Exploring the impact of the Paris Agreement on ISO 14001 certification market value

Posted on: 18 November 2024 in Research

Dr Irene Margaret’s research shows international environmental management certifications, such as ISO 14001, increase market value in the presence of a strongly binding multilateral agreement.

An analysis of over 3,000 multinational corporations (MNCs) demonstrates the institutional pressure exerted by the commitment to environmental obligations in the Paris Agreement, resulted in an approximately $315m (£250m) increase in market value.

However, the study shows differences in the value attached to ISO 14001-certified MNCs from emerging and advanced economies, with a greater positive financial impact for the former.

The results also indicate investors attach higher economic valuations to certified international organisations when they operate in foreign countries with stringent environmental regulations.

The study highlights the importance of strong multilateral enforcement, as it incentivises responsible corporate behaviours, to attract investor interest.

From a managerial perspective, the investigation emphasises the importance of aligning corporate sustainability with geographical diversification strategies, while legally it stresses the role of global operations monitoring to ensure environmentally responsible practices.

The value-generating power of the ISO 14001 certification

International management standards are considered pivotal tools to achieve Sustainable Development Goals (SDGs), as standards help facilitate the dissemination and adoption of sustainable practices, through a harmonised, stable and globally recognised framework.

As the most prominent global standard for eco-management systems, ISO 14001 provides a framework for organisations to improve environmental performance.

Adhering to this voluntary standard signals a commitment to taking proactive measures to minimise a firm’s environmental footprint, comply with legal requirements and achieve environmental objectives.

The popularity of ISO 14001 has increased dramatically in the past decade, reaching over half a million certifications across nearly 200 countries in 2022.

While this reflects global interest in addressing climate issues, there is evidence of lower market values of ISO 14001-certified firms and negative market reactions, casting doubt over the standard’s value-generating power.

Paris Agreement increased value of ISO 14001-certified MNCs

Before the 2015 Paris Agreement, global environmental accords lacked sufficient commitment from the signing parties, leading to institutional failure to encourage actions from MNCs.

In contrast, the Paris Agreement was the first international environmental treaty which established binding targets for advanced and emerging economies.

In their study, Irene and colleagues Dr Frederiek Schoubben and Dr Ernst Verwaal from KU Leuven, propose that ISO 14001 value-generating potential is enhanced by the Paris Agreement.

They calculated the market value of 3193 ISO 14001-certified MNCs with headquarters in 60 different countries, three years before and after the adoption of the Paris Agreement.

The results indicate ISO 14001 certification increased market value more strongly post-agreement, with the economic advantages constituting approximately £248m extra.

This suggests market actors place greater attention on sustainability practices in the presence of a strongly binding multilateral agreement, as it elevates the need for a reliable, standardised reference of business commitment to climate action. As opposed to having more international agreements, stronger enforcement at the multilateral level appears to be more effective in driving corporate actions.

Country of origin effects: greater market value for companies from emerging economies

Although a strong multilateral agreement increases investor appetite for ISO 14001 certification, the results show financial reward varies depending on where the company is headquartered.

The analysis indicates greater post-agreement market value for ISO 14001-certified companies from emerging economies (EM-MNCs) than for those in advanced economies (AE-MNCs).

The authors argue that, while the Paris Agreement creates a common expectation of global environmental sustainability in all countries, EM-MNCs are subject to a lower reference of corporate behaviour compared to counterparts in advanced economies.

Exposure to host countries with stringent environmental regulations

Although this finding seems to suggest EM-MNCs could easily exploit the ISO 14001 certification to boost investor confidence, this is contingent on their exposure to host countries with strict legal environmental standards.

The study indicates managers who use certification as part of a greenwashing exercise should be aware that market actors are less likely to value their efforts when the firm’s geographic diversification strategy leads to lower exposure to stringent regulations.

In other words, the study shows market incentive to adopt the ISO 14001 standard is greater for MNCs in “pollution halos” than those exploiting institutional learning in “pollution havens.”

From a legal perspective, this suggests policymakers should not solely rely on EMS adoption to achieve SDGs without ensuring environmental stringency.

This means efforts to encourage corporate social responsibility through formal law may not be effective unless MNCs are monitored by third-party agencies and exposed to strict regulations across their global operations.

Dr Irene Margaret Lecturer in Strategy and International Business