ISO 14001 certification and financial performance: selection-effect versus treatment-effect

Abstract

The paper explores the bi-directional relationship between ISO 14001 certification and financial performance with the aim of shedding light on whether better performance is due to the beneficial effects of ISO 14001 or due to selection-effects where better performance precedes accreditation. The study uses a five year longitudinal analysis to compare the financial performance of firms in Spain before and after certification. The results of a multivariate panel data analysis find that firms with better than average performance have a greater propensity to pursue accreditation but there is no evidence that improvements in performance follow certification. This suggests that the inference that environmental variables cause improved financial performance may be unwise in research studies that can only measure association.

Introduction

Commitment to the natural environment has become an important variable within current competitive scenarios (Graff, 1997). “Business-led” initiatives such as development of firm-structured environmental management systems (EMSs), participation in trade association programmes emphasizing codes of environmental management, and adoption of international certification standards for environmental management are becoming widespread (Anton et al., 2004, Nakamura et al., 2001). This is illustrated by registrations to the ISO 14001 EMS standard which have grown nearly 50% in recent years with 188,815 firms in 155 countries registered at the end of 2009 (ISO, 2009). This suggests that there is a widespread belief in the international business community of the benefits of ISO 14001 registration.

Although there is a plethora of research articles that study ISO 14001 EMS standard and their association with environmental performance improvement (Dahlström and Skea, 2002, Florida and Davidson, 2001, King and Lenox, 2002, King et al., 2005, NDEMS, 2003, Potoski and Prakash, 2005, Russo and Harrison, 2001, Szymanski and Tiwari, 2004, Schaltegger and Synnestvedt, 2002), there are few articles that examine the relationship between ISO 14001 and financial performance, and there is little of this research that can attribute causality. The inference often drawn is that ISO accreditation leads to higher levels of performance. What tends to be forgotten is that the opposite direction of causality could be true, i.e., successful firms may well have a propensity to pursue certification. Thus, environmental performance and/or its accreditation could be a kind of ‘luxury good’ for a company when it has reached a certain level of economic performance (Schaltegger and Synnestvedt, 2002). In other words, financial performance may influence environmental management (Wagner, 2005) because a firm with a good financial performance can allocate more resources to environmental initiatives. Moreover, it must be taken into account, as has been stressed by other authors (King et al., 2005, Potoski and Prakash, 2005), ISO 14001 accreditation is often market driven, adopted because customers require it, or because competitors have it.

Therefore, the aim of this article is to examine the relationship between ISO 14001 and financial performance with a particular emphasis on trying to establish the direction of causality in that relationship. To achieve this we compare the actual sales and profitability of ISO 14001 accredited firms with their performance prior to registration.

Furthermore, most quantitative studies are based on surveys in which the ratings were given by respondents that had taken part in the EMS introduction process (e.g. Sulaiman et al., 2002, Hamschmidt and Dyllick, 2001, Summers, 2002, Schylander and Martinuzzi, 2007). Any analyses of the effect of EMSs conducted in this way are subject to possible weakness and methodological distortion, so to avoid this problem we use only objective variables in our analyses.

The paper is structured as follows. First, we present a review of literature that considers environmental management, certification and performance. This is then followed by a description of our research methodology and presentation of our findings. These are then discussed and conclusions drawn.