ANALYZING THE INFLUENCE OF ENVIRONMENTAL LEADERSHIP ON POLLUTION ABATEMENT

COSTS

Assoc. Assist. Oana Cătălina Țăpurică Ph. D Student The Bucharest University of Economic Studies Faculty of Management Bucharest, Romania Cristina Elena Ispășoiu Student The Bucharest University of Economic Studies Faculty of Management Bucharest, Romania

Abstract: The present paper aims to provide some empirical evidence regarding the relationship between environmental leadership and pollution abatement costs within different types of organizations. We provide a short literature review on environmental leadership approaches, as well as on the main types of pollution abatement costs, including the connection between these two concepts. Afterwards, we made some assumptions regarding the relationship between the environmental leadership and the evolution of each type of pollution abatement cost and we provide some empirical evidence in order to validate them, by using specific examples from Romanian companies.

JEL classification: H23, O13, M10

Key words: environmental leadership; environmental protection; pollution

abatement costs; strategic management; business performance.

1. INTRODUCTION

Taking into account the fact that human impact on natural environment has

increased lately as the economic agents became more and more competitive on their

markets, many researchers and practitioners have identified several large and complex

problems concerning the environment, which are mostly caused by the uncontrolled

pollution generated as a result of current activities carried out by economic agents.

Under these circumstances, managers and leaders within big companies have started to

exercise a new type of leadership, in order to overcome these problems and to find

sustainable development solutions, which is usually regarded as environmental

leadership (Moffat & Auer, 2006).

Although the term “leadership” is widely known, the term “environmental

leadership” involves some additional features, which are not common to the usual

leadership styles. Hence, environmental leadership is closely connected to a healthy

business development, performed under sustainability conditions, being intended to

provide a safe working environment, to support the downsizing of pollution abatement

costs, and to lead the organization towards achieving its social goals. Environmental

leadership, like many other economic concepts, is somehow related to the military field.

Therefore, the military historian John Keegan stated that there are five imperatives

which can be applied to environmental leadership: kinship, prescription, sanction,

action, and example (Viluksela, 2007). These imperatives were taken over within

business environment, under the assumption that environmental leadership should

promote such values in order to motivate people to fulfil their tasks by not harming the

environment. Under these circumstances, an environmental leader should possess a set

of qualities, such as: human-centred traits, a systemic approach, or the ability to act in

uncertain situations and to generate positive outcomes (Viluksela, 2007).

We assume that an environmental leader should be concerned about achieving

his goal harmoniously, so that his decisions will be focused on both reducing the

pollution and providing adequate solutions for increasing employees’ performance, as

well as organizational performance. Therefore, he should posses the necessary skills, in

order to harmonize the company’s business perspective with the environment, by

developing non-pollutant products, services, and policies.

Despite some theoretical considerations on environmental leadership, the article

aims to emphasize the impact of performing environmental leadership on pollution

abatement costs. We assume that applying this type of leadership within certain

industrial companies, the pollution abatement costs will decrease, due to the fact that all

taxes concerning the environment will decrease and, consequently, the company will be

motivated to develop environmental policies and to invest in eco-technologies.

The impact of environmental awareness on pollution abatement costs has been

largely investigated. Firstly, most of the authors consider there is a positive correlation

between environmental awareness and the downsizing of pollution abatement costs

(meaning that the companies which act environmentally responsible usually have lower

environmental costs than those which are not interested in environmental issues).

However, Brechet & Jouvet (2006) shown that adopting an environmental-friendly

technology, or even using best available technologies, may lead to more pollution and

less profit than applying the most popular and well-known technologies. They

emphasized the fact that environmental innovation does not necessarily reduce marginal

pollution abatement cost at all levels, even if there are many opposite opinions within

the literature (Kesicki & Strachan, 2011; Bovenberg, et al, 2008).

2. LITERATURE REVIEW

Given the fact that over the past decade the impact of economic activities on

the environment became more and more harmful, and the concerns of international

policy-makers in order to reduce this impact are very significant, the companies are

requested not only to deal with emission downsizing, but also with political, economic

and financial pressures arising from this matter of fact (Giannouli, et al, 2011). Under

these circumstances, the companies were determined to innovate, and to develop

environmental leadership, as a new leadership style, which is meant to successfully deal

with pollution problems and also to reduce the pollution abatement costs.

