Journal:Quality and environmental management systems as business tools to enhance ESG performance: A cross-regional empirical study
| Full article title | Quality and environmental management systems as business tools to enhance ESG performance: A cross-regional empirical study |
|---|---|
| Journal | Environment, Development and Sustainability |
| Author(s) | Ronalter, Louis M.; Bernardo, Merce; Romaní, Javier M. |
| Author affiliation(s) | Universitat de Barcelona |
| Primary contact | Email: ronalterlouis at gmail com |
| Year published | 2022 |
| Article # | 660 |
| DOI | 10.1007/s10668-022-02425-0 |
| ISSN | 1573-2975 |
| Distribution license | Creative Commons Attribution 4.0 International |
| Website | https://link.springer.com/article/10.1007/s10668-022-02425-0 |
| Download | https://link.springer.com/content/pdf/10.1007/s10668-022-02425-0.pdf (PDF) |
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Abstract
The growing societal and political focus on sustainability at the global level is pressuring companies to enhance their environmental, social, and governance (ESG) performance to satisfy respective stakeholder needs and ensure sustained business success. With a data sample of 4,292 companies from Europe, East Asia, and North America, this work aims to prove through a cross-regional empirical study that quality management systems (QMSs) and environmental management systems (EMSs) represent powerful business tools to achieve this enhanced ESG performance. Descriptive and cluster analyses reveal that firms with QMSs and/or EMSs accomplish statistically significant higher ESG scores than companies without such management systems. Furthermore, the results indicate that operating both types of management systems simultaneously increases performance in the environmental and social pillar even further, while the governance dimension appears to be affected mainly by the adoption of EMSs alone.
To the best of the authors’ knowledge, such large-scale, cross-regional analysis of the impact of QMSs and EMSs on ESG performance is absent from the literature, thus paving the way for pioneering academic research. The study is grounded in stakeholder theory and demonstrates to managers how the implementation of management systems can assist in successfully translating stakeholders’ sustainability concerns into actionable business practice. Furthermore, it allows decision-makers to gain insight into the strengths and weaknesses of QMSs and EMSs for tackling specific ESG issues and highlights the performance advantages of combining both management systems. The work also depicts to policymakers how corporate sustainable performance (CSP) can be improved by fostering management systems adoption, thereby emphasizing the importance of supporting and facilitating the diffusion of these systems.
Keywords: corporate sustainable performance, environmental management systems, ESG performance, quality management systems, sustainability
Introduction
A significant number of companies worldwide rely on management systems (ISO, 2021) to improve corporate operations (Robson et al., 2007; Sampaio et al., 2009) and address stakeholders’ needs systematically. (Poltronieri et al., 2018) Given that achieving “development that meets the needs of the present without compromising the ability of future generations to meet their own needs” (UNWCED, 1987, p. 54) nowadays represents a normative concept (Hahn et al., 2015), corporate executives are under increasing pressure to fulfil one particular stakeholder demand: making their companies more sustainable. (e.g. Ashrafi et al., 2020; Silva et al., 2019; Talbot et al., 2021; Yunus et al., 2020)
For example, consumer attitudes towards sustainable products and services are increasingly positive (e.g. de-Jacobs et al., 2018; Magistris & Gracia, 2016) and investors are placing increasing value on data on sustainability-related issues for financial commitments. (e.g. Amel-Zadeh & Serafeim, 2018; Grim & Berkowitz, 2020; van Duuren et al., 2016) In this context, such stakeholders often consider firms’ environmental, social, and governance (ESG) scores in their decision-making process (Avetisyan & Hockerts, 2017; Rajesh & Rajendran, 2020) and, in return, companies that apply ESG practices can improve stakeholders’ trust by accumulating social capital and strengthening attachment to the firm. (La Fuente et al., 2021) Scholars also devote a great deal of attention to the ESG concept (Do & Kim, 2020), which has emerged as a measure of companies’ corporate sustainable performance (CSP). (Avetisyan & Hockerts, 2017; Dorfleitner et al., 2020; Rajesh & Rajendran, 2020)
When it comes to researching CSP in relation to management systems, however, academics focus more on investigating the benefits related to specific issues such as reduced emissions (e.g. Russo, 2009) and sustainable supply chains (e.g. Zimon et al., 2021), as opposed to connecting management systems with the broader ESG concept as a framework for the various CSP demands of stakeholders. Few studies consider ESG ratings alongside management systems. Broadstock et al. (2021), for example, state that to achieve higher scores in the environmental pillar, companies must perform well in environmental management systems (EMS) certification. Furthermore, Schmid et al. (2017) conclude that ESG themes may be anchored in quality management systems (QMSs), and Chams et al. (2021) deduce that firms with QMSs are less reliant on financial capital to improve ESG ratings. Nevertheless, to the best of the authors’ knowledge, there is a shortage of academic studies that connect management systems to ESG performance and empirically analyze their relationship, which is evidenced by the lack of corresponding search results in databases like Web of Science and Scopus.
