From institutional pressures to environmental innovations

A priority item on the agenda of political decision makers the world over and an issue in the spotlight of the media: environmental sustainability. It has even become a deal breaker in the choices of consumers, investors and workers, who are more and more mindful of the green philosophy as far as the way companies do business.

To respond to intensifying institutional pressure, companies are continually upscaling their investments in innovation by developing products, process and services that minimize damage to the environment, or by utilizing new methods for emissions treatment and waste management. Although there is broad consensus on the value of environmental innovation, what still needs to be investigated are the reasons why some are working in this direction more than others, and what conditions or external drivers prompt companies to pursue environmental innovation.

According to my research, published in 2013 in the Strategic Management Journal, what pushes companies to be more proactive environmental innovators is greater institutional pressure (both from governments and governmental agencies, as well as NGOs and other social actors). My study specifically looked at environmental patents granted to 326 US companies (in a five-year window from 1997 to 2001) in industries that are the biggest polluters, to find out how regulations and pressure from NGOs impacted their level of environmental innovation.

What emerged from my findings is that in companies whose reputations are tainted by environmentally negligent conduct with respect to their industry are more sensitive to pressure from regulators and NGOs. This result aligns with passive environmental innovation, responding to external pressure to lessen possible environmental damage. So it’s the companies that did less in the past that find themselves forced to shore up their investments in environmental innovation.

What’s more, companies are more likely to engage in environmental innovation when they’ve made substantial investments in this direction that they wouldn’t recover if they went out of business. These are the companies that risk the most when they get fined or targeted by activities or environmental NGOs.

Finally, companies that have sizeable internal resources have an ambivalent response to growing institutional pressures. On one hand, these organizations can afford environmental innovation thanks to such resources; but on the other, they can be used to implement greenwashing measures, which mitigate the effect of institutional pressures but do not generate a better environmental impact.

Institutional pressures, in particular when they are coercive, are generally geared toward environmental improvements in terms of emissions. Here technological solutions are often needed that can only be found by making major investments in innovation. As far as other environmental practices, which could be effective in the short term, environmental innovation is an initiative with a longer time horizon that requires heftier investments. But since there is a greater chance of substantially cutting emissions, this move will more likely produce a satisfactory response to institutional pressure.

Given that the competitive advantage of a company depends on its ability to innovate in a way that its rivals can’t easily imitate, environmental innovation represents an invaluable managerial strategy. In fact, external influence can spur managers to develop unique resources that would have a beneficial effect on company performance. What’s more, the trend in recent years is increasing attention to environmental impact among companies and along their entire supply chain. A passive response, a simple reaction to institutional pressures like the article describes, is no longer enough. The more virtuous companies will have to take the lead themselves, preempting regulatory bodies and pressure from activists and environmental NGOs, with increasingly innovative technologies to mitigate environmental impact.

My article was published nearly ten years ago, but it continues to accumulate a growing number of academic citations. (So far, it’s the third most frequently cited article of all the content published in the Strategic Management Journal from 2012 to 2014.) This goes to show that environmental innovation in companies is still an extremely pertinent research topic.