Informing Green Markets: The Roles of Industry, NGOs and Government

Erb Institute Report No. 101

Informing Green Markets: The Roles of Industry, NGOs and Government

by Thomas P. Lyon and Julian Dautremont - Smith

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colabels, standards and certifications are growing in prominence and spreading to new industries. These tools promise a variety of benefits, especially in the international arena, where there is no global regulatory mechanism. They can allow consumers with strong environmental tastes to express their preferences in the marketplace, facilitate sharing of best practices among producers, and support government action to green various industrial supply chains. However, unless these tools can induce significant changes on either the supply side, the demand side, or both, they will never offer an attractive alternative to government regulation of products.

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Erb Institute Report No. 101

Letter from the Director

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Erb Institute Director, Tom Lyon

lthough there is rapidly growing interest in the use of ecolabels, there is unfortunately not yet enough empirical evidence to assess how large a difference we can expect ecolabels to make.

Furthermore, relatively little is known about how to design these programs to achieve maximum environmental and social benefits.

How can program design assure positive social and environmental outcomes and motivate continuing improvements? How do private initiatives interact with government regulation and voluntary programs? When is label competition good or bad for social and environmental performance? More research in this area is badly needed.

Fortunately, there are a number of Action Research Collaborations underway to improve our understanding of the potential of ecolabels, including The Sustainability Consortium, the Green Products Roundtable, and the Packard/Walton/MARS Assessment. [see inset, page 4.] This document summarizes key lessons from a recent conference hosted by the Erb Institute for Global Sustainable Enterprise at the University of Michigan, where representatives from each of these (and other) efforts gathered to share their work and identify opportunities for collaboration. Entitled “Informing Green Markets: The Roles of Industry, NGOs and Government,� the conference was held from June 17-19, 2010. It was designed to explore the role of information in making green markets work, and to highlight key research needs.

Over 80 individuals, including academic researchers from a variety of disciplines as well as developers and users of ecolabels, participated in the conference, which was organized by the Erb Institute for Global Sustainable Enterprise with support from Duke University and the Sustainability Consortium.

We hope this summary will stimulate discussion of this important topic and help to improve the workings of green markets.

Tom Lyon Director Erb Institute for Global Sustainable Enterprise

Informing Green Markets : The Roles of Industry, NGOs and Government Š 2010, the Erb Institute

Key Lessons

(Lto R) Bethany Koch (Rain Forest Alliance), Jon Johnson (University of Arkansas / Sustainability Consortium), and Michael Conroy (Colibrí Consulting).

Proliferation and competition among ecolabels has both good and bad consequences.

Many observers worry that label proliferation may confuse rather than enlighten consumers. Harbaugh, Maxwell, and Roussillon (2010) demonstrate that when consumers don’t know which competing labels are relatively stringent or lax, weak labels can dominate a market. As a result, producers may prefer not to participate in any of the labeling programs. Furthermore, competition among ecolabels may not reward those labeling programs with the greatest positive impacts. Prado (2010) shows how Asocolflores, the flower industry association in Colombia, limited the adoption of ecolabels that compete with its own Florverde label. On the other hand, Bullock (2010) points out that seemingly competitive ecolabels may be beneficial because they serve the needs of different market segments. The net impact of label competition thus remains ambiguous.

There is little hard evidence that ecolabels improve environmental and social performance.

In reviewing the literature on ecolabels for agricultural commodities, tourism operations, fish and forest products, Blackman and Rivera (2010) find just 37 relevant studies, and only 14 that use reasonable counterfactuals. Of these 14 (11 of which study Fair Trade or Organic certification), only six find any positive impacts on producer practices. However, none tested whether certification enhanced market demand for producers who were already using best practices. The knowledge base may improve now that ISEAL’s (International Social and Environmental Accreditation and Labeling Alliance) new Code of Good Practice for Assessing the Impacts of Standards Systems provides a standardized methodology to measure social and environmental improvement.