Such studies would provide valuable insight into the strengths and weaknesses of individual management systems in terms of meeting specific environmental, social, and/or governance needs. This knowledge would make it possible to draw managerial conclusions regarding which management systems to implement and combine to satisfy certain stakeholder CSP demands. Thus, the aim of this work is to start filling this research gap by empirically proving that QMSs and EMSs, which are the most widely adopted management systems on a global level (ISO, 2021), represent powerful business tools to achieve enhanced ESG performance, by answering the following three research questions (RQs):
- RQ1: Do companies that operate QMSs and/or EMSs achieve statistically significant higher ESG scores than firms without such management systems?
- RQ2: Which ESG issues are positively impacted by the implementation of QMSs and/or EMSs?
- RQ3: Do companies that apply both QMSs and EMSs simultaneously achieve higher ESG performance than firms that operate with only one of these management systems?
To answer these RQs, this study presents a comprehensive exploratory literature review and both descriptive and cluster analyses of ESG data from 2019 for 4,292 companies spread among the three leading global economic areas: Europe, East Asia, and North America. Refinitiv Eikon is used as data basis. The descriptive analysis describes the fundamental characteristics of the data and measures central tendencies among the sample groups with or without management systems. (Mishra et al., 2019) The cluster analysis gradually classifies the sample based on similarities (J. Bu, Liu, et al., 2020; Bu, Qiao, et al., 2020), thus allowing patterns to be defined between companies with QMSs, EMSs or no such management systems.
This paper contributes to the academic literature by directly connecting QMSs and EMSs to the ESG concept and by empirically proving at a global level that both management system types serve as powerful business tools for enhancing ESG scores. The study helps corporate executives to understand the ESG-related strengths inherent in QMSs and EMSs and, in addition, highlights how combining these management systems can impact a corporation’s sustainable performance in different ESG categories. Furthermore, the results give policymakers an insight into the positive relationship between management systems and CSP, as well as the regional and industrial differences in ESG scores, thus emphasizing the importance of pushing forward with the international standardization of best practices in management as well as their global diffusion.
The paper continues in six sections. The next section provides extensive background information on management systems and ESG ratings. Then the data sampling process and methodologies applied are explained, followed by the findings. The paper closes with discussion and some final conclusions.
Literature review
Stakeholder theory
In accordance with the increasing stakeholder focus on CSP, this paper follows the reasoning that companies must not only fulfil obligations to their shareholders in order to be successful, but that the interests of multiple parties with stakes in the social and financial performance of the firm must be taken into account. (Donaldson & Preston, 1995) This aligns with the concept of management systems, which are directed at satisfying specific stakeholder needs (as outlined in the management system's underlying standards), as well as the ESG concept, which is linked to numerous stakeholders, including society, suppliers, employees, and shareholders. (La Fuente et al., 2021; Muñoz-Torres et al., 2019) Thus, this study is grounded in stakeholder theory, which goes beyond simply maximizing the wealth of owners to acknowledging “any group or individual who is affected by or can affect the achievement of an organization’s objectives” (Freeman, 1984, p. 46), while addressing “morals and values explicitly as a central feature of managing organizations.” (Phillips et al., 2003, p. 481)
In general, Freeman’s (1984) stakeholder theory offers a pragmatic approach to a strategy that urges firms to be aware of their relationships with all stakeholders in order to become more successful. (Laplume et al., 2008; Lee & Isa, 2020) At the moment, the stakeholder theory appears to be the prevailing theory in CSP-related research. (Daugaard & Ding, 2022) Thereby, it should be acknowledged that (i) different stakeholders influence organizations in different ways; (ii) some stakeholders have more influence over organizations than others; (iii) not all stakeholders might be regarded as legitimate stakeholders by organizations—in this regard, stakeholder theory is closely related to legitimacy and institutional theories “in the sense that only those with legitimate claims and institutional identification can be considered stakeholders” (Daugaard & Ding, 2022, p. 2)—and (iv) existing organization/stakeholder relations are not static but can change. (Friedman & Miles, 2002).
Developments in relationships in any direction might be induced by changes in material interests of either side, emergence of contingent factors, changes in the sets of ideas held by stakeholders and/or organizations, or institutional support changes. (Friedman & Miles, 2002) Nowadays, we witness increasing contingent factors such as those related to global climate change or pandemics, causing more and more stakeholder groups, including shareholders, to adjust their material interests and to value sustainable development as an increasingly important aspect. In alignment, the institutional support for CSP increases as visible in policy making and media coverage. Hence, to ensure sustained business success, this study argues that companies must be aware of the environmental, social, and governance demands of stakeholders and address them accordingly by using suitable business tools. Therefore, the following exploratory literature review on management systems and ESG ratings emphasizes the stakeholder focus inherent in both concepts.
