The American environmental movement seems to be in decline. After decades of mounting regulation, there is now a shift in Washington toward regulatory reform, cutbacks in administration and enforcement funding, and watered-down rewrites of the country’s leading environmental laws, such as Superfund and the Clean Water Act. Recent polls indicate that public support for the environment is fading as issues like crime prevention and the protection of individual rights capture a greater share of mind. And many of the United States’ largest nonprofit environmental groups have suffered steep falls in both membership and funding since their peak in the early 1990s.

As a result, many corporations are beginning to rethink their approach to environmental management. Historically, most companies took a defensive, compliance-oriented approach to the environment, focusing on delaying regulation and implementing end-of-pipe solutions. Starting in the late 1980s, however, businesses began to recognize the benefits of a more cooperative position; they invested in pollution control measures, appointed environmental representatives to their boards of directors, and agreed to new, more flexible, market-based regulations. Today, having made real progress in protecting the environment, these businesses seem to be getting the message that the tide has turned (Exhibit 1). They are starting to ask, "Should we continue to be environmentally proactive, working to anticipate regulation and shape creative new solutions? Or can we go back to the old ways?"

In spite of what current trends might suggest, turning one’s back on corporate environmental management would be misguided, and perhaps dangerous. Closer examination shows that the environment still matters, and will continue to play an important role in everyday business decision making and corporate strategy. Those who neglect it do so at their peril.

The threat of reform

Compliance becomes far more difficult when companies must adhere to multiple environmental mandates

There is much talk in Washington of shifting the balance of power back to individual states and reforming the funding and enforcement of federal environmental laws. Although most businesses believe that the devolution of environmental regulatory powers to state level is a welcome and long-overdue change, the consequences may not be as beneficial as they imagine. Certainly, state regulation means that decision-making responsibility is closer to those affected by environmental costs and benefits, giving companies better access and more opportunity to influence regulatory outcomes at the local level. But it is also true that heightened state involvement implies a more fragmented set of environmental requirements for most businesses. Compliance becomes far more difficult when companies must adhere to multiple environmental mandates that depend on where a product is produced, shipped, and sold.

Cases where states have already taken the environmental lead illustrate the types of problem that devolution may create:

Recycled content regulations for newsprint. Currently, 28 states have mandatory or voluntary requirements for the recycled content of newsprint produced, distributed, and/or sold in those states (Exhibit 2). To complicate matters further, each state has its own specifications for pre- and post-consumer waste types, recycled content requirement as a percentage of virgin pulp, and implementation date. Newspapers published nationally are having to decide whether altering their production and distribution processes to comply with individual state mandates is cheaper than simply adhering to the earliest and most stringent state requirement for their entire product line.

Clean Air Act mandates on vehicle emissions. Faced with the challenge of individual state compliance plans for the Clean Air Act, the petroleum industry has had to determine how to market gasoline to states with different sulfur content requirements. Although producers have the choice of selling several grades of gasoline or marketing a single grade that meets the strictest specifications, many customers are likely to be upset if their gasoline prices rise because of another state’s requirements. National producers must exercise caution in choosing to sell a single grade of gasoline, as smaller competitors could easily take advantage of lucrative local market niches.

Packaging requirements for consumer goods. State laws that restrict the use of certain packaging materials or mandate packaging volume reductions have frustrated consumer goods companies for years. The inconsistent treatment of packaging across states has forced product managers of nationally distributed brands to choose between costly packaging variations or a single universally acceptable—but possibly suboptimal—solution. In addition, some of the most intriguing new packaging innovations, such as multi-layer plastic food packaging, have been kept off the market because of recycling limitations.

Companies will thus be faced with the challenge of how to comply with numerous new state environmental requirements. Some will elect to meet each state on its own terms; others will implement standardized solutions to accommodate all possible variations; and some may decide to exit certain markets because of the increased costs.

One of the most important effects of state involvement will be the new competitive disparities it will produce

One of the most important effects of increased state involvement in environmental affairs will be the new competitive disparities it will produce. There are already significant geographical differences in environmental costs in such industries as petroleum, chemicals, and pulp and paper. In the last of these, for example, 25 percent of national production takes place in Louisiana, Alabama, and Georgia, yet only 16 percent of the industry’s environmental costs is incurred there. Conversely, Wisconsin, Texas, and Pennsylvania, with their more stringent environmental requirements, produce 13 percent of pulp and paper output for 23 percent of the total environmental cost.

Companies with production sites in states with more lenient environmental standards will have obvious competitive advantages over those located elsewhere. In addition to labor availability, access to raw materials, and energy costs, state environmental regulation is likely to become a key criterion in siting new production facilities in the future.

While many executives view EPA budget reductions as welcome relief from overzealous federal bureaucrats out of touch with the economic pressures affecting their businesses, the truth is that some of the more progressive federal programs, such as the Common Sense Initiative, may be among the first to be jettisoned. In working with businesses and stakeholders at the local level to develop more flexible rules and regulations, the EPA has lately been trying to introduce more sensible means of achieving national environmental goals. If, as has been proposed, its funding is sharply reduced, these more resource-intensive, collaborative initiatives may be lost, and the emphasis could swing back to the old command-and-control approach.

Similarly, enforcement funding cuts could prompt the EPA to focus its limited resources on "big-game hunting"—targeting only the largest companies for possible violations, rather than spreading itself thinly over smaller players. Not only would this increase the compliance burden for the bigger corporations, but it could permit smaller competitors to profit from less diligent compliance.

The cost/benefit analyses and judicial reviews of environmental laws may also produce unintended complexity. Although sure to delay and perhaps even overturn some regulations, these are expensive and unreliable means for seeking regulatory relief. Many companies fail to realize that they will not be the only ones able to argue for or against new regulation. Special interest groups will also have the right to challenge proposed legislation as being not stringent enough.

