Benefiting from Pollution Prevention
By: James E. Haklik
Transformation Strategies

What if companies reduced pollution because it made good business sense, and not because they were forced to by laws and regulations? Well, this is the goal of ISO 14000. Its purpose is to reduce pollution by providing voluntary standards for environmental management systems (EMS). It is expected that companies will implement ISO 14000 because of the benefits provided by standards, registration and pollution prevention. This article looks at the idea of benefiting from pollution prevention, presents the results of research on this issue, and recommends ways to support ISO 14000 and pollution prevention.

Reduction of pollution is the goal of ISO 14000, but the amount of reduction is not prescribed. Therefore, reduction results from voluntary actions supported by the management system. Voluntary programs such as ISO 14000 must justify their existence. A challenge facing supporters of ISO 14000 is convincing companies to register to the standard. There is a perception in industry that the benefits of registration may not outweigh the costs of the effort. Historically, the U.S. has used legislation and regulation to reduce pollution. Companies are accustomed to complying with environmental regulation and recognize such efforts as a cost of doing business.

Although intended as a voluntary system, there are countries that are adopting ISO 14000 as a standard and it may become a requirement for doing business in some of them. There also may be market forces that favor companies registered to ISO 14000. Thus, ISO 14000 may evolve from a voluntary standard to a requirement. However, until this occurs, ISO 14000 must compete with other uses for the corporate expense and investment dollar and against the legacy of regulation.

ISO 14001 provides a standard and comprehensive approach to environmental management systems with many benefits to registration. Companies can have an effective EMS and good environmental performance without registration. Since there are few sites with ISO 14000 registration in the U.S., there is little data available about the benefits achieved from registration. Thus, the research for this article sought to identify the benefits realized from all pollution prevention activities, including regulated activities, environmental management systems and ISO 14000.

There is a cost to pollution prevention and to establishing an EMS, so companies must receive benefits from voluntary efforts or they will be reluctant to make them. These benefits can take many forms; some of the major categories of benefits are operational, financial, social, regulatory, and marketing. Many companies have some form of an EMS because of the operational and regulatory benefits it can provide.

Companies implement voluntary projects to create profits in the future. Research and development, new product introduction, and plant modernization are all examples of voluntary projects for this purpose. These projects are measured by their return on the investment over time and on how long it takes to pay back the investment. There is competition among various projects for a company’s investment dollars.

Selecting a project can be a complex process. Two of the major criteria are return on investment and risk. The relationship between return and risk is very important. A project with a high return might have a risk that is relatively greater than the return. Also, the return might be attractive, but the risk may be so high that the potential for realizing the return is small. The nature of competition in a company’s market affects the perception of risk and reward. In some industries, high risks must be taken to survive. Companies manage their investments to achieve the best possible return for the level of risk they are willing to take. In our highly competitive global market, there is constant pressure on each investment to provide the best possible return. Risk, reward, and return on investment are important issues when considering voluntary pollution prevention projects such as ISO 14000.

One of the ways companies manage the performance of their investments is to track their costs and profit(loss). Annual reports include an "Income Statement" or "Statement of Profit and Loss" that shows from a very high level how certain categories of the business are performing. The Income Statement reports the operating results of the company. These include sales, cost of sales, expenses, and income or profit(loss). These figures allow investors and potential investors to judge how effective the company is at investing its money. They also provide a tool to judge the performance of different business categories and executives. The Income Statement in the annual report is at a high level, built by rolling up data from lower levels of the organization. Product lines and individual products are managed by tracking the cost to produce them and their profit(loss).

Profit(loss) is not used to manage all functions of the company. Some are considered overhead and there is no profit associated with their cost. They are managed as "cost centers." Companies invest in people, equipment, buildings, and services to comply with regulations to prevent pollution. This is recognized as a cost of business, a cost that affects the profitability of the company, but which may not produce a profit. So, pollution prevention is generally not a profit center, but is reflected as a cost of sales or an operating expense.

