Explaining Corporate Environmental Performance: How Does Regulation Matter?

TLDR

The study investigates how regulation influences corporate environmental performance, its relative importance versus other incentives, and the factors explaining variation across firms. The authors analyze environmental performance in 14 pulp and paper mills across Australia, New Zealand, Canada, and the United States. Regulatory tightening and political pressure over three decades improved and converged pulp mill environmental performance, with many firms exceeding compliance, yet residual differences stem from social‑license pressures and management style, while economic limits curb further gains, and regulation remains a key coordinative mechanism that interacts with market and activist forces to reduce performance disparities.

Abstract

How and to what extent does regulation matter in shaping corporate behavior? How important is it compared to other incentives and mechanisms of social control, and how does it interact with those mechanisms? How might we explain variation in corporate responses to law and other external pressures? This article addresses these questions through an study of environmental performance in 14 pulp and paper manufacturing mills in Australia, New Zealand, British Columbia, and the states of Washington and Georgia in the United States. Over the last three decades, we find tightening regulatory requirements and intensifying political pressures have brought about large improvements and considerable convergence in environmental performance by pulp manufacturers, most of which have gone “beyond compliance” in several ways. But regulation does not account for remaining differences in environmental performance across facilities. Rather, “social license” pressures (particularly from local communities and environmental activists) and corporate environmental management style prod some firms toward better performance compliance than others. At the same time, economic pressures impose limits on “beyond performance” investments. In producing large gains in environmental performance, however, regulation still matters greatly, but less as a system of hierarchically imposed, uniformly enforced rules than as a coordinative mechanism, routinely interacting with market pressures, local and national environmental activists, and the culture of corporate management in generating environmental improvement while narrowing the spread between corporate leaders and laggards.