Because of the imprecise nature of scientific evidence and the subjectivity involved in evaluating the value of a human life, a tree, or a species, the outcomes of such contests will be difficult to predict. Companies will find it hard to plan for environmental initiatives when requirements can be passed, then overturned, and possibly reintroduced later in another form. If environmental policy does not already seem somewhat arbitrary and unpredictable, these reforms will clearly make it so. Strategic planning and long-term capital management will become extremely difficult in the face of such uncertainty.

Ultimately, we could be heading for a regulatory "backlash" like the one that followed the Reagan administration

Ultimately, we could be setting ourselves up for a regulatory "backlash" like the one that followed the end of the Reagan administration. If the regulatory reforms now under discussion fail to improve corporate environmental performance or, worse, actively cause the quality of the environment to be degraded, companies could soon be facing a new set of command-and-control directives from Washington.

People still care

Admittedly, public support for environmental issues has declined since the late 1980s, but it is important to interpret opinion polls in their proper context. Most Americans readily acknowledge that business has made substantial strides in protecting and preserving the environment over the past 25 years. This progress makes it only natural that fewer people are concerned about environmental issues than in the days of pesticide poisoning and rivers catching fire. If asked about their concern over the issues of women’s suffrage and civil rights today, the public would no doubt show a similar loss of interest compared with 40 or 50 years ago.

But this does not mean that people no longer care about a clean environment, or that they believe all our problems have been solved (Exhibit 3). In fact, as recently as May 1995, 70 percent of people surveyed said they did not believe the government had gone far enough to protect the environment. Moreover, 78 percent of Americans still describe themselves as environmentalists. There is a bedrock environmentalism alive in the United States that will not stand for any rollback of the laws that created the benefits enjoyed today.

Compared with the environmentalists of the 1970s and 1980s, contemporary supporters are not so outspoken and appear to be committed to the environment at a more personal level. According to a recent study by Roper Starch Worldwide, one in four Americans say they have done local voluntary work on behalf of the environment in the past two years. In many ways, the environment has become part of the national consciousness, instead of a radical fringe movement.

The other important fact about public opinion is that the younger generation is far more deeply committed to environmental protection than its elders. Just as baby boomers have come to accept the value of seatbelts and curbside recycling programs, today’s youth have grown up believing in the importance of a clean environment. Possessing a keener interest in and awareness of environmental issues, these younger Americans are likely to carry their environmental commitment into adulthood as tomorrow’s majority voters and consumers.

NGOs stage a comeback

Throughout the 1980s, nongovernment organizations (NGOs) like the Sierra Club and the National Audubon Society drew on a number of emotionally charged issues to boost their membership and funds. However, the early 1990s were plagued by declining membership and budgets and efforts that were spread too thinly across too broad a set of issues. Since then, environmental groups have begun to retrench, refocusing on their constituents’ core issues and reorganizing at the grassroots level. In addition, many have sought to boost their ranks of professional managers to deal with the growing administrative challenges of running a national organization.

Thanks to these efforts, the erosion of membership and funding has been halted at most of the largest environmental nonprofits, and a few are starting to show significant increases. The new political climate in Washington may well be partly responsible for this turnaround.

The role of NGOs in environmental activities is changing in line with their new focus. When NGOs attempted to work with lobbying organizations to influence legislation in Congress, they met with little success. But many are now finding they can be far more effective in direct grassroots campaigns. Evidence of their success can be found in such recent examples as Shell UK’s decision not to sink an offshore oil platform, as a result, in part, of Greenpeace-led protests. NGOs’ ability to capture the sympathy of the public and influence environmental decisions through direct action is more evident today than ever.

Customers seek environmental benefits

Issues such as environmental friendliness are proving to be the tie-breaker for otherwise almost indistinguishable products

Historically, price and quality have been the dominant criteria in customer purchase decisions, and though consumers state that environmental attributes are important, they have been unwilling to pay for them. But things may be about to change. Mounting global competition and continuous improvement initiatives have leveled the product market playing field in many industries. Today, "softer" issues such as environmental friendliness are proving to be the tie-breaker for otherwise almost indistinguishable products and services. Companies are responding to this consumer trend: one in nine new products is reportedly being marketed as possessing some form of environmental benefit.

For industrial companies, helping to solve a customer’s environmental problems can be an important way of differentiating products and adding value. Specialty chemical companies, for example, may work with their customers to eliminate hazardous waste problems by setting up new systems to collect and reprocess used chemicals. Environmental pressures can also create product substitution opportunities. Consider the current battle between timber and steel for the US residential framing market. Because of dramatic rises in timber prices brought on by logging restrictions and other environmental pressures, steel is now a cost-competitive building material fighting to capture share from the lumber industry.

Environmental considerations will increasingly influence customer purchasing decisions. Regardless of regulatory requirements, customer demands will force companies to address new environmental issues in the design, production, sale, and disposal of their products.

It is impossible to escape the conclusion that environmental management should remain a top priority for chief executives. Environmental issues promise to remain highly visible and time- and resource-intensive, and they will continue to put shareholder value at risk. Senior management would be well advised to continue its efforts to integrate environmental management into business decision making. Now is not the time to abandon the substantial progress that has already been made in managing environmental issues and risk a regulatory "backlash" by returning to a defensive, compliance-only approach.

Rather than beating a retreat, companies should be taking the lead in demanding flexible new regulations based on sound science and clear priorities. Environmental challenges and opportunities will continue to emerge well into the foreseeable future, and the companies that recognize and plan for this inevitability can only benefit over those that do not.