According to Gordon & Berry (2006), the essence of environmental leadership

is that leaders and followers not only interact but also empower each other. Hence, we

should wonder who is the leader when deciding which goods and services will be

marketed, or which technology is more adequate, in order to finally achieve the best

economic outputs. Is it the industry or the businesses that leads – and decides how

ecological or ethical the goods and services are – or are the consumers the real leaders,

by deciding how to use their buying power? (Viluksela, 2007). Moreover, Gordon &

Berry (2006) state that among the most interesting and characteristic of environmental

leadership is the extent to which it virtually permeates all boundaries.

Ecologists remind us constantly that ecosystems, at whatever scale we choose

to study or manage them, are open to the movement of matter and energy both in and

out (Shakir-Hanna & Osborne-Lee, 2012). The solutions to environmental problems

demand communication, understanding, and cooperation amongst many disciplines and

traditions. To enable and facilitate the changes that mankind is requested to deal with,

there is the need of effective environmental leadership and leaders. To solve the

environmental challenges, we need concerted action on many levels and fronts. To

design, initiate, and coordinate that action, we need systems intelligent, visionary, and

result-oriented leadership (Viluksela, 2007).

On the other hand, Borck, et al. (2008) consider that there are Environmental

Leadership Programs (ELPs) that recognize and encourage facilities with strong

environmental performance. ELPs offer benefits, including recognition and limited

regulatory flexibility to facilities that demonstrate that they comply with environmental

regulations, set environmental performance goals that go beyond compliance, and

report the agencies about their progress in meeting those goals. In addition to improving

environmental quality, agencies seek to use these programs to achieve social goals such

as reducing costs, improving relationships, or changing cultures within facilities.

Furthermore, Carmazzi (2005) asserts that environmental leadership is not

about changing the mindset of the group or individual, but in the cultivation of an

environment that brings out the best and inspires the individuals in that group. It is not

the ability to influence others to do something they are not committed to, but rather to

nurture a culture that motivates and even excites individuals to do what is required for

the benefit of all.

In addition to these statements, there is another one, which emphasizes the role

of environmental leadership on sustainable development. Economic sustainability aims

to raise the agricultural productivity and production in order to achieve food security on

national and international level. The aim of social sustainability is to improve

productivity and profits of small-scale agriculture and food security within the home.

The aim of environmental sustainability is to ensure the sustainable use and

conservation of land, forests, water, wildlife, fish, and water resources.

However, as stated before, most of the approaches regarding environmental

leadership are focused on descriptive theories, which illustrate the characteristics and

principles of environmental leadership. Despite their invaluable contribution to the

development of theoretical research in the field of environmental leadership, they are

not supported with clear evidence about how environmental leadership might influence

the performance of a company.

In order to develop this undiscovered field of research, this paper aims to

clarify some issues regarding the influence of environmental leadership influences the

pollution abatement costs.

Reassuming a previous approach of Ciobotaru & Țăpurică (2011), we shall

divide the pollution abatement costs in four major categories:

• cost of direct damage;

• cost of avoiding damage;

• cost of compliance;

• cost of pollution control.

Related to pollution abatement costs, Brechet & Jouvet (2006) claim that

environmental innovation does not necessarily reduce the marginal cost of pollution

abatement at all pollution levels as it is known. It may happen that the innovating firm

pollutes more than the non-innovating one, depending on the policy instrument imposed

by the regulator. The effect on profits can also be unexpected.

Last but not least, we assume that environmental leadership has a significant

impact on reducing pollution abatement costs throughout its connections with

sustainable development and its capacity to motivate people to achieve economic,

ecological, and social common goals.

3. RESEARCH METHODOLOGY

We use descriptive methods based on empirical research, for analyzing possible

connections between the current use of environmental leadership and the dynamics of

pollution abatement costs.

The paper comprises a cause-effect approach for describing the expected

impact of applying environmental leadership principles within the environmental

performance of a company, and we state hypothesis regarding the connections between

these two elements. We also use case study evidence for validating or invalidating the

hypothesis. Given the fact that environmental leadership is not a very popular concept

among Romanian managers and entrepreneurs, the evidence is collected from a small

sample, which makes it inappropriate for statistical processing, as it might not be

representative for drawing pertinent conclusions.

4. THE INFLUENCE OF ENVIRONMENTAL LEADERSHIP ON POLLUTION ABATEMENT COSTS

Further we will focus our analysis on approaching in a cause-effect manner the

expected impact of environmental leadership on pollution abatement costs. Obviously,

our analysis will be focused especially on heavy industry, manufacturing, some energy-

intensive industries, and other industries which are well-known for their harmful impact

on the environment. Paradoxically, leadership (in general) and environmental

leadership (in particular), are most likely exercised within companies operating in

services field or in industries which require high qualified staff, but do not have a

harmful impact on the environment, which makes the analysis more difficult, given the

fact that there are only few companies eligible for performing such an analysis.

