Testing the market appetite for voluntary international environmental management certification

Posted on: 16 October 2023 by Dr Irene Margaret in Research

Dr Irene Margaret’s research tests the market appetite for voluntary international environmental management certification and examines the impact of a strongly binding multilateral agreement on the perceived value of adopting the ISO 14001 certification.

International management standards are considered as pivotal tools in achieving Sustainable Development Goals (SDG), as standards help to facilitate the dissemination and adoption of sustainability practices globally by providing a harmonised, stable, and globally recognised framework.

An example is ISO 14001, a prominent voluntary global standard of environmental management system.

Within the last five years, the number of certifications has increased by more than 66%, comprising 529,853 valid ISO 14001 certifications in 181 countries.

While this positive trend reflects global interest in addressing climate issues, the certificate literature suggests firms can suffer financial loss from having the ISO 14001 certification due to the negative investors’ reaction or the lower market valuation.

Do market actors have a different appetite for ISO 14001 certification? What kind of sustainability strategy that businesses should formulate so that it will pay to be green?

A firm’s sustainability practices become more valuable in the eye of market actors in the presence of a strongly binding multilateral agreement

The role of strongly binding multilateral environmental agreements

Given the costly adoption of environmental management systems (EMS) and ISO certification process, firms strategically use ISO 14001 as a signal to differentiate themselves from competitors, and as such, gain the market premium.

However, this signalling effect might be weakened or even diminished as the global diffusion of ISO 14001 make it no longer unique and distinctive.

In a recent article, we propose that ISO 14001 is effective as a value-generating tool in the presence of the strongly binding Paris Agreement.

This is because a strongly binding multilateral environmental agreement can effectively direct investors’ attention on environmental sustainability and elevate the need for a reliable, standardised reference of businesses’ commitments on climate actions.

In other words, a firm’s sustainability practices become more valuable in the eye of market actors in the presence of a strongly binding multilateral agreement.

We have had multiple multilateral environmental agreements, from the 1987 Montreal Protocol to the 2021 Glasgow Climate Pact, and with the recurring Conference of Parties (COP), and we are likely to have similar kind of agreements in the future.

Before the Paris Agreement, multilateral environmental agreements have been criticised due to low commitment from emerging and developing economies, leading to institutional failure in driving actions from large multinational corporations.

As indicated from our research, firms are likely to experience greater financial rewards from their sustainability practices in the presence of a strongly binding multilateral agreement.

Accordingly, rather than having more multilateral agreements, we need stronger enforcement at the multilateral level to drive corporate actions.

Winner and loser

Although a strongly binding multilateral agreement effectively increases investors’ appetite for the ISO 14001 certification, we found that the financial reward varies.

The binding commitments of advanced and emerging economies in the Paris Agreement create a common expectation of global environmental sustainability.

In this situation, firms from emerging economies benefit more from the ISO 14001 certification, because they are subject to a lower reference of corporate behaviour compared to their counterparts from advanced economies.

Although this finding seems to suggest that emerging economy firms can easily exploit international management standards to boost investors’ confidence, even as window dressing, investors will consider factual information about their international activities.

There has been a concern that firms employ ISO 14001 certification merely as a symbolic action or greenwashing.

This concern is pertinent to large corporations from emerging economies with international activities in both emerging and developing markets, as they can exploit their knowledge of doing business under low-quality institutions.

Nonetheless, our study indicates that managers who consider the ISO 14001 certification merely to “show-off their company’s EMS” or to “catch-up with the global trend” should be aware that market actors are less likely to value their certification when the firm’s geographic diversification strategy leads to lower exposure to stringent regulations.

As such, those exploiting institutional learning in “pollution havens” will be the biggest losers from having the ISO 14001 certification.

Dr Irene Margaret Lecturer in Strategy and International Business