Community Right-to-Know Act, also known as Title III of the Superfund Amendments and Reauthorization Act (SARA). Enacted in 1986, the TRI documents information on the types and amounts of toxic materials released by manufacturing units. The chemicals listed in the TRI range from mildly toxic to highly toxic. Since its inception, however, the list has changed as chemicals that were originally judged toxic have been removed from the list while others that were not on the original list but were subsequently found to be toxic were added. The TRI now covers 368 individual toxins and 20 chemical categories.
The information contained in the TRI is reported by the companies themselves. Facilities that manufacture, import, or process more than 50,000 pounds - or use more than 10,000 pounds - of toxic chemicals are required to report to the EPA the amount of those chemicals that were either released into the environment or sent for off-site treatment or disposal. Only since 1991 have companies been required to report chemicals sent to off-site facilities for recycling or reuse.
TRI data, as currently reported, have several drawbacks. First, they cover only about 0.5% of the approximately 60,000 registered chemicals. Second, many of the companies' TRI reports are based on estimated releases and not on definitive monitoring. Third, the list of chemicals in the TRI and reporting format are constantly updated, making year-to-year and firm-to-firm comparisons difficult. Despite these drawbacks, however, the availability of TRI data has meant a quantum leap forward in our ability to apprehend the impact that businesses have on the environment. The EPA is currently working on some of the drawbacks of the TRI and will hopefully develop a more inclusive and stable listing of toxic chemicals.
Several other databases on environmental issues are compiled by agencies of the U.S. government and made available to the public. The Aerometric Information Retrieval System (AIRS) database records companies' levels of air permit compliance, and is maintained by the EPA. The Occupational Safety and Health Administration (OSHA) of the U.S. Department of Labor collects and summarizes information on various worker safety and health related violations by companies. Information is available on the number of violations, the breakdown of types of violations, and the fines remitted as a consequence of OSHA violations.
The Sites Enforcement Tracking System of the EPA lists the number of federal Superfund sites at which a company has been identified by the EPA as a potentially responsible party. The Superfund is a pool of money collected from a tax on the chemical and petroleum industries created under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) which was passed by the U.S. Congress in 1980. Each Superfund expends money to "clean up" abandoned or uncontrolled hazardous waste sites. Before any clean-up takes place, however, a legally complex and expensive process seeks to determine responsible firms through careful historical examination; often lengthy legal proceedings are involved.
Securities regulation creates another key source of information on corporate environmental performance. Under modifications to the U.S. Securities and Exchange (SEC) Acts of 1933 and 1934, companies are required to declare "the material effects that compliance with environmental law may have upon capital expenditures" and to provide shareholders with dollar estimates of any other impacts on capital expenditures that might result from environmental compliance. They therefore require that firms provide investors with a rough estimate of the costs that were incurred or are expected as a consequence of a company's impact on the environment. Companies provide these data in many SEC information filings.
A problem arises, however. Although the new SEC reporting requirements provide easy access to cost estimates of environmental responsiveness, the estimates themselves are not necessarily reliable. For one, remediation costs are difficult to quantify. Moreover, no clear definitions of terms such as "compliance costs" exists, so that each company develops its own definition and therefore its own idiosyncratic estimates - of what compliance costs will be.
Besides regulatory agencies, the news media are the only other key source of independent information on companies' environmental performance. News reports are particularly useful in gathering and disseminating information about regional events. Whereas a company's overall environmental record might show good environmental performance, local news from a small community in which the company operates a manufacturing plant might tell a very different story. In recent years, the growing availability of large computerized databases that enable rapid search of diverse news media has significantly increased the power of even small town newspapers to reach a wider audience.
Despite the growing availability of information on firms' environmental performance, however, it remains true that most of the data are still widely dispersed and not easily accessed. Often they are buried in larger reports, or are presented in a format that requires aggregation, making it time consuming to collect and ambiguous to interpret them. To overcome these limitations, a number of nongovernmental organizations have developed over the years that play a pivotal role in facilitating collection and dissemination of environmental data. They include two principal types of groups:
• Social Monitors
• Corporate Coalitions
Both of these groups draw on common government and media sources for information about companies' environmental performance. They play a key role in summarizing and diffusing interpretations about firms to other observers.