4.1 The cost of direct damage

The cost of direct damage includes the cost of all the irreversible damages

produced upon the environment, as a result of the economic activity (accidental spills,

uncontrolled explosions, gas emissions, etc.). In Figure 1 we emphasize the main causes

of direct damage, which are susceptible to generate a wide range of negative effects,

and to raise the cost of direct damage.

Assuming the case of big corporations operating in highly polluting industries,

which activities’ involve a possible direct damage on the environment, we assume that

environmental leadership is expected to lead to a gradual downsizing of the cost of

direct damage.

The causes of direct damage could be divided in exogenous variables, which

are due to the market the economic agents operate on (the type of industry, the current

technologies, monopolies, etc.) and endogenous variables, which can be seriously

downsized by exercising appropriate environmental leadership techniques. For

example, some issues like personnel negligence or lack of environmental awareness

could be eliminated by convincing the staff that the customers expect them to change

something in their way of doing things and to act more carefully towards the

environment.

CAUSES OF DIRECT DAMAGE

TYPES OF DIRECT DAMAGE

EFFECTS OF DIRECT DAMAGE

ENVIRONMENTAL LEADERSHIP

· Accidental spills

· Uncontrolled explosions

· Gas emissions

· Wastewater discharges

· Toxic substances discharges

· Ecological accidents

· Damages on aquatic fauna and

flora

· Highly polluting industries

· Obsolete technologies

· Low environmental regulations

· Low competition on the market

· Personnel negligence

· Irresponsible managerial

attitude

· Lack of environmental

awareness within economic

agents

· Inefficient protection measures

· Underestimation of

environmental risks

· Ignorance of pollutants effects

on the environment

· Significant increases in costs of

direct damage

· Profit downsizing

· Alteration of competitive

position on the market

· Credibility losses with main

stakeholders

· Significant increases in

marginal costs

· Enforcement of polluter-pays

principle

· Increased risk of litigation and

lawsuits

· Increased breakeven points

and losses of market share

Source: Authors

Figure no. 1 Casual analysis on main sources of cost direct damage

This process usually involves all the native abilities of a leader, including

charisma, self-confidence, and the ability to motivate people for achieving an objective

they initially might not believe in. Environmental leadership could also fix the

irresponsible managerial attitude and could enhance adequate protection measures, in

order to avoid the enforcement of polluter-pays principle or even to reduce the risk of

litigation and lawsuits.

4.2 The cost of avoiding damage

The cost of avoiding damage includes the cost of all pro-active financial

measures taken by economic agents in order to prevent a direct damage (contingency

plans, pollution provisions, protection equipment, etc.). Environmental leadership

promotes a protective approach towards both the environment, and the company’s

credibility on the market, which leads to higher avoiding damage costs than usual.

However, the aggregate pollution abatement cost is the sum of the four types of

pollution abatement costs.

The most important and harmful component of aggregate pollution abatement

costs is the cost of direct damage, which is susceptible to generate environmental

damages and to obliterate the economic agents’ credibility on the market. The aim of

environmental leaders is usually to lower as much as possible the risk of occurrence of an

environmental damage, even if this means increasing the cost of avoiding damage (CAD).

Given the fact that environmental risk is the occurrence probability (p)

multiplied with the environmental impact (q), and assuming the environmental impact

of damage as constant, economic agents should choose to minimize the pollution

abatement costs (PAC). This relation could be represented in mathematical terms as

follows:

Min (PAC =C(p * q) + CAD), where

PAC = pollution abatement cost

C(p*q) = the cost of direct damage, depending on environmental risk

CAD = cost of avoiding damage

Therefore, environmental leaders should be able to optimize this relation. The

optimization key consists in an appropriate estimation of environmental impact (q). If

we assume CAD is known, environmental leaders should assess whether C(p*q) is

lower than estimated CAD. If this is the case, the economic agents could choose not to

invest in avoiding damage, but to wait for the environmental damage not to happen, or

to happen only a few times in a while. As stated above, the key for optimizing the

relation is the estimation of environmental impact, as it can be converted in money.

For insignificant impacts, the occurrence probability is not important, unless

very high probabilities will lead to a large number of small damages within a definite

interval, which gathered become more expensive than the cost of avoiding damage.

However, if environmental leaders estimate a fair impact on environment, they choose

to avoid the damage, even if apparently, in certain circumstances, the adequate decision

might seem to adopt a re-active attitude.