Management systems
Management systems are a set of procedures to be followed to achieve stakeholder satisfaction concerning specific demands, thus a “process of systemizing how things are done.” (Mahesh & Kumar, 2016, p. 578) They are implemented to handle stakeholders’ needs systematically in both internal and external organizational contexts (Poltronieri et al., 2018; Rebelo et al., 2016) and are aimed at the continuous improvement of operations and procedures. (Robson et al., 2007; Sampaio et al., 2009) Management systems can be classified as quality, environmental, or occupational health and safety (OHS) systems, among others, depending on their objective. (Jørgensen et al., 2006) The core elements of management systems are often defined in management system standards (MSSs), and compliant companies can receive certification if the standard allows it. (Oliveira, 2013; Santos et al., 2011) These MSSs are developed and published by national and international bodies, the most famous being the International Organization for Standardization (ISO) (Karapetrovic & Jonker, 2003); its ISO 9001 for QMSs and ISO 14001 for EMSs are the most commonly implemented and certified MSSs worldwide. (ISO, 2021)
In general, a QMS is the means by which quality management practices—including quality planning, quality control, quality assurance, and quality improvement—are turned into an integral part of an organization that directly affects the way it conducts business. (Nanda, 2005) An EMS, on the other hand, seeks to make organizations both more competitive and more environmentally responsible by adapting techniques aimed at reducing environmental impacts such as waste reduction and process/product redesign. (Watson et al., 2004) The implementation of such management systems results in various benefits. (e.g. Aba & Badar, 2013; Bernardo et al., 2015; Tarí et al., 2012) For example, QMSs are positively correlated with business performance, as companies improve the efficiency of their processes, provide their customers with added value, enhance customer satisfaction and, ultimately, generate more revenue. (Singh, 2008; Tarí et al., 2012; Zaramdini, 2007) Similarly, EMSs positively impact the performance of firms due to savings in resource input and energy consumption, increased efficiency, and better profitability. (Tarí et al., 2012; Zutshi & Sohal, 2004) However, the adoption benefits depend on the individual circumstances of firms. Operating management systems alongside comparable practices, for example, might be less beneficial for companies’ financial performance due to the redundancy of different processes aimed at similar goals related to stakeholder satisfaction. (e.g. Franco et al., 2020)
ESG ratings and scores
ESG ratings are company assessments based on an evaluation of environmental, social, and governance matters whose individual weightings result in an overall score. (Clementino & Perkins, 2021) They are provided by specialized rating agencies, whose expertise makes them a key reference point for firms, financial markets, and scholars regarding CSP data (Escrig-Olmedo et al., 2019) and which emerged in response to an increased demand for social and environmental information. (Avetisyan & Ferrary, 2013) Rating agencies typically use their own research methodologies (Avetisyan & Hockerts, 2017), which are based mainly on publicly available information, third-party research, and corporate reports. (Drempetic et al., 2020; Jackson et al., 2020)
Applying ESG practices is generally aligned with stakeholder theory (Lee & Isa, 2020), as the concept is linked to numerous stakeholders. (La Fuente et al., 2021; Muñoz-Torres et al., 2019) Furthermore, ESG scores play a crucial role “in helping stakeholders apprehend, evaluate, and manage the increasingly complex, multi-faceted nature of business ethics and sustainability.” (Clementino & Perkins, 2021, p. 381) They serve as a standard for comparison and set benchmarks for further improvement. (Rajesh, 2020; Tamayo-Torres et al., 2019) Managing ESG issues responsibly increases companies’ integrity within society and stakeholders’ trust, thus influencing the economic performance of firms. (Tarmuji et al., 2016) Therefore, companies with high ESG ratings might enjoy better market and financial performance (e.g. Aboud & Diab, 2019; Kotró & Márkus, 2020; Shakil, 2020), although there is no univocal consensus on how that should be approached. (Brogi & Lagasio, 2019; Miralles-Quirós et al., 2019; Taliento et al., 2019) Due to increasing public awareness of sustainability issues and the corresponding corporate acknowledgement, the number of firms disclosing ESG data is rapidly increasing. (Alsayegh et al., 2020)
However, ESG ratings also face criticism. As the concept has no fixed boundaries, the validity of ratings is questioned, since the various rating agencies view the ESG pillars differently and, moreover, use different weighting strategies to compile the final scores. (Chatterji et al., 2016; Saadaoui & Soobaroyen, 2018) Another set of criticism concerns the quality of the data underlying the scores. (Clementino & Perkins, 2021; Drempetic et al., 2020) To mitigate these key concerns related to ESG ratings, this study utilizes data from Thomson Reuters, whose ESG database is one of the market leaders and is both used and accepted by fellow scholars. (e.g. Burritt et al., 2020; Jeriji & Louhichi, 2021; Rajesh, 2020; Yunus et al., 2020)
To justify researching the role of QMSs and EMSs as business tools to enhance ESG ratings, this work clusters their adoption benefits by ESG pillar (see Table 1) and, subsequently, derives corresponding hypotheses about their impact on ESG performance.
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References
Notes
This presentation is faithful to the original, with only a few minor changes to presentation, spelling, and grammar. We also added PMCID and DOI when they were missing from the original reference.
