environmental self-regulation and sustainable economic growth: the seamless web framework

Eco-Management and AuditingEco-Mgmt. Aud. 6, 61–75 (1999)

ENVIRONMENTALSELF-REGULATION ANDSUSTAINABLE ECONOMICGROWTH: THE SEAMLESS WEBFRAMEWORK

William J. Altham1 and Turlough F. Guerin2*

1Murdoch University, Australia2Environmental Adviser, USA

A ‘seamless web’ framework ofenvironmental regulation is emerging.The seamless web provides acomprehensive and holistic framework forfacilitating the transition to ecologicallysustainable development (ESD). Thisseamless web comprises numerousthreads, that is regulators and regulatorymechanisms, which provide theframework in which society may attaineffective protection from environmentaldegradation. Regulatory bodies includegovernment and state regulators, NGOs,industry peers, investors and consumers.Regulatory mechanisms and incentivesrange through lower costs, increasedmarket share and long term resourceaccess and sanctions ranging throughincarceration of directors, licensewithdrawal, fines, falling profits, loss ofmarket share and falling investorconfidence. We conclude thatself-regulation is a useful mechanism topromote environmental protection, and

CCC 0968-9427/99/020061–15 $17.50Copyright ? 1999 John Wiley & Sons, Ltd and ERP Environment.

that industry will increasingly facepressure to improve its environmentalperformance from many stakeholders.The seamless web framework recognizesthe pivotal role of industry inenvironmental regulation, catering for arange of corporate cultures, and therebystimulating innovation of appropriatetechnology. Copyright ? 1999 JohnWiley & Sons, Ltd and ERP Environment.

Accepted 3 February 1999

INTRODUCTION

T he environment, according to manyopinion polls, is the issue of the ‘future’(Gunningham, 1994a). Concern for the

environment has led to many innovations, foraand institutions that study, discuss or attempt toprovide solutions for our environmentally unsus-tainable social and economic system. The WorldBusiness Council for Sustainable Development,Brundtland Report, Agenda 21 and the EarthSummit, Climate Change Convention and OzoneConventions are just some examples of institu-tional responses to environmental problems.Many of these responses see industry involve-ment, through self-regulation in a broad sense, asa critical component of a successful resolution ofthese issues (Anonymous, 1996; Deavenport,

*Correspondence to: Dr. Turlough F. Guerin, 1691 E Green BriarsDrive, Suite 3821, Schaumburg, IL 60173, USA.

W. J. ALTHAM AND T. F. GUERIN

1996; Hemphill, 1996; Nash and Ehrenfeld, 1997;Jackson, 1998; Mullin, 1998a & b; Noor-Drugan,1998; Scott, 1998).

There is ongoing debate regarding the mosteffective forms of environmental regulation(Mullin and Sissell, 1996). Environmental regula-tions are required to correct market failures, whileoffering protection to the environment and futuregenerations. Full costs should be considered bythe market to ensure the correct allocation ofresources. However, environmental regulationsare open to political interference in a climatewhere there are high levels of uncertainty as tofuture technology, resource availability, industrygrowth, innovation and employment.

Self-regulation is increasingly being promotedas an efficient form of regulation and is beingincorporated into corporate environmental policymaking and implementation (Seif, 1995; Sheldon,1997). However, this has created heated debatewithin society. Industry fears that self-regulationmay become part of standard regulatory practice(Colby, 1997) under political pressure from envi-ronmentalists. Industry also fears that a voluntaryindustry framework, to allow companies to gobeyond environmental compliance within theirown time-frame, could become another regulatoryweapon by which they will be controlled, that itwould hit small business particularly hard and thatit could become a barrier to trade and increasecommodity prices (Blau, 1995; Samdani, 1995;Bridgen, 1996; Dwyer, 1996). Certain industriesalso see the introduction of further environmen-tal standards as additional, non-business work(Webb, 1995). On the other hand, environmental-ists maintain that self-regulation is a move to ‘pullthe wool’ over the public’s eyes, with the environ-mental movement having a distrust of initiativesfrom industry (Mullin, 1998a & b). Others arguethat the command-and-control framework, whichis the basis for most environmental regulations,is economically inefficient and have proposed avariety of market-based alternatives. The mostprominent alternative is industry self-regulation,which affords industry the opportunity to gainexemptions from specific command-and-controlrequirements by proposing different methodsfor achieving underlying environmental goals(Steinzor, 1998).