(Left) Blackman and Rivera, Table showing 14 total studies, 5 that find positive social impact and 1 that finds positive environmental impact

Informing Green Markets : The Roles of Industry, NGOs and Government © 2010, the Erb Institute

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Key Lessons (continued) Small changes in the design of eco-label programs can have big effects on program impact The European Energy Efficiency Label (at right) initially classified appliances on a fixed scale from “A” to “G.” As technological improvement qualified more products for “A” ratings, the European Commission created new A+, A++, and A+++ tiers.

However, Heinzle and Wüstenhagen (2010) found that consumers perceive smaller differences between the various “A” classes than between the original A-G classes.

Thus, the new system leads consumers to place less weight on the rating and more on price.

The B2B market, not consumers, is driving demand for detailed information about the social and environmental attributes of products Walmart’s demand for sustainability metrics from suppliers is the most prominent example of large buyer interest in green product information. But there are many indications that institutional purchasers have a greater demand for detailed product information than do consumers. Molina and Smith (2010) found that architects responded more positively to advertisements for home insulation that presented disaggregated lifecycle assessment data. This suggests that environmental claims targeted at sophisticated business buyers should be backed up with detailed supporting information.

European Energy Efficiency Label (old and new)

Limited transparency undermines credibility of many ecolabels Big Room, Inc., and the World Resources Institute have collected data on 340 different ecolabels worldwide.

They found that “over half of the ecolabels surveyed, including some prominent ecolabels, were unreachable, difficult to reach, or uncooperative when asked about core metrics.” Indeed, only a third of the 340 contacted ecolabelers completed the survey and of these 13 percent do not make public their criteria for awarding the label.

Well-accepted rules for assessing the credibility of different ecolabels would improve the performance of the labeling industry.

Action Research Collaborations: • The Sustainability Consortium aims to create an open-source database on the average social and environmental impacts associated with the supply chain of every consumer product category. The Consortium, a partnership between University of Arkansas and Arizona State University, is supported by major corporations, including Walmart.

• The Green Products Roundtable seeks to help institutional buyers identify greener products. Facilitated by the Keystone Center,the multi- stakeholder group works to provide guidance on which ecolabels credibly address the highest-priority impacts in important product categories, and where we need new tools to mitigate currently unaddressed impacts.

• The Packard Foundation, the Walton Foundation, and Mars Inc. are funding an assessment of the state of knowledge on the environmental, social and economic impacts of certification. The aim is to understand which environmental problems certification can address effectively, under what conditions certification works, and how it interacts with government regulation.

Informing Green Markets : The Roles of Industry, NGOs and Government © 2010, the Erb Institute

Burning Questions

(Lto R) Allen Blackman (Resources for the Future), Abby Dilley (RESOLVE), Christopher Grundler (Environmental Protection Agency), John Maxwell (Indiana University, Kelley School of Business)

How can researchers account for ecolabel impacts beyond changes in participant behavior?

Bartley (2010) notes that few ecolabel studies examine impacts other than changes in the behavior of participating producers. But an ecolabel might also help exemplary performers expand market share, influence government regulation, or have other indirect effects. Indeed, the LEED green building rating system stimulated a variety of local and state green building requirements. Furthermore, ecolabels may impact the performance of an entire industry, rather than just the performance of participants. Prado (2010), reports that many Ecuadorian flower producers adopted the social practices required by the Flower Label Program but did not pursue certification. Ironically, by reducing the performance gap between participants and non-participants, such a dynamic might lead researchers to underestimate an ecolabel’s impact.

How does the design of an ecolabel affect producer and consumer behaviors?

Little study has been done into how ecolabel design and level of detail affect consumer and producer behavior. For example, some ecolabels award multiple levels of achievement (e.g. Bronze, Silver, Gold) while others are binary (pass/fail). Changes in the behavior of participants in binary labeling programs likely occur prior to certification, whereas multi-tiered certifications may motivate continuing improvements. Furthermore, the impact of labels depends upon the type of buyer using them. Institutional buyers are more likely to carefully research potential purchases than most retail customers. A fairly simple product label supported by detailed online information might best meet the needs of both business and retail buyers.

