Time horizons of environmental versus non‐environmental costs: evidence from US tort lawsuits

Abstract

One explanation for a positive correlation between environmental and financial performance at the firm level is a bias in firms' investment evaluation processes caused by systematic differences between environmental and other investment opportunities. One of these systematic differences, often hypothesized but still unverified, is that environmental costs occur farther in the future than other costs. We empirically test this hypothesis, and find statistically significant support for it. In our data set the mean time lag for environmental costs was more than ten years, compared with five years for the control set costs. Such a difference could induce managers to accept too much environmental liability if they evaluate investments using discounted cash flow methods with a discount rate based on the firm-wide cost of capital. Copyright

Motivations and Barriers to Corporate Environmental Management

“…The barriers receiving the highest average ratings included high upfront expense, high day‐to‐day costs and significant upfront time commitment (Jones, ). Our findings support the findings of other studies that have found costs and time constraints to be among the most significant barriers to implementing environmental management measures (Bendell and Kearins, ; Johnstone and Labonne, ; Jones, ; Marshall et al ., ; Masurel, ; Regnier and Tovey, ; Simpson et al ., ; Stoeckl, ).…”

“…In one study, Masurel () found cost‐savings to be the most important influence on investment decisions, while important impediments to investments in energy‐saving technologies included the availability of more attractive investment opportunities combined with limitations on capital availability. Regnier and Tovey () suggest that organizations often use discount rates that favor the short term, while the horizon for environmental costs is longer and this leads to apparent underinvestment in environmental performance by firms. In this study, the collective effect of barriers is measured with an index of responses capturing perceived barriers constructed using PCA.…”

“…Third, relatively few studies specifically address barriers to environmental management, as does this research. When barriers are included, studies find the costs of environmental management to be one of the most significant barriers to implementing environmental management measures, particularly for SMEs and facilities operating in service sectors (Bendell and Kearins, ; Johnstone and Labonne, ; Jones, ; Masurel, ; Regnier and Tovey, ; Stoeckl, ). Studies also tend to find that regulatory pressures are among the most important drivers of environmental management, while also noting that SMEs have difficulty in keeping abreast of regulatory requirements and supporting compliance costs (Masurel, ; Simpson et al ., ).…”

Offshoring Decisions: A Comprehensive and Conceptual Framework

“…On the other side, there is a long period for measuring and quantifying the negative effects in the absence of investments in environmentally friendly policies, technologies, and strategies. An empirical study found that the mean time lag for measuring return on investments in the environmental costs was more than ten years (Regnier & Tovey, 2007). Extended time frames for return on investment decisions tend to motivate business leaders to ignore investments in environmentally friendly technologies because they are under pressure to show improvements in the organizations' performance to their shareholders on a quarterly and annual basis.…”

Moving Beyond Profit: Expanding Research to Better Understand Business Environmental Management

“…Few studies explicitly investigate specific barriers to voluntary environmental management, but among available findings, the most frequently reported issues are time, cost, and a lack of perceived benefits to investing in environmental strategies [3,4,9,17,21,32,43,44,46,106,107]. Findings show that such issues may disproportionately affect SMEs because these organizations: (1) have difficulty keeping abreast of regulatory requirements and supporting compliance costs; (2) experience lower consumer demand for environmental improvements; and (3) may lack an organizational network (e.g., trade association) that supports voluntary environmental management [21,94,104,105,108].…”