Industry needs to take an active role in thedevelopment of all forms of environmental

Copyright ? 1999 John Wiley & Sons, Ltd and ERP Environment.

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regulation if it wishes to ensure a balanced debatewith workable solutions. To encourage proactiveindustry involvement in setting and implementingcorporate environmental policy will require thedevelopment of institutions and governmentand state policies that manage risk and uncer-tainty for industry (Lepkowski, 1994; Jaffe andStavins, 1995). The development of feedbackloops, or improvement cycles, within companymanagement systems, which leads to continuousimprovement, is important if industry is goingto demonstrate environmental leadership. Thecommercial benefits of such a proactive approachto environmental management are becomingclear in numerous industries (Greis, 1995; Ferrone,1998; Jancsurak, 1998). Traditionally, environ-mental issues and concerns have been viewed as aconstraint to businesses and have resulted inenvironmental managers relying heavily on areactive, compliance-based approach to justifychange. Businesses are now recognizing thatefficient management in the environmentalarena can benefit the entire company andopen new opportunities for increased profits.Managers have acknowledged that environmentalissues can be integrated into daily businesstrends and activities (Metcalf et al., 1996). Notonly does sound environmental managementdecrease liability, but also, in current markets,a ‘green’ image can attract investors andcustomers.

It is argued in the current paper that a seamlessweb of environmental regulation has an ability toprovide the greatest protection to the environ-ment while stimulating the innovation and diffu-sion of environmental technology, catering fordifferent corporate cultures and providing a holis-tic approach to environmental regulation. Thispaper describes the development of a seamlessweb framework of environmental regulation. Thepaper divides the evolution of environmentalregulation into three stages in order of develop-ment (Figure 1(A) – (C)). These represent themajor groups of stakeholders in the setting ofenvironmental regulation for each of the stages(Table 1). The ISO 14000 environmental manage-ment system (EMS) standards (Begley, 1996) havebeen used as an example of self-regulation in thispaper and the specific definitions used are given inTable 2.

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SEAMLESS WEB FRAMEWORK

Figure 1. (A) Stage one – traditional environmental regulation. (B) Stage two – traditional environmental regulation influencedby market mechanisms. (C) Stage three – seamless web model of environmental self-regulation.

(A)

(B)

(C)

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MARKET FAILURE AND THEDEVELOPMENT OF ENVIRONMENTALREGULATIONS

A market failure occurs when the market does notproduce the allocation of resources that maxi-mizes the total level of social welfare. In otherwords, such failures occur when an importanteconomic factor is overlooked and therefore leftunpriced. Underpricing can lead to the rapidoverexploitation of a given resource and regulat-ory institutions should operate on the assumptionthat higher prices must be assigned to limitedresources (Brown, 1996).

Hawken (1993) comments that ‘markets aresuperb at setting prices, but incapable of recog-nizing costs’. The costs referred to here areexternalities, and these create a market failure. Anexternality occurs when a third party has to bearthe cost of the action of others, and is not fullycompensated (Philpot, 1992). Pollution is theclassic example of an externality. This cost ofpollution is largely borne by the community as asocial cost. Because the community and not theconsumer of the product carries some of thesecosts, the price of the product is reduced anddemand is increased.

A range of environmental regulatory mechan-isms are available to correct such market failures(Harris, 1996; Hyde, 1997). These vary in the


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degree of their government and state authority.Such mechanisms include traditional (command-and-control) regulation, market mechanisms andself-regulation measures. The effectiveness ofthese mechanisms varies depending on manyfactors. These include the culture of the organiz-ation under these regulatory mechanisms, thenature of the market failure, the opportunities forthe industry to alter their production methods andsubstitute materials, the resources allocated to theregulator, the visibility of the industry sector inthe market place and the expectations of thecommunity and other stakeholders.

THE ROLE OF TRADITIONALREGULATION

Traditional environmental regulation involveswhat is commonly called ‘command-and-control’.This includes flat taxes and charges, and directenvironmental regulations. They involve a gov-ernment or state institution legislating industrybehaviour (Gunningham, 1994b), in effect tellingindustry what it can and cannot do, and howmuch it will cost them (Figure 1(A)). Industryresponds to the regulations by addressing thespecific concerns with limited view to anygreater environmental impact reduction (Wilson,1997).

Table 1. Stakeholders in environmental regulation.