Diffusing environmental information
Various social monitors dedicate themselves to gathering and disseminating environmental information on companies. Their primary purpose is to pull together from diverse sources information about firms' environmental performance. They act as a clearinghouse of sorts and make environmental information more readily accessible to consumers.
Social monitors differ in their information sources. Many rely exclusively on government data. Their reports tend to address customers interested in assessing environmental liabilities at a particular site. Of these social monitors, the following are among the more prominent:
• Environmental Data Sources, Inc.: A Connecticut firm that offers extensive searches of over 300 government databases.
• Vista: A company headquartered in California that provides environmental risk assessment based on a search of over 500 government databases.
• Others include: Dun & Bradstreet in New Providence, New Jersey; Environmental Risk Information and Imaging Services in Alexandria, Virginia; and Agency Information Consultants, Inc, in Austin, Texas.
A second group of social monitors relies not only on government data but on primary research to develop environmental profiles of companies. Kinder, Lydenberg, Domini & Co., inc., for instance, is based in Cambridge, Massachusetts and sells corporate profiles and a database of ratings on some 750 companies that are among the largest in the U.S. Their Domini 400 Social Index has gained visibility as a tool for monitoring the profitability of investments in socially responsible companies. The Investor Responsibility Research Center (IRRC) is a Washington D.C. not-for-profit group that provides short reports on government compliance data on all the S&P 500 firms. Finally, the Council on Economic Priorities (CEP) is a research organization based in New York that provides information about the social and environmental records of corporations, with the goal of influencing their "economic vote."
Social monitors: The case of CEP
Although there are a growing number of social monitors who issue ratings of companies, we focus here on those of the Council on Economic Priorities (CEP) because of the breadth of their offerings as well as their availability in a variety of formats, including books, disks, reports, and lists. CEP's best-selling books aim to make consumers more socially and environmentally conscious. They include the organization's annual Shopping for a Better World (Ballantine Books 1990-1993; Sierra Club Books, 1994) and The Better World Investment Guide (Prentice-Hall). Both books provide user-friendly information on how corporations rate on various social and environmental performance criteria.
Besides publishing occasional books, CEP also regularly circulates 20-90 page reports on the environmental policies and practices of specific corporations. The reports are relatively unique in that they compare each company to others in the industry on a variety of criteria. Another service provides interested customers with more concise quarterly summaries of the social and environmental records of approximately 700 U.S. and international corporations.
Every year, CEP also conducts some more focused campaigns. The annual "America's Corporate Conscience Awards" recognizes firms whose policies and practices indicate abiding concern for social and environmental responsibility. The "Campaign for Cleaner Corporations" identifies some of the U.S.'s worst environmental performers relative to their industry peers. The campaign invokes participation from a wide range of consumer, environmental, civic, and investor organizations in a collective effort to improve corporate environmental policies and practices.
Critical to preparing these digests of environmental information are systematic procedures for collecting, analyzing, and presenting information. CEP relies on information gathered, not only from the EPA, OSHA, the SEC, and the regional and national media, but from other government publications, legal databases, business and environmental organizations, and corporations themselves. Most of the data are summarized in absolute terms as well as in comparative form to industry rivals.
Environmental ratings of companies are based on industry questionnaires that are prepared by CEP staff with help from industry and environmental experts. Companies provide self-reported information about their environmental policies and practices. Often the data re veal valuable insights that would not otherwise be available from secondary sources. They also provide judges with an insider's view, and so a more complete profile of a company's environmental posture.
Corporate information is combined with information gathered from secondary sources, including government databases, computerized searches of newspapers, periodicals, and other publications, internal CEP files, news clippings, company literature, annual reports, 10-K filings, proxy statements, and other SEC documents. All data are later reviewed and entered into an environmental ratings template. Each subcategory of environmental ratings is given a relative weight based on expert input from CEP's advisors. The subcategories are rated individually based on the ratings template. Finally, through a systematic computation process, an overall rating of the company is developed and communicated to both the company and to advisors, who review the rating and identify areas for clarification, more information or discrepancies. Any new information acquired in the process is input into the rating template and a new rating computed for each subcategory. The subcategories are then recombined to obtain a revised overall rating.