Do ecolabels complement, substitute for or undermine government regulation?

Ecolabels may preempt regulation if policymakers perceive a label as a sufficient solution to a problem or if they allow concerned individuals to meet their needs through consumer choice. For example, the availability of organic produce might reduce consumers demand for industry-wide pesticide regulation. On the other hand, ecolabels may provide a platform that facilitates regulation (e.g. local regulations requiring buildings be LEED certified) or bring about changes that reduce industry opposition to regulation. Designers of certification systems would benefit from greater knowledge helping them to shape such impacts.

Informing Green Markets : The Roles of Industry, NGOs and Government Š 2010, the Erb Institute

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Burning Questions (continued) Why do producers participate in ecolabel programs and what are the relative strengths of their motivations?

Most ecolabel studies assume producers primarily are responding to consumer demand for certified products or services. While some consumers will indeed pay more for environmentally friendly products, consumer demand often seems to be too weak to explain certification decisions. Other important drivers may include cost reduction, reputational risks from activist campaigns and negative media coverage, regulatory preemption and government purchasing mandates.

What – if anything -- should be done about ecolabel proliferation?

Label competition/proliferation has positive and negative consequences, but the net effect on the public interest remains unclear. Fischer and Lyon (2010) show that when low-cost firms co-exist with high-cost firms in an industry, label competition can be valuable because it increases total industry participation in certification. However, when most firms have similar costs, industry-sponsored ecolabels can steal so much demand from environmentally-motivated labels that label competition actually harms the environment. Even in these cases, however, it is not obvious what interventions would optimize label competition. Possible mechanisms to facilitate the exit of less effective ecolabels include government endorsement of a specific standard (e.g., USDA Organic), promotion of ecolabels that meet accreditation standards, or dissemination of information about ecolabels by an independent monitoring group.

Do single-issue labels cause "burden shifting"?

Efforts to improve performance on one dimension of sustainability may exacerbate impacts elsewhere. For example, carbon labeling schemes might help reduce carbon emissions but could increase impacts caused by alternatives such as biofuels and nuclear power. Certification systems that broadly address lifecycle impacts of a product, service, or entity seem less likely to shift burdens.

How can ecolabels best encourage innovation?

Fearing that prescriptive standards could reduce innovation, some ecolabels promote and reward innovation.

For example, the LEED system awards points for innovative activities not covered by the rating system or that exceed its requirements. The effectiveness of these efforts is not well studied, however.

More Information • • • •

Ecolabel Index - http://www.ecolabelindex.com/ Green Product Roundtable - http://www.keystone.org/spp/environment/sustainability ISEAL Alliance - http://www.isealalliance.org/ Sustainability Consortium - http://www.sustainabilityconsortium.org/

Conference presentations are available for download at: http://www.bus.umich.edu/Conferences/EcolabelConference-Ann-Arbor-2010/Schedule.aspx

Informing Green Markets : The Roles of Industry, NGOs and Government © 2010, the Erb Institute

Sources Bartley, Tim. Certification as a Mode of Social Regulation. Jerusalem Papers in Regulation & Governance, Paper No. 8, May 2010.

Blackman, Allen, and Rivera, Jorge. The Evidence Base for Environmental and Socioeconomic Impacts of “Sustainable” Certification. Resources for the Future, March 2010.

Bullock, Graham: University of California, Berkeley. Ecology of Ecolabels: Information-Based Environmental Governance in the Electronics Sector. (Working Paper, 2010).

Delmas, Magali: UCLA Institute of the Environment and Anderson School of Management. Perception of Eco-Labels: Organic and Biodynamic Wines. (Working Paper, 2010).