Stakeholder Influence

Government Set industry standards under political pressureState Set industry environmental performance standards under direction of governmentIndustry organization Influence industry standard settingsIndustry Influence industry standard settingsPeers Influence industry standard settings

Participate in trading under market regulationEnvironmental regulators Set and enforce industry standardsMarket Place where market regulation are tradedCommunity Influence environmental performance and standards through political pressureConsumers Influence sales, therefore profit of companyEnvironmental NGOs Influence industry standard settings through political pressureFinancial institutions Influence industry behaviour through reduced cost if environmental risk is managedInsurance sector Influence industry behaviour through reduced cost if environmental risk is managedInvestors Influence industry behaviour through supply of capital if environmental risk is managedWork force Affect worker productivity and staff turn-over

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Many problems with traditional environmentalregulation have been identified (Bovy, 1989;Susani, 1996). These including their inflexiblility(Wolf, 1988) and tendency to be directed bypolitical consideration (Brozen et al., 1990). Inaddition, limited power and resources availableto the regulator often leads to inadequateenforcement of regulations.

As far back as the late 1960s economists andindustrialists were questioning the economic ef-ficiency of traditional environmental regulations(BIE, 1992; Tyler Miller, 1994). The BIE (1992)provides a summary of concerns with traditionalregulations, while highlighting the benefits of themarket mechanism:

Many economists argue that direct regu-lations are static, inflexible and sub-optimalin terms of environmental and economic ef-ficiency. Direct regulation, despite its accept-ability by government, is cost-ineffective inreducing emissions when compared to bothpollution taxes and permits.

These statements were supported by studies ofthe costs of the two types of policy (traditionalversus market) on industry in the US’s Clean AirAct policy changes, with the shift to marketrequirements producing an estimated saving of$US900 million up to 1985 (BIE, 1992). Tyler-Miller (1994) claims that the current US bill forenvironmental protection of over $US120 billionper year could be cut by 33–50% if more effectivemarket-based policies were used.

However, possibly the greatest drawback withtraditional regulation is that, in general, it hasresulted in ‘end-of-pipe’ solutions to environ-mental problems (Nash and Ehrenfeld, 1997).End-of-pipe solutions are short-term, regulatory-driven solutions, which do not generally addressthe cause of the problem (Klassen and Angell,1998). Examples include where equipment isadded to the end of a process, such as filters andscrubbers to pollution discharge points.

Although sound and well enforced environ-mental regulations are an essential foundation forimproving environmental quality, command-and-control systems alone are not achieving the lowerlevels of pollution that will be necessary toachieve ecologically sustainable development(Rondinelli and Berry, 1997).


THE ROLE OF MARKET MECHANISMS

Market mechanisms require the establishment ofproperty rights for pollution emission and naturalresources, and a market in which to trade theserights, with the price determined by marketforces. In theory, market mechanisms allow natu-ral resources to be used for their highest marketvalue end use, by the most economically efficientoperators. Pollution is generated by sectors ofindustry with the greatest potential to pay, orthe highest control costs (though not strictlyalways the case). This leads to the ‘polluter paysprinciple’, in which

Trade occurs because low-cost polluters willfind it financially advantageous to cut pol-lution levels and sell permits, whereas highcost polluters find it financially advantageousto purchase permits rather than decreasepollution (Owen, 1991).

This trading mechanism allows the maximumproduction for any loading of total emissions. Inaddition, market mechanisms and tradeable permitsystems, in theory, are dynamic, allow for tech-nological innovation, allow new entrants into theindustry, expand markets and are self-adjustingfor inflation. All of these factors reduce theinvolvement of the state in environmental regu-lation (Figure 1(B)). An example of market mech-anisms is that of air emissions trading. Under theUS Acid Rain Program, and California’s RegionalReclaim Program, the US has demonstrated theeconomic and environmental feasibility of theseso-called ‘cap-and-trade’ programs. Now, emis-sions trading is being considered in other arease.g. northeastern US, where trading schemes areunder development to curb ozone precursors. Avariety of states have implemented tradingprograms to reduce NOx and volatile organiccompounds. Emissions trading is becoming inter-national as governments attempt to curbgreenhouse-gas emissions (Hairston et al., 1998).Such initiatives represent a fundamental change inenvironmental management. A key element ofemissions trading is the degree of complianceflexibility it affords individual operators (Hairstonet al., 1998).

