In recent decades, there has been a marked increase in concerns about the adverse environmental impacts of corporate production activities. This heightened awareness stems from the growing threats posed by climate change, resource depletion, and ecological degradation. As companies continue to prioritize profit maximization and shareholder value, their toxic emissions have come under scrutiny. These emissions have potential externalities associated with adverse effects on human health, reductions in local housing prices, and decreased worker productivity.
Amidst this environmental landscape, a pressing research question emerges: How does corporate culture influence a firm’s toxic chemical emissions? There is substantial anecdotal evidence indicating a strong relationship between corporate culture and sustainability. A notable example is Volkswagen’s response to the emission scandal. In September 2015, the U.S. Environmental Protection Agency (EPA) accused Volkswagen of manipulating emissions tests. This event, referred to as “Dieselgate,” represented a major crisis in the automotive industry. Volkswagen responded by implementing three key strategic shifts, including a cultural transformation towards ethical, collaborative, and purpose-driven operations. This shift enabled Volkswagen to evolve from being a company associated with pollution and deceit to one recognized for its commitment to sustainability. Our recent paper explores this topic in greater depth, examining the broader relationship between corporate culture and environmental impact.
MUNICH, GERMANY – 2021: Volkswagen IAA Way to Zero Talks (Photo by Martin Kloss)
Corporate culture is a composite of shared values, norms, attitudes, beliefs, and coordination mechanisms within a firm. It serves as the bedrock of a firm’s decision-making process. Corporate culture directs employee behaviors, influences organizational effectiveness, and subsequently affects a firm’s overall value and performance. In the context of environmental responsibility, corporate culture becomes pivotal. That is because a firm’s approach to sustainability is not merely a product of external pressures but is more likely to be deeply rooted in its intrinsic values and beliefs. Given the profound influence of corporate culture on a myriad of corporate outcomes, it is important to understand its role in shaping a firm’s environmental footprint.
Building on this foundation, we posit that firms ingrained with a strong corporate culture are more likely to exhibit lower levels of pollution compared to those with a weaker culture. A strong corporate culture, characterized by values like teamwork, innovation, respect, and integrity, could potentially steer firms toward more sustainable practices. On the one hand, a robust corporate culture spurs firms to actively tackle environmental issues since it fosters long-term orientation, employee diversity, and compliant behaviors. On the other hand, firms with a strong culture can effectively achieve pollution reduction by investing more in R&D activities and enhancing abatement efficiency.
Our initial analysis investigates the impact of corporate culture on firms’ toxic releases. We find that firms with a strong culture tend to release fewer toxic pollutants than those with a weak culture. Economically, a one-standard-deviation increase in the total corporate cultural value is associated with a 6.30% decrease in the log amount (000’s of lbs.) of firms’ total toxic emissions from the mean level of 4.10. In addition, a strong corporate culture is also associated with lower pollution intensity, suggesting that firms with a strong culture adopt an eco-friendlier growth approach. These findings underscore the importance of cultivating and nurturing a strong corporate culture within firms, as it can effectively contribute to the promotion of corporate environmental sustainability.
Next, we investigate the specific polluting activities of firms with a strong culture. We show that these firms actively mitigate toxic emissions associated with adverse environmental and human health impacts and appear not to engage in regulatory arbitrage by selectively targeting specific environmental acts administered by the U.S. EPA. Our results suggest that the superior environmental performance of firms with a strong culture is not merely a result of greenwashing practices. Furthermore, we examine the specific cultural values that primarily underpin the negative relationship between corporate culture and firm pollution. We find that firms with high cultural values, particularly in teamwork, innovation, respect, and integrity, are driven towards more environmentally responsible actions.
Channels Underlying the Relationship Between Corporate Culture and Pollution
We consider three potential channels to explain why firms with a strong corporate culture pollute less and achieve better environmental externalities. First, we find that enhanced diversity strengthens firms’ incentives to reduce toxic releases, consistent with the literature showing that improved diversity is associated with better environmental outcomes.
Second, we examine whether research and development (R&D) activities serve as potential channels through which firms with a strong corporate culture effectively mitigate their toxic emissions. We show that corporate culture is positively associated with R&D expenditures and that increased R&D spending helps alleviate firm pollution. This finding suggests that by allocating resources to R&D initiatives, firms can tackle environmental issues and implement innovative solutions to minimize their ecological footprint. Finally, we examine whether the lower emission levels of firms with a strong culture stem from the sacrifice of economic activity. We find that the decreases in firm pollution do not come at the expense of production. Firms with a strong culture appear to strike a balance between environmental responsibility and maintaining their productivity.
The Role of Environmental Policies Stringency
Our cross-sectional tests explore heterogeneity related to environmental policies. Specifically, we examine whether the stringency of environmental regulations affects the relationship between corporate culture and toxic emissions. Interestingly, we find that less stringent environmental policies, which were induced by President Trump’s election, strengthen the negative relation between corporate culture and firm pollution. When expected regulatory burdens decrease, firms with a weak corporate culture tend to show an inclination to increase toxic emissions. However, even in the face of changing external environments, firms with a strong corporate culture persistently adhere to their long-term environmental commitments, effectively managing their pollution levels (see Figure 1). This results in a more pronounced disparity in toxic releases between firms with a strong culture and their counterparts.
Figure 1 depicts average residuals of Ln(Total Release) (i.e., the log amount (000’s of lbs.) of firms’ total toxic emissions) in the two years before and after the election of President Trump in 2016. Ln(Total Release) is potentially explained by firm size, asset turnover, financial leverage, cash holding, Tobin’s Q, capital expenditures, and tangible assets. Therefore, we partial out these seven possible determinants of toxic emissions through a regression design and plot the average residuals of Ln(Total Release). Notably, the year on the x-axis is the end of the year. The blue line shows the results for firms with a strong culture. The red line presents the results for the firms with a weak culture.
Conclusion
Our findings have implications for policymakers, firm managers, and stakeholders who seek to mitigate the negative environmental externalities associated with firms’ toxic emissions. We highlight the importance of nurturing a strong culture to achieve sustainable and environmentally conscious business practices. Furthermore, our study sheds light on the mechanisms through which corporate culture affects toxic releases. At its core, our study reinforces the transformative potential of corporate culture in sculpting firms’ environmentally responsible business paradigms.
Wenquan Li is a Ph.D. candidate in Finance at the UQ Business School of the University of Queensland.
Suman Neupane is a Senior Lecturer in Finance at the UQ Business School of the University of Queensland
Kelvin Jui Keng Tan is an Associate Professor in Finance at the UQ Business School of the University of Queensland.
This post is adapted from their paper, “Environmental Externalities of Corporate Culture: Evidence from Firm Pollution,” available on SSRN.