However, there have been efforts to make functions that were previously cost centers into "profit centers", which have full profit and loss responsibility. For example, the Information Systems organization in some companies has become a profit center by calculating the value it brings to other parts of the company. The change from a cost center to a profit center helps the company manage its investment to gain the greatest benefit.

Because of the important role that benefits play when companies decide how to spend their money, Transformation Strategies began a research project to learn how companies have benefited from environmental efforts. An eight month effort consisted of the following activities:

The results of this effort are:

One of the reasons for the lack of detailed public information about benefits was expressed by Dr. Alvin Mushkatel, Professor at Arizona State University. Dr. Mushkatel has organized forums on waste management for ten years. These have been attended by representatives of industry, government, and higher education. He remarked that many companies do not share the details because they see them as competitive advantages. Sometimes a company reduces pollution by changing a production process with a waste byproduct so that a new byproduct is produced that can be sold to another company. This new process was developed at a cost to the company and it wishes to protect the profitability of the new product. Considering that companies may be reluctant to discuss in detail the benefits they have received, it may be difficult for the public to identify what these benefits are.

The research presented in this article raises many questions. First, are companies using profit and loss techniques with their environmental management efforts? At what levels? What levels are they comfortable with reporting to their investors and the public? Hopefully, these can be answered through future research. The answers will depend upon the willingness of companies to share information.

The importance of benefiting from a voluntary program leads to several recommendations. The first is: companies should track their costs and benefits using Environmental Income Statements. This would change the way environmental costs are viewed and would emphasize the potential for creating profits through environmental management. Focusing on profits would provide incentives to employees to find creative ways of preventing pollution that also benefit the company. 3M is well know for this outlook. They say "Pollution Prevention Pays", and they prove it.

To support the Environmental Income Statement, it is recommended that standards be developed for accounting to report the profit and loss of environmental projects. These standards would fit well within the ISO 14000 standard. They would be voluntary, but would provide a blueprint for companies to follow, relieving them of the burden of creating their own approach. These standards would address all levels of reporting, from the high level, typical of an annual report, to the lowest operational level.

There are many challenges to implementing this idea. It is difficult to identify all the costs that apply to a particular operation or project. At the lowest operational level, direct costs can be readily recognized (cost of a new scrubber, landfill charges, etc.), but indirect costs can be more difficult (EHS staff time, fines, etc.). A judgment must be made about how to apportion these costs, an effort that cost accountants are experienced in doing. Uniformity among all company operational units and among companies in an industry is important to help management make good business decisions. Since the benefits can take many forms, some of which have no dollars naturally attached to them, there is a challenge in identifying the benefit, assigning a value, and then apportioning the value to the various projects. Consistency is vital here, too.

The higher one gets in the hierarchy of cost/benefit reporting, the more that individual efforts are combined, and the easier this effort gets. An excellent example of a high level environmental management report is that of Baxter International. Baxter reports costs, benefits, and percent return; an excellent approach to high level management. . While top management can manage using high level information, the tough issues of cost and benefit allocation must be worked through at very low levels to have the maximum effect on the organization.

Another recommendation is to report the Environmental Income Statement to investors and the public. The amount of information reported is best answered by each company depending upon their own competitive situation. Certainly the high level reporting typified by Baxter poses no competitive risk and provides assurance to investors that the company is managing this category of costs in a responsible and aggressive manner. The objective is to report at the lowest level that is competitively viable and of interest to readers.

The recommendations presented here are:

These recommendations provide a foundation for establishing a new attitude about pollution prevention expenses. They will help companies become aggressive at finding new ways to benefit from pollution prevention projects, and thus improve their overall impact on the environment.

Research into these areas continues, and there will be future articles about the issues raised in this one. If you have comments, suggestions, or experiences you would like to add to this project, or would like to write an article, please contact us.

Return to Articles----Go to Site Map

Copyright 1996-2002 Transformation Strategies, All Rights Reserved ani-bear-green-e.gif (4753 bytes)