The type of environmental regulation alsoaffects the organizations’ incentive to adopt newtechnology for pollution control (Jaffe and

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Stavins, 1995). In work by Milliman and Prince(1989) they concluded that

Direct controls, which are common regulatorytools, usually provide the lowest relative firmincentives to promote technology. On a rela-tive basis, emission taxes and auctioned per-mits provide the highest firm incentive for theadoption of new technology.

The major limitation of market mechanisms isthat they cannot set the physical limits to thelevel of harvesting of natural resources or theassimilative capacity of the environment. This is arole for science, but clearly our scientific knowl-edge is incomplete (BIE, 1992). For example, iftimber allocations or fishing quotas are set toohigh, the level of harvesting will be unsustainable.Alternatively, if the level of emission quotasallocated within a region is higher than the areacan assimilate there will be social costs associatedwith the activity.

The potential role market mechanisms mayplay in effective management of environmentalissues have recently been discussed (Gustafsson,1998). Although some assert that environmentalproblems could be solved by appropriate pricingof the environment and liberal application ofmarket mechanisms for environmental manage-ment, these types of simplification may overlookthe many complicating factors inherent inenvironmental degradation and the limitationsof market mechanisms as a means of copingwith environmental problems. These limitationsinclude problems in defining and enforcing prop-erty rights concerning functions and servicesprovided by nature (Gustafsson, 1998).

THE ROLE OF SELF-REGULATIONAND CODES OF PRACTICES

Self-regulation, including codes of practice andstandards, are developed by industry for manydiverse reasons, including as a means of showingsocial responsibility and a desire by industry toreclaim the agenda-setting of their industry fromother stakeholders. The development of EMSstandards (ISO 14001, BS7750 and EMAS) can beseen as the latest stage in the development ofmodern environmental regulation (Nash and


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Ehrenfeld, 1997). Self-regulation can include eitherperformance, content or process standards. It isthe process standard of ISO 14001 whichis now contemporary and is being adoptedinternationally (Hemenway, 1995; Snyder, 1995;Hemenway, 1996; Label and Tandy, 1998).

Simply defined, a standard is anything, a rule orprinciple, that is used as a basis for judgment, anaverage or normal requirement, quality, quantity,level, grade, established by authority, custom oran individual as acceptable. Standardization, andits application to business systems, is one of themost important aspects of effective environmentalmanagement, a prerequisite for management, andempowering employees to understand where thecompany is vis-a-vis work and performance( Johannson, 1994). The improvement process can-not be undertaken successfully until standards areestablished and understood.

Self-regulatory mechanisms, including the ISO14000 series, accept the legislative regulations asa minimum standard that industry must achieve.The standards then encourage industry to beproactive, encouraging continuous improvementthrough the management process. ISO 14000 isa series of voluntary EMS standards, developedby the International Standards Organization(Struebing, 1996; Burns and Fredericks, 1997;Iwanski et al., 1997; Hersey, 1998). These stan-dards provide a framework by which an organ-ization can focus attention on its internalmanagement activities. This allows the organiz-ation to integrate environmental managementwith other existing management considerations(such as production, sales, finance, safety andquality), with the aim of achieving continuousimprovements in the organization’s environ-mental performance. The overall aim of ISO 14000is to support environmental protection andprevention of pollution in balance with socio-economic needs. This series of standards coverthe following major areas:

(i) environmental management systems,(ii) environmental auditing,(iii) environmental performance evaluation,(iv) eco-labeling and(v) life-cycle analysis.Self-regulation implies (to a large extent) no

legal requirement to comply. Therefore someother type of incentive for organizations to adopt

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such mechanisms is required. The major initialincentive for organizations to adopt self-regulation, including ISO 14001, is provided bythe market. That is, organizations adopting themwill, it is commonly claimed by advocates, be moreefficient and competitive, gaining a marketingadvantage in the longer term (Johannson, 1995).

Codes of practices can act as a trail to seehow industry is affected by changes in regulation.On occasions, sections of these codes haveeven become incorporated into law, such as thedangerous goods code in Australia, which hasbecome Federal law. There is the problem ofverifying that individual industry organizations,claiming compliance to a particular code, are infact complying with that code. To minimize thisproblem and increase the public’s confidence inthe minerals industry, the Minerals Council ofAustralia (MCA), for example, requires memberorganizations to be externally audited at leastevery three years against the MCA Code forEnvironmental Management.