4.3 The cost of compliance

The cost of compliance includes all the expenses made by an economic agent,

in order to come into line with the environmental regulation (pollution fees, investments

in new technology, investments in purchasing green certificates or other tradable

permits, etc.). Unlike the previous categories of costs, the cost of compliance is a safe

expense for economic agents, as the compliance with environmental regulations is

mandatory. Therefore, the role of environmental leaders is not any more to make

decisions about making proposals of allocating or not financial resources for

environmental issues, but to decide when the most suitable moment for investing in

environmental issues is.

Environmental leaders are expected to anticipate the dynamics of the micro-

economic and macroeconomic environment and to adopt pro-active environmental

strategies aimed to get the company one step before the competition. For example,

environmental leaders should anticipate a possible new regulation and its long-run

effects and should act accordingly, so that when it becomes mandatory and the competi-

tors are obliged to invest in complying with the regulation, the company can focus its

investments in increasing market share or in other key factors for business performance.

4.4 The cost of pollution control

The cost of pollution control includes the cost of monitoring the emissions, so

that the maximum allowable limits won’t be exceeded (EMS implementation, EMAS

implementation, Environmental Strategic Plans). In this case the role of environmental

leaders consists in promoting the most adequate methods for environmental emissions,

ranging from the classic ISO 14001 EMSs to computational systems used for instant

pollution control (which are particularly used by nuclear, chemical, wastewater

treatment plants, or other large industrial companies, which can easily damage the

environment and are being enforced to use advanced pollution control techniques).

Even if these instruments exist, their efficiency is subsequently influenced by

the human factor, which, if properly modelled by the environmental leaders, could

enhance the responsibility towards the environment and could become more aware of

the impact of his activity on company’s environmental performance, or even on

company’s financial and business performance.

The cost of pollution control is related to the company’s impact on the

environment. If the current activity of the company involves low impact on the

environment, and the usual emissions are much below the maximum allowable quotas,

the cost of pollution control is very low, and, most likely, environmental leaders could

lack from the staff of a company. Otherwise, not only that the company will most likely

be subjected to high costs for ensuring the pollution control, but these costs will also be

supplemented on short run with the additional costs of hiring or training environmental

leaders, in order to downsize the long run shortcomings.

5. VALIDATING HYPOTHESES: A CASE STUDY APPROACH

Given the previous evidences, we state 3 major hypotheses regarding the

influence of environmental leadership on pollution abatement costs, as follows:

1. On short run, environmental leadership increases pollution abatement cost

2. On long run, environmental leadership reduces environmental risks and

contribute to the downsizing of pollution abatement costs

3. For small companies and companies which activities have low impact on the

environment environmental leadership has low impact on the business.

Further we will present some research findings which will validate or invalidate

these hypotheses, by analyzing the case of three Romanian companies. As initially

stated, the result do not support generalization, as they are not statistical representative,

but could represent the background for a further research.

In Table 1 we present the profile of the companies used during the research.

Table no. 1 Company’s profiles Profile element Company A Company B Company C

Year of foundation 1998 2000 2000

Number of employees 988 34 244

Main field of activity Waster supply, sewerage and

wastewater treatment

Retail Agriculture

Environmental leader(s) Yes Yes Yes

Turnover (ths. €) 26544 837 4448

Profit margin 4,42% 18,33% 2,11%

Environmental costs within last 3 years (ths. €)

349 11 205

Company A is one of the biggest regional operators in the field of water supply,

sewerage, and wastewater treatment services in Romania. Company A should comply

with national and European regulations regarding drinking water and wastewater and

should also match the customers’ expectations in terms of water quality and reasonable

supply costs. The company has incorporated within its business principles

environmental leadership for a few years.

Company B is a growing IT&C retailer which operates on the market since

2002. The company decided four years ago to follow the principles of CSR and

environmental leadership, as a way of achieving a long-run competitive advantage on

the market.

Company C is a medium-sized company operating in southeast of Romania, in

the field of agriculture, which was directly influenced by the soil pollution, partly

generated by its own irresponsible behaviour towards the environment, and therefore

decided to change attitude regarding this issue by hiring environmental leaders.

Within all three companies environmental leadership is being performed for at

least 3 years, and the top managers within these companies are already able to share

some incipient opinions regarding the impact of environmental leadership. These

opinions represent a primary background for validating or invalidating the research

hypotheses presented above.

5.1 Hypothesis 1: On short run, environmental leardership increases pollution abatement costs

In the case of company A, the hypothesis was not confirmed by the top

management. Company A already had some persons empowered to monitor

environmental issues in order to stay ahead of the regulations in the industry.

