The United Nations reported in October that to address the threat of climate change requires transforming the global economy at a speed and scale with “no documented historic precedent.” The United States Global Change Research Program reported in Volume II of the Fourth National Climate Assessment, released Nov. 23, that “Without substantial and sustained global mitigation and regional adaptation efforts, climate change is expected to cause growing losses to American infrastructure and property and impede the rate of economic growth over this century.”
How, then, do companies fit into this transformation? What factors make it more likely that a firm will improve its environmental performance?
Glen Dowell, associate professor of management and organizations at Johnson, has spent more than a decade looking into these questions. Two of his recent articles illuminate key factors that incline companies to adopt sustainable practices.
Glen Dowell, associate professor of management and organizations at Johnson, focuses his research on corporate sustainability, with a particular interest in firms’ environmental performance. A faculty affiliate for the Center for Sustainable Global Enterprise and a faculty fellow at the Atkinson Center for a Sustainable Future, Dowell teaches Sustainable Global Enterprise and Critical and Strategic Thinking at Johnson.
The first paper, “Will Firms Go Green if It Pays?” published in Strategic Management Journal in 2017, examines the long-debated connection between sustainability and profit. “A lot of work, both from practitioner and academic writing, tries to look at making money by being more environmentally or socially responsible,” says Dowell. “Implied in this is the idea that if you can show people it pays to be better, then they’ll do it.”
This is a reasonable assumption, but is it true?
To find an answer, Dowell and his co-author Suresh Muthulingam from Penn State collected more than 88,000 energy-savings recommendations from the Department of Energy’s Industrial Assessment Center (IAC) program, which provides free energy audits to small- and medium-sized manufacturing firms. The information from the IAC included each specific recommendation, its expected financial return, and whether the company ultimately implemented it. Dowell and Muthulingam (who was an assistant professor of operations management at Johnson, 2009–14) then asked two energy experts to rank the general classes of recommendation — 680 in all — based on how disruptive they would be to a firm: Was the recommendation a simple retrofit, like wrapping steam pipes in insulation, or would it force operational changes in, say, the supply chain or employee behavior?
Fundamentally, Dowell and Muthulingam found that firms don’t simply chase profitable environmental retrofits, but that they balance profitability against disruptiveness. “If an energy-savings initiative has payback in a year but it’s really disruptive, firms are not as likely to do it as one in which the payback is much slower but it’s also easier,” Dowell says. “And this is consistent with how firms behave: There is a lot of competition for capital, and there are reasons why you want to operate this week the same way you did last week.”
“If an energy-savings initiative has payback in a year but it’s really disruptive, firms are not as likely to do it as one in which the payback is much slower but it’s also easier.” — Professor Glen Dowell
The researchers found important nuance in this conclusion, though. If firms had evidence that energy-savings initiatives were effective — specifically, if other facilities within roughly 100 miles had done the same thing — then they were more likely to take disruptive action. Firms were also more likely to take disruptive action if local residents embraced environmental norms. Dowell and his co-author found that higher rates of membership in Sierra Club increased the likelihood that firms would invest in energy-saving initiatives, even if they were inconspicuous. Dowell found this to be a peculiar result: While plenty of research has shown the effect of environmental norms on highly visible environmental displays, like solar panel installations, “people don’t see it if I put a new furnace or insulation in my business.”
Dowell’s research points to a common oversight when incentivizing companies to adopt technologies that improve environmental performance: Company leaders consider a whole series of factors besides profit when they undertake energy-savings initiatives. “We need to realize that it’s not just financial returns that managers are responding to,” Dowell says. While rebates and tax incentives are great, governments ought to pair them with strategies that normalize new technologies and make their adoption less disruptive. For instance, publicizing other nearby firms that have adopted the same technology may help lower perceived barriers to installation. In the end, says Dowell, “the financial return does not increase the probability of adoption as much as whether a given initiative is relatively easy to undertake.”
What happens if a clean firm buys a dirty firm? What about the other way around? Regardless of who acquires whom, the practices of the cleaner firm improve the practices of the dirtier firm.
In another paper recently published in the Strategic Management Journal, “Environmental Performance and the Market for Corporate Assets,” Dowell studied how acquisitions affect environmental performance. What happens if a clean firm buys a dirty firm? What about the other way around? To investigate this question, Dowell and his co-authors, Luca Berchicci of the Erasmus University Rotterdam and Andrew King of Dartmouth, gathered 15 years of chemical release information, by facility, from the U.S. Environmental Protection Agency’s Toxic Release Inventory. They matched this data with corporate ownership information. From this pairing, they pulled out 3,130 cases in which they could measure whether a firm’s environmental performance changed after acquiring, or being acquired by, another firm.
They found that, regardless of who acquires whom, the practices of the cleaner firm improve the practices of the dirtier firm. That is, when a clean firm buys a facility from a dirtier firm, the environmental performance of the dirtier facility improves, and does so reasonably quickly. When a dirty firm buys a cleaner firm, the dirty firm’s environmental performance improves.
To Dowell, this suggests that employees are transferring tacit knowledge — information often essential to a firm’s smooth functioning that can’t be readily written down in a user’s manual. Dowell likened it to riding a bike: You don’t learn by reading a book but by practicing how to shift your balance. “When you buy a facility that is cleaner than your existing one, having people who understand that and who move to your old facilities is a powerful way to get improvements you’re seeking,” he says. “It’s going out on a bit of a limb here, because you can’t actually observe tacit knowledge [transference], but that seems to be at least part of what’s going on here.”
This also, he says, raises intriguing implications about the undervalued potential of acquisitions to improve environmental performance. Consider the 2000 sale of Ben & Jerry’s to global giant Unilever. At the time, many environmental advocates saw this acquisition as the purest case of a company rooted in social mission selling out to — or undergoing an aggressive takeover by — a profit-driven Fortune 100. “People get very upset when socially or environmentally proactive firms are purchased,” Dowell says. But such reflexive reactions may be misguided. “Maybe we should all take a step back and say that purchases like this could be a really powerful means for the acquiring firms to get better,” he says. “Unilever would freely admit that it learned from Ben & Jerry’s.”