INTEGRATING THE COMPONENTSOF ENVIRONMENTAL REGULATIONINTO A SEAMLESS WEB

With continuous additions to the regulatorymechanisms, it is often difficult to determinewhere any particular regulator or regulation fits.One way of understanding the situation isthrough the concept of a seamless web of regu-lation (Figure 1(C)). A seamless web of environ-mental regulation implies an integrated set ofregulations, regulators and incentives. Regulationsinvolve a mix of traditional regulation, marketmechanisms and self-regulation. Regulators in-clude federal and state regulators, NGOs, peers,other companies along the supply chain, serviceproviders, investors and consumers. Incentives forimproved environmental performance range from


lower costs to increased market share and longterm resource access, with sanctions rangingacross incarceration of directors, license with-drawal, loss of resource access, fines, fallingprofits, loss of market share and falling investorconfidence.

Even within an industry, individual organiz-ations will respond to environmental regulationsin different ways, depending on managementculture, size of the organization and the environ-mental sensitivity of the operation. Improvingenvironmental performance requires regulatorymechanisms that cater for a range of variables andstimulate industry to adopt new environmentaltechnologies. Traditional, direct environmentalregulation will always be required to motivatelaggards who are the slowest to adopt the mostappropriate course of action (Guerin and Guerin,1994). Proactive companies (innovators andleaders), on the other hand, will respond to theopportunities and incentives that self-regulationoffers to improve environmental performance.

Command-and-control environmental regu-lations and reactive organizations are unlikelyto develop management improvement cyclesbecause the aim of the organization under thismechanism is to meet their legal requirement(Figure 2). Further, market mechanisms generateonly limited incentive for organizations todevelop a continuous improvement cycle, becausethe aim of the organization is to meet their legalrequirements (and no more), at least cost. Industryself-regulation, through an EMS, can create agreater incentive for management to develop theimprovement cycle, which leads to a process ofcontinuous improvement in environmental per-formance (Kirschner, 1995; Crognale, 1997). Con-tinuous improvement is created because changesin environmental performance are measuredagainst present performance and not past per-formance or an arbitrary legal standard (Figure 3).Moreover this level of performance is continually

Table 2. Definitions.

Environmental regulation Means that control or modify organizational behaviour towards the environmentRegulators Stakeholders playing a role in creating and enforcing this modified behaviourState The unelected institutions and bureaucracy that carry out the affairs of stateGovernment The elected representative of the people

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under review by the organization to determinewhether it can be improved.

The concept of a seamless web removes someof the limitations of a regulatory system thatrelies on a single traditional regulatory mechan-ism, or single agency, to enforce environmentalregulations. These limitations include the problemof regulatory capture, skills shortages, budgetarycutbacks and political interference into the oper-ations of the regulators. Furthermore, it allowscompanies more flexibility in reducing costsassociated with dealing with the environmentalimpact(s) (Hesse, 1989; Young, 1994).

Within the concept of the seamless web there isno single best method of environmental regu-lation. As soon as an organization identifies underwhat category of environmental regulation theywill be controlled, they investigate methods toreduce that regulation’s impact on their operation.This action will often lead to measures thatwill reduce the effectiveness of the original regu-lation, and in some cases lead to an inefficient‘ratcheting-up’ effect of environmental regulation.


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Citizen Legal Standing

The proper functioning of the seamless webrequires two factors that are becoming moreprevalent in modern environmental policy. Thefirst is the granting of legal standing to allstakeholders under the relevant environmentalregulation. This provision allows individuals ororganizations to instigate legal action againstparties who in their opinion are not complyingwith legislative environmental regulation. Thisprovision supplements the resources the state hasto devote to enforcing environmental regulationswhile preventing regulatory capture. Industrysometimes claims that granting private standingwill lead to large numbers of ‘nuisance’ claims.However this does not appear to be the case.This citizen legal standing can also be usedto force public authorities to comply withrelevant environmental regulations and to en-sure environmental regulators act on breachesof environmental regulations carried out byorganizations.

Figure 2. The environmental management improvement cycle.

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Public Disclosure

For environmental regulations to work efficiently,all stakeholders need access to the relevant infor-mation. Therefore, the second factor required isenvironmental reporting by organizations inorder to aid informed debate and correct decisionmaking by stakeholders (Chynoweth, 1994; Nashand Ehrenfeld, 1997). This information must becomplete, accurate, relevant, easily understand-able and made available at short regular intervalssuch as in external company reports. The ToxicRelease Inventory (TRI) initiative introduced bythe US EPA is an example of this practice at work.Under this programme, companies reported ashaving the highest levels of emissions had thelargest stock price decline and subsequentlyreduced emissions more than their industry peers(Konar and Cohen, 1997).