Fortunately, most of these persons were also informal leaders within the organization,

which involved no additional staff, no accommodation time, no additional salaries, no

additional training. They were just invested with additional authority and were given

extended tasks (to monitor some of the key processes within the organization, to discuss

environmental issues with process performers, to make people aware of their

responsibility regarding the environment protection, etc.). As environmental monitoring

was also a core issue within the organization, environmental leadership did not

increased pollution abatement costs at all, on short run. The new environmental leaders

enjoyed their new status within the organization, while the rest of the employees almost

did not notice the changes that were taking place within the organization.

Neither in the case of company B, was the hypothesis confirmed. Being a

developing company, the top management needed to hire a sales manager, in order to

coordinate sales processes within the company. Among the job requirements were

introduced some environmental leadership skills, in order to make the future job holder

compatible with both positions (as hiring a person only for being an environmental

leader was not an economic decision, given the size of the company and the relative

low impact on environment it produced).

In the case of company C the hypothesis was confirmed. In 2005, the

irresponsible behaviour of some employees of the company produced serious damage to

the soil where the company was cultivating cereals, which lead to 50% crop damage

that year, and low soil fertility for the next two years. The company had to pay some

significant fines and was also obliged to pay the land owners the rent, according to the

agreements between them. Moreover, in the next two years, the company faced lower

incomes. The company decided to enforce environmental leadership principles among

the employees. The costs were high: the companies recruited and hired environmental

leaders, the employees were included in training programmes aiming to make them

more aware of environmental issues, the environmental leaders suggested the

implementation of an EMS, which finally led to a short-run increase in pollution

abatement costs. Since then, there were not any environmental incidents whatsoever.

5.2 Hypothesis 2: On long run, environmental leadership reduces environmental risks and contribute to the downsizing of pollution abatement costs

In the case of Company A the hypothesis was confirmed. The top managers

noticed a higher commitment within the employees with regard to environmental

issues, which made the top management lower the risk provisions and make available

additional financial resources for other business purposes. The environmental

emergency plans became more accurate and the employees more ware about what are

they supposed to do in case of an environmental damage. Under these circumstances, it

could be noticed a smooth decrease of pollution abatement costs.

In the case of Company B the hypothesis was neither confirmed nor disproven.

The top manager of the Company B didn’t notice any change in pollution abatement

costs. He motivated that the activity had involved very low pollution abatement costs

before the environmental leader was hired, and it is unrealistic to assume a reduction of

these costs due to his activity so far.

In the case of Company C the hypothesis was confirmed. Since environmental

leadership principles were enforced within the organization, there were not any

environmental incidents involving the company, the people became more responsible in

performing their tasks, and their behaviour is closely monitored during their working

hours. The top manager appreciated that environmental leadership is not the only

variable which led to these changes, but admitted that it played a significant role either.

5.3 Hypothesis 3: For small companies and companies which activities have low impact on the environment, environmental leadership has low impact on the business

The hypothesis could be analyzed only for company B, and, as stated above, it

was confirmed. Environmental leadership didn’t caused any major changes in

Company’s B organizational climate and didn’t influenced the pollution abatement

costs either.

The results of the empirical research activity were summarized in Table 2.

Table no. 2 Outputs of the empirical study Hypothesis Company A Company B Company C Conclusion

On short run, environmental leadership increases pollution abatement cost

X X V

Further research should be carried out in order to

statistically invalidate the hypothesis

On long run, environmental leadership reduces environmental risks and contribute to the downsizing of pollution abatement costs

V Not verified V

Further research should be carried out in order to statistically validate the

hypothesis

For small companies and companies which activities have low impact on the environment environmental leadership has low impact on the business

n/a V n/a

Further research should be carried out in order to test the hypothesis on several small and

medium-sized organizations

The conclusions of the study reveals further research directions, according to

the preliminary results collected from the three organizations previously identified.

6. CONCLUSIONS

There are several variables influencing both the environmental performance of

an organization and the pollution abatement costs. One of these factors could be

represented by environmental leadership. However, it is usually very difficult to

quantify how much does environmental leadership weights in downsizing pollution

abatement costs, especially taking into account that some important variables, such as

the size of the organization, the pro-activeness towards environmental issues, the field

of activity the organization operates in, or the impact of the organization’s activities’ on

the environment should also be considered when analyzing. In developing countries,

and especially in industrial and rural areas, there are lots of top managers who did not

even hear about environmental leadership, which makes the analysis even much

difficult. Further research could be carried out in statistically validating or invalidating

some theoretical hypotheses, like the ones presented above in the paper, which involves

firstly gathering a representative sample of companies using environmental leadership

as strategic tool for enhancing environmental performance and subsequently for

downsizing pollution abatement costs.

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