In most of its work, CEP relies on panels of judges to determine which firms to nominate for awards or to highlight on lists. Judges are invariably comprised of prominent experts from the relevant disciplines. Nominated firms are contacted for additional information, based on which the panels determine which companies to include and decide the lists and the winners to announce publicly.
Besides social monitors, a number of groups have coalesced into networks to share environmental information, communicate best practices, create standards of environmental reporting, or disseminate reports to consumers. Two of these are among the more visible: The Coalition for Environmentally Responsible Economies (CERES) and the Public Environmental Reporting Initiative (PERI).
CERES is a not-for-profit membership organization comprised of leading social investment professionals, environmental groups, religious organizations, public pension trustees, and public interest groups. The network was launched in 1989, and focuses on the various ways investors can help to implement environmentally and financially sound investment policies. In 1993, the coalition claimed to speak for more than 10 million people and to represent over $150 billion in invested assets. The CERES Principles are a ten-point environmental ethic that endorsing companies pledge to follow by monitoring and improving their results on protecting the biosphere; exploring sustainable use of natural resources; reducing waste; conserving energy; enhancing product and service safety; restoring the environment; and informing the public. Endorsing companies back up these pledges with concrete information and public revelation in the annual CERES Report. Like some other social monitors, CERES Reports provide consumers with capsule summaries and longer reports of voluntarily disclosed corporate information. The reports do not assign relative rankings to endorsing companies.
Fig. 2 Monitoring Environmental Performance
The PERI Guidelines were developed by a coalition of companies from different industry sectors. The group researched how various social monitors like CEP and IRRC assessed companies and summarized their findings as guidelines for environmental reporting. The Guidelines are intended to encourage other companies to move voluntarily towards improving their environmental performance. The group does not in and of itself create reports; rather, it describes the kind of information a company should provide to consumers in order to demonstrate environmental responsiveness.
Figure 2 summarizes the major groups involved in monitoring companies and their environmental performance.
Consumers of environmental information
Not all consumers of environmental information are the same. For instance, although most reports are available to all interested parties for a fee, each is generally aimed at a specific audience. In-depth reports on corporate environmental performance are generally of particular interest to grassroots environmentalists, law firms specializing in environmental issues, large nonprofit groups such as the World Wildlife Fund, Sierra Club, and Greenpeace, as well as research organizations, lobbying groups, investment managers, institutional investors, environmental engineers, educators, environmental regulators such as the EPA, state-level Departments of Environmental Protection, and corporations themselves. Shorter reports tend to target socially-screened mutual funds, foundations, investment managers, and stock brokers who want to direct their investment dollars toward companies that are socially and environmentally responsible. CEP's best-selling guidebook Shopping for a Better World is aimed at consumers of corporations' products. It evaluates over 2,000 products of some 191 major companies with the objective of influencing consumers' purchases and, ultimately, corporate social and environmental performance.
The news media are both consumers of the environmental reports of social monitors and active disseminators. Reports of social monitors are often used by reporters for newspapers and magazines thereby magnifying the reach and impact of a social monitor on the public and, indirectly, on firms. The news media actually extends the reach of a social monitor to consumers who are not subscribers to its products. News reports based on a social monitor's reports or ratings also affect other groups that routinely monitor the news.
As varied as are the consumers of environmental information published by social monitors, so too are the uses to which that information is put. Business subscribers often use the reports of social monitors to read the environmental performance of their industry and to identify "best practices" to model. They often use those same reports to promote their own environmental performance.
Often competing social monitors will rely on each other's reports to inform their own campaigns and programs. The reports not only provide information on companies' environmental performances, but also are often pointers to sources of information that other social monitors might explore further. The in-depth reports of some social monitors also prove useful to small regional environmental groups looking for information on a company's local facilities. Government agencies and offices also use these reports as an added check on the accuracy of a company's environmental claims.
Many social investors, pension fund managers, and institutional investors find the information compiled by social monitors to be valuable in selecting investments or voting on proxies. Attorneys, environmental engineers, financial accountants, and public relations professionals use the in-depth reports of social monitors for a quick read on a company's environmental performance, saving themselves the enormous time and effort that would be required to put together a comprehensive profile of the firm. Educators and students use them as reading material in courses and as data for research projects. Many individual consumers rely on the guidelines of social monitors to help them choose what products to buy, which companies to invest in, and which companies to work for.