Best Practice Licencing

To further illustrate the development of thisseamless web model of environmental regulation,the Western Australian Environmental ProtectionAuthority’s (WAEPA’s) Best Practice License initiat-ive (DEP, 1996) is described. Prior to the intro-duction of this initiative, most industries inWestern Australia operated within a system oftraditional regulation. All organizations receivedthe same incentive and the same legislative sanc-tions. With the introduction of the system,WAEPA offered a range of alternatives fororganizations, catering for differences in corporateculture and varying the level of monitoringrequired. There are four levels of licence available:a regulated licence, a partially monitored licence, amonitored licence and a best practice licence (BPL)(Baker, 1996). The system was introduced from1 October 1996 for all forms of licence except theBPL, whose criteria were released in 1998. After1 October 1996, organizations could choose toadopt their preferred licence as their licencerenewals occurred, provided the regulators acceptthe organization’s application. It is likely that inthis Western Australian situation laggards willcontinue to operate as before, that is under theregulated (command-and-control) licence. How-ever, organizations that are proactive have theopportunity to show leadership and obtain a BPL.If such organizations can demonstrate proactive


environmental management and go beyond com-pliance, they receive a benefit in accordance withtheir efforts. These benefits include lower licensefees (the theoretical maximum can be as high as$180 000AUS), reduced external monitoring oftheir operation and longer periods betweenlicense renewals.

An Example of Stakeholder Influence

A contrast of the influence that stakeholder press-ure can have on company behaviour, managementand environmental performance is illustrated byShell’s Brent Spar Oil Platform activity in theNorth Sea, and the Exxon Valdez oil spill inPrince William Sound, Alaska. The communityand the market sanctioned Shell, although Shellcomplied with legislation and with the support ofthe relevant government departments, when theyattempted to sink their oil platform, the BrentSpar (Greenpeace, 1996). In the case of the ExxonValdez oil spill, though many regulations werebreached, anecdotal evidence indicates that,despite the urgings of high profile environmentalcampaigners, neither the community nor the mar-ket sanctioned the Exxon Oil Company to thesame extent as Shell. This example demonstratesfor modern business the need to be aware of thestakeholder’s view, together with willingness bystakeholders to act on these views, as it shouldaffect a company’s environmental strategy if thecompany is to operate in their own long term bestinterest.

THE ROLE OF ISO 14001 IN THESEAMLESS WEB OF ENVIRONMENTALREGULATION

Industry Involvement

Industry is expected to play an increasinglyimportant role in developing clean, sustainableproduction systems. This is in response to regu-latory failures, increasing public expectation ofindustry’s environmental performance, and theuncertainty surrounding the effect of stateenvironmental regulations on growth and inno-vation (Heaton and Banks, 1997). The adoption ofISO 14001 should encourage organizations to

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develop an environmental strategy as an import-ant element of overall management decision mak-ing, together with a framework by which thisstrategy can be put into operation. Through thisframework, self-regulation can lead to significantimprovements in environmental performance(Gunningham, 1994b).

Models of Corporate Culture and BeyondCompliance

There are various models for corporate cultures,company actions and the benefits to firms and theenvironmental impacts of these actions. The re-lationship between actions and benefits variesbetween companies depending on their particularpriorities, and it is expected that there would bedifferences between and within industries. Anygiven firm will establish their EMS with specificgoals in mind. There are two important points formanagement to consider: (i) the development ofan EMS is a learning process for the organizationand (ii) the benefits are compounding. Any firmcan start with the simple inexpensive changesfirst, then with experience, develop their EMS to ahigher level at a rate and in a manner which iscompatible with the organization. For example,any company doing the minimum required forISO 14001 certification could be classified asObserve and Comply, while another certified firm,


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which is ‘truly’ environmentally proactive with alarge commitment to R&D into environmentaltechnology, can be classified as Proactive. Thispoint illustrates a problem with ISO 14001 in itspresent form. It should be recognized that theimplementation of ISO 14001 on its own isunlikely to bring about maximum benefits to thecompany, if the company or corporate culturedoes not accept the need for a continuousimprovement in environmental management(Anonymous, 1995; Kanegsberg, 1996; Rimich,1996; Epstein and Roy, 1997).