Fischer, Carolyn and Lyon, Thomas P: Competing Environmental Labels, Stephen Ross School of Business, University of Michigan. (Working Paper, 2010).

Harbaugh, Rick: Kelley School of Business, Indiana University, Maxwell, John W.: Kelley School of Business, Indiana University, and Roussillon, Beatrice: Department of Economics, University of Manchester. Label Confusion.

(Working Paper, 2010).

Heinzle, Stefanie, and Wüstenhagen, Rolf: University of St. Gallen, Institute for Economy and the Environment, Switzerland. Disimproving the European Energy Label’s value for consumers? Results from a consumer survey.

(Working Paper, 2010).

ISEAL Impacts Code. Retrieved from http://www.isealalliance.org/content/impacts-code.

ISEAL Code of Good Practice for Setting Social and Environmental Standards. Retrieved from http://www.isealalliance.org/content/standard-setting-code.

Molina, Sergio A.: Center for Sustainable Development Studies, The School for Field Studies, Costa Rica, and Smith, Timothy M.: Institute on the Environment, University of Minnesota. The Greenwashing Sin of Substantiation? Exploring Complex Green Messages in Product Advertisements. (Working Paper, 2010).

Prado, Andrea M.; Stern School of Business. Competing Environmental and Labor Certifications in the Floral Industry. (Working Paper, 2010).

Acknowledgments Editor, Rick Bunch; Designer, H Dominique Abed

About The Erb Institute Created in 1996 through the generosity of Frederick A. Erb (BBA ’47) and his wife, Barbara, the Erb Institute for Global Sustainable Enterprise is a 50-50 partnership between the School of Natural Resources and Environment and the Stephen M. Ross School of Business at the University of Michigan.

The Work of the Institute: • Focuses on advancing understanding of the complex dynamics of coupled human and natural systems in relation to economic activity; • Promotes an interdisciplinary approach integrating the natural, social and engineering sciences; • Links knowledge generation with social action by connecting scholars with practitioners in the search for creative strategies and approaches to transformation; and • Relies on a strong collaborative network, both internally and externally, to accomplish its objectives.

Informing Green Markets : The Roles of Industry, NGOs and Government © 2010, the Erb Institute

Erb Institute Report No. 101 Erb Institute Report No. 101

About the Authors Thomas P. Lyon is the Dow Professor of Sustainable Science, Technology and Commerce at the University of Michigan Ross School of Business and School of Natural Resources and Environment, and Director of U-M’s Erb Institute for Global Sustainable Enterprise. He is the author of Good Cop/Bad Cop: Environmental NGOs and Their Strategies toward Business, and Corporate Environmentalism and Public Policy, and editor of The Political Economy of Regulation. Professor Lyon’s current research deals with the interplay between corporate strategy and public policy, including corporate environmentalism, electric utility investment practices, natural gas contracting, innovation in the health care sector, and the introduction of competition in regulated industries. Professor Lyon serves on the editorial board of the Journal of Regulatory Economics, and his research has been published in such journals as the RAND Journal of Economics, the Journal of Law and Economics, the Journal of Public Economics, the Journal of Economics and Management Strategy, and the Journal of Law, Economics and Organization.

Julian Dautremont-Smith is currently an MBA/MS student in the Erb Institute’s class of 2012. Prior to enrolling at University of Michigan, Julian co-founded the Association for the Advancement of Sustainability in Higher Education (AASHE) and served as the organization’s Associate Director from November 2004 to August 2009. In that capacity, he played a leadership role in the creation of the Sustainability Tracking, Assessment & Rating System (STARS), a sustainability rating system for higher education institutions that is in use at over 200 colleges and universities. Before working at AASHE, Julian co-founded a social enterprise that produces biodiesel in Barbados while studying there on a Fulbright Scholarship. Julian has a BA in Environmental Studies from Lewis & Clark College and is a Doris Duke Conservation Fellow and Harry S. Truman Scholar.

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