Environmental information disseminated by social and environmental monitors impacts corporate environmental practices in a number of ways. Some of the impacts are direct while others operate indirectly through a diffuse network of individuals and organizations. Often individuals in companies, even high officials, are not aware of their own environmental record. Often they are also unaware of what their competitors are doing, and how they compare to their competitors. Social monitors help companies directly to improve their environmental performance by providing subscribers with environmental digests and profiles that enable them to make decisions about their own environmental policies and practices. For these consumers, the information serves both as a report card of their own standing on environmental issues, as well as a benchmark against other companies which they want to emulate or surpass.
When a social monitor lists a company among the worst environmental performers in its industry, the group generally provides the company with recommendations for remedial action. At CEP, for instance, each company is invited to meet with the ratings staff and work out solutions to its environmental problems. The judges communicate to the company the various things it needs to do in order to demonstrate an improved environmental record. CEP therefore directly influences corporate decision makers, and thereby impacts corporate environmental practices.
Much of the advice provided to a firm comes from the expertise of experienced advisors, but it is enhanced by knowledge that other companies in the company's industry have developed and are using in their own environmental practices. In this way, social monitors also act as an industry-level disseminator of information about environmental best-practices.
Companies prefer to avoid bad publicity and are generally quick to react to news coverage that contains environmental information on their companies. News reports will therefore typically prompt firms to initiate public relations efforts as well as to take a closer look at their environmental practices - if only to avoid bad press in the future. The news media therefore play a key role in indirectly impacting business practices. Media reports also influence consumers, who react either by mail and phone campaigns to offending firms or by changing their buying patterns.
Social investors also rely on information from social monitors. They use environmental data to channel their investment dollars and vote their proxies. By reacting to environmental information, they send a message to offending companies about their environmental practices. As a result, environmental information compiled and disseminated by social monitors can also indirectly influence the firm's environmental practices.
In this way, then, social monitors play a key role in collecting and disseminating environmental information, and so stand to affect business practices. Despite these developments, however, much work remains to be done if we are to create a truly responsive and responsible business sector. We suggest some avenues to pursue.
Two questions come to mind when thinking about future prospects for improving the environmental performance of firms and achieving global sustainability:
• How might we improve on data currently available?
• How might we improve on information dissemination?
Impressive improvements have been made in data availability about U.S. firms in the last few years. Despite regulatory initiatives and the voluntary disclosure standards embodied in the CERES Principles and the PERI Guidelines, problems of standardization remain, making comparability difficult from year to year and from company to company. Stronger disclosure rules could help rectify these problems.
Without a doubt, corporate participation in voluntary disclosure programs helps. However, disclosure rules now require companies to estimate only the legal costs of compliance, such as those incurred in complying with regulations and paying fines for regulatory violations. Yet many of the real costs associated with poor environmental performance involve the loss of "reputational capital" that stems from negative publicity. Lowered market values of public companies are surrogate measures of the implicit costs of noncompliance that could be estimated and disclosed.
Finally, good environmental performance affords solid benefits, not only to those who live near unsound facilities, but to a company's consumers and other constituencies. It would be useful to balance the disclosure equation with estimates not only of hidden costs, but of hidden benefits. Estimating these benefits could be an attractive carrot with which to attract non-performing firms.
There may be ways to heighten cooperation among existing government agencies, NGOs, and others actively disseminating environmental information. As environmental awards, ratings, and reports proliferate, we need closer coordination among evaluating institutions to produce consistent reports. At a minimum, a closer alliance between social monitors would reduce the kinds of contradictory assessments that invariably damage the credibility and reputation of all environmental monitors.
In an era of rapidly evolving communications media, new methods could also be developed to tap, summarize, and disseminate environmental information. Most social monitors rely on labor intensive methods to distill environmental information and could doubtless benefit from more sophisticated access to computerized technologies for information manipulation. Here, too, we see significant potential for cooperative benefits in shared networks among social monitors to minimize duplication of effort.
Finally, we have dealt in this chapter exclusively with the situation in the U.S. Given the relative success of social monitors like CEP in the U.S., we foresee clear benefits from developing a web of such organizations worldwide. Only in this way might we improve environmental performance in the global village to which we all belong.