Any company, at any point in time, will besomewhere along the continuum of environ-mental performance. A company may shift to theleft of their present position, to observe andcomply. This would represent deterioration in thecompany’s concern for environmental issues. If acompany has no history in EMS and attempts tomove to True ESD, then it is likely it will havegreat difficulty in doing so. Such companies canspeed up the process of learning by devotingmore resources to their EMS. Components of aneffective EMS such as worker participation andchanges to corporate culture and mechanisms tointegrate environmental factors with other man-agement considerations take time and substantialresources to develop. Fortunately, there is aprocess of learning by doing.

Figure 3. Improvement of environmental performance in a company.

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The Prospects of a Market Solution to aMarket Failure

The public’s expectation of how industry shouldact regarding the environment has changed inrecent years. The natural environment cannotnow be treated as a free commodity or a dumpingground. More importantly, sections of society areprepared to act on these expectations, either bychanging spending patterns (Grabosky, 1995) orthrough direct actions (such as illustrated in Shell’sBrent Spar case). The US Superfund legislation isanother example where political and social press-ure is being used to make industry more account-able for their actions and correct past marketfailures. Surveys of the public in the US concludedthat more than 75% of participants classifiedthemselves as environmentalists (Nicklas, 1993;McInerney and White, 1995). Similar results wereshown from a survey conducted by the AustralianBureau of Statistics (1996) where 75% ofAustralians were concerned about environmentalissues.

Companies are having to assess and managethe environmental risks of their operation(s), anddemonstrate this to service providers, investorsand other stakeholders, to ensure the long-termsupport of the stakeholders, and indeed the sur-vival of the company. These changes create thepotential for market pressure to be broughtagainst a market failure. However, if we were toleave it up to the market to trigger the change,the results would be much slower and moreerratic than socially desirable or acceptable. Hencethere is a requirement for public policies tocomplement the incentive for industry to adoptnew technologies. This could be achieved throughlegislative reform and recommendations in rela-tion to the US environmental laws and regulatoryframework have been presented by Heaton andBanks (1997).

This shift in organizational culture towards theenvironment, for whatever reason, is paralleled inother areas of organizational management. Areassuch as unfair dismissal, health and safety issues,childcare, maternity leave and redundancy pay-outs are examples where corporate attitudes havechanged in recent times.

There are likely to be many sceptics to theargument being mounted that the market andindustry can protect the environment, claiming


that self-regulatory standards are another way bywhich industry can ‘pull the wool’ over thepublic’s eyes. This is being too cynical. Fewadvocate the removal of other types of environ-mental regulation. Both environmentally pro-active companies and ISO maintain there willalways be a need for the ‘carrot’ and the ‘stick’.Both approaches are important threads of theseamless web of regulation. To this effect,Gunningham (1994a) states

The bigger the stick at the disposal of theregulators, the more it is able to achieveresults by speaking softly.

This is supported by Stoughton (1994), whoargues that

Voluntary programs have the potential toaffect significant changes in environmentalbehaviors, and can be effective policies forenvironmental protection. They often depend,however, on a strong enforcement role for theagency under its regulatory mandates, andthus must be a supplement, rather than areplacement for regulation.

These statements support the argument putforward in this paper that the time has come whenthe ‘carrot’ can play a greater part, by rewardingcompanies for being proactive in the field ofenvironmental management. For this process tobe successful, however, legislative environmentalregulations are required, and the size of the ‘stick’maintained or increased. To obtain the maximumenvironmental benefit of environmental manage-ment systems (including those based on ISO14001), these regulations should be integratedinto the seamless web, providing another thread,and complementing, not replacing, existing regu-latory measures. The use of economic incentivesis normally preferable to the power of the law toalter human behaviour. We assert that both needto be available.

CONCLUSION

There can be a win – win outcome in the ESDdebate – when industry produces and the en-vironment is protected. Furthermore, the currentESD debate is not between environment and

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development, but rather between sustainable andunsustainable technology. Economies are achiev-ing growth with reduced environmental impacts,through the appropriate use of innovations inenvironmental technology.

There is a clear indication that a combination ofa specific type of environmental regulation, cor-porate culture and public policy will stimulateinnovation in environmental technology. How-ever, the use of environmental regulation alone isan indirect and inefficient method of stimulatinginnovation in environmental technology. Insti-tutions and policies that manage risk and uncer-tainty should assist industry to adopt cleanerproduction methods.

The ‘evolution’ of environmental regulationidentified a problem with traditional environ-mental regulations in that they encouraged ineffi-cient, ‘end-of-pipe’ solutions. Market mechanismsgenerate incentives for the economically mostefficient solution, but they retain many of theproblems of traditional legislative environmentalregulation, including the absence of sufficientincentives for organizations to go beyond com-pliance. This evolution has led to the developmentof self-regulations that include ISO 14001. ISO14001 is a process or management standard that isforming an important thread in the seamless webmodel of environmental regulation. ISO 14001supplies the framework for industry to go beyondcompliance and it encourages continous improve-ment in environmental performance, based on afeedback loop that measures improvement frompresent performance, not an arbitrary benchmark.

The environmental result desired by organiz-ations under traditional regulation is to meet therequired legislative standards. The result desiredby organizations under a market mechanism is tomeet the required legislative standard at the leastcost. These are contrary to the desire of organiz-ations with a continuous improvement cycle intheir management system, and therefore, a desireand behaviour to improve environmental per-formance, and to move beyond compliance.Under traditional and market regulations, organi-zations have very little incentive to review theirenvironmental impacts, unless for legal reasons,and therefore a ‘set-and-forget’ mentality mayensue.

The incentive for adopting ISO 14001 is atpresent provided by the market, although this is


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starting to change as environmental regulatorsbegin to recognize benefits in having organiz-ations develop environmental managementsystems. The framework presented here, of aseamless web, requires the maintenance of tra-ditional environmental regulation; however, itallows the ‘carrot’ to play a greater part in thedevelopment and adoption of environmentaltechnology.

Modern environmental policy needs to bedeveloped so that industry and society gains themaximum benefit from all the threads and inter-actions of the seamless web, leading to betterenvironmental protection with the least impacton production and competitiveness for anyorganizations that accept this challenge.

A key attribute of the seamless web model isthat it provides a framework that does not rely onany one mechanism or stakeholder, so, where onemechanism or stakeholder may fail, another willfill the gap, allowing for on-going environmentalprotection. Furthermore, advocating a single regu-latory mechanism is prone to failure because thosebeing regulated implement management changesthat reduce the effect of the relevant regulation ontheir behaviour. In addition, complex authori-tative environmental regulations require largeamounts of public resources to be fully imple-mented and these resources are not always pro-vided. The seamless web model provides theflexibility to cater for different corporate cultures,a major requirement of modern environmentalpolicy. It also reduces the demand on public fundsto enforce legislative environmental regulations.Policy makers need to actively reduce risk anduncertainty while giving incentives for industryto be proactive, for these are the organizationswhich will help solve many of our environmentalproblems. The stick will still need to be main-tained as an important mechanism to activatelaggards.

It is recognized that there is a large amount ofenlightened self-interest in the process of self-regulation for industry. Therefore the process ofself-regulation will require external monitoring ifit is to attain credibility amongst stakeholders.Self-regulation allows companies to be flexibleabout how and when they address their environ-mental problems, reducing associated costs andimproving efficiency. However, industry mustrealize that this process will not necessarily reduce

Eco-Mgmt. Aud. 6, 61–75 (1999)


the level of scrutiny industry faces, but rather thedirection from which this scrutiny comes fromwill shift from the government and state to othersectors of society. Further, the required level ofenvironmental protection may not in all cases beable to be achieved at no cost to industry, and inthese cases traditional regulation and marketmechanisms will be required.

The stakeholders involved in environmentalregulation do not operate in isolation. To protectthe environment, in balance with economic devel-opment, the core aim of ESD, will require that allstakeholders play their part in an integratedseamless web of environmental regulation.

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Eco-Mgmt. Aud. 6, 61–75 (1999)


BIOGRAPHY

Dr. Turlough F. Guerin can be reached at 248Gladstone Avenue, Coniston 2500 New SouthWales, Australia.Email address: [email protected]

Dr. Guerin has expertise in environmental tech-nology and management systems and has workedfor ICF Kiser, Hamersley Iron and Rio TintoR&TD. He assists corporations with cross-industry technology transfer and the integratedmanagement of business and EHS issues and hasadvised to numerous corporations in the USA,


including the Motorola Corporation and Levine-Fricke Engineering.

William J. Altham can be reached at Institutefor Science and Technology Policy, MurdochUniversity, Perth 6510, Western Australia.Email address: [email protected]

William (Jim) Altham holds an EconomicsDegree and a Master Degree in ESD. His researchinterests include environmental managementsystems, green corporate strategy, regulation andinnovation in clean technologies, emissionstrading and renewable energy policy.

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