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UNIVERSITE DE GENEVE DEPARTEMENT HEC

Certificat de Formation Continue "Gestion de l’environnement et entreprise"

LA GESTION

DE L’ENVIRONNEMENT DANS L’ENTREPRISE

THE ENVIRONMENTAL QUALITY OF GOODS

 (En anglais)

JEAN-BAPTISTE LESOURD

Genève, Novembre 2003

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BIBLIOGRAPHY

• Lesourd, J.B. and Schilizzi, S. (2003), The Environment in Corporate Management, Foreword by D. Pearce (University of London); Preface by Lena Gevert (Volvo Group). Cheltenham, UK: Edward Elgar. Second paperback edition.

• Ottman, J. (1998), Green marketing: Opportunity for Innovation, Lincolnwood, Ill.: NTC Business Books.

• Ottman, J. (1999), Will the Consumer Pay a Premium for Green? New York: Ottman Inc.

• University of St Gallen, Institut für Wirtschaft und Ökologie, web site: http://www.iwoe.unisg.ch.

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Background

• At least in countries where the public opinion is concerned about the environment, consumers can be sensitive to the so-called environmental quality of products or goods

• There are so-called green or environment-friendly products.

• These products can be either material goods, or intangible services.

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Examples of “green” products

(1)Organic foods.

(2)Renewable and non-polluting energies such as solar

energy, wind energy or hydroelectric power. (3)Intangible services that contribute indirectly to

environmental protection, such as "green" mutual funds.

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Aims and scope of our presentation

• We intend to discuss how consumers may be reliably informed about environmental qualities.

• We try to analyze the sources of consumer sensitivity to the environmental qualities of products, and to assess which segments of the market are likely to be affected

by environmental quality attributes.

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The environmental quality of goods

• Nelson (1970, 1974) and Darbi and Karni (1973) developed a categorization of the quality attributes of goods, with

• search goods,

• experience goods,

• and credence goods.

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Search goods

• Search goods are goods with easily verifiable quality attributes, before or on purchasing the good (called search quality attributes, as they can be searched by consumers before buying the good).

• A red apple bought at a nearby grocery store is a search good.

• Being red is a search quality attribute.

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Experience goods

• Experience goods are goods with quality attributes that can be detected only upon using or consuming the good (called experience quality attributes, as they are revealed to consumers through experience).

• A car, a domestic appliance such as a washing machine, or a computer, are typical experience goods in which problems, such as various breakdowns or incidents are revealed to the consumer only upon using the good.

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Credence goods

• Credence goods constitute a category for which it is a layman (a laywoman) cannot verify the quality attributes of the good.

• Scotch whiskies, which are distilled in Scotland in a traditional manner, using scottish malt, and scottish springwater and peat, is a typical credence good.

• French wines such as Bordeaux or Alsace wines, characterized by traditional wine-making within a specified terroir and with specified grape varieties (such as Riesling in Alsace) are also typical credence goods.

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Quality management for search goods

• Search goods are quite easy to handle in terms of quality management.

• In search goods, consumers may directly or readily verify the quality claims as appear in publicity or in catalogs. If the claims appear unfounded or false, consumers will be able to penalize the faulty firm through shifting suppliers, if the market is competitive,

or through appropriate legal action if necessary.

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Quality managementfor experience goods

• Experience goods are also comparatively easy to manage in terms of quality.

• In experience goods, the supplier typically offers a guarantee to handle the difficulties that could occur after the product has been sold.

• Under such a guarantee system, the product can, for instance, be refunded or replaced for free if it fails to satisfy the customer.

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Quality signalling for credence goods

• Credence quality attributes are more difficult to handle.

• These cannot easily be verified: there is a signalling problem, which applies to the case of the environmental quality.

• One way of informing the consumer or the client is quality certification that is credible to the consumer,

usually by an independent third party organization.

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Environmental labelling

• There are several ways of signalling environmental quality attributes, which are credence attributes.

• Direct signalling techniques, or environmental claims, include environmental labelling, which informs clients

about environmental quality attributes.

• Indirect environmental marketing techniques provide background information that makes direct information trustworthier.

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Signalling, and competitive markets

• Markets are competitive only if all economic agents on the demand side are suitably informed about the

quality of the goods they intend to buy. This is especially true in the case of credence attributes, which are beyond the possibility of verification by potential purchasers.

• Markets in which sufficient information is available to buyers, have been termed (Fama, 1970, 1991) (informationally) efficient, in the case of financial markets.

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Signalling credence quality attributes: third-party certification

• Financial asset markets are indeed markets on which shares of companies, which are goods with typical credence attributes, are sold.

• Regulations impose that quoted companies disclose financial information which is sufficient for potential buyers of their stocks to be fully informed of their potential future profitability, usually through third-party certification of accounting documents carried out

by independent auditors or audit firms.

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Efficient markets for “green” products

• The concept of informationally efficient markets applies to all sorts of markets with goods that have credence quality attributes, including environmental quality.

• An efficient market is, most generally, a market on which sellers cannot make unfair profits because they do not deceive consumers about the true quality of their goods.

• This means signalling techniques, which are in many cases self-compliance rules.

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Environmental claimson an efficient market

• Deceptive advertising is generally considered as contrary to an efficient competitive market: this applies to deceptive environmental claims and

labelling.

• Rather than specific prohibitions, the US Federal Trade Commission (FTC) has issued guidelines for the application of general legal principles to environmental claims.

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Environmental claims, and "fair" competition

• Rather than regulations, these FTC guidelines are open to voluntary compliance.

• These guidelines aim at avoiding that producers make unfair profits through deceptive environmental claims overstating environmental quality attributes.

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Examples of misleading signalling statements

• Vague environmental statements such as ‘Eco-safe product’ without any other information constitute misleading advertising. As they do not give any detail, they might correspond to lower environmental quality than for other competing products that do not make environmental claims.

• Whenever the use of CFCs is prohibited because of a negative impact on the ozone layer, a statement such as ‘this product is without CFCs’ concerning a shaving foam is misleading since anyway all such foams have to comply with legal requirements.

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Environmental quality, and international trade

• Rules and regulations for the environmental quality of goods are also issues for international trade.

• Third-party certified ecolabelling is not contrary to fair international trade rules, unless certification favours a country’s industry, or is dominated by oligopoly interests that tend to exclude outsiders.

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Voluntary compliance schemes

• There are also voluntary compliance schemes in which the producer signals that it voluntarily complies with some specific environmental rules.

• For instance, self-declarations and environmental claims, are standardized under ISO 14021 norms as Type II environmental labeling.

• For instance, the Mobius loop signalling recyclable packaging voluntary complies with rules that ensure the self-declaration about this recyclable character is sincere.

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A classification of the ISO 14020 norms for environmental signalling

• ISO 14020: General definitions and principles (All types of environmental labelling);

• ISO 14021: Type II environmental labelling (Self-declarations and environmental claims);

• ISO 14024: Type I environmental labelling (Third-party certified environmental labelling for the best products);

• ISO 14025: Type III environmental labelling (LCA-based environmental declarations, industrial products).

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Certified environmental labelling (Type I, ISO -14024): Examples

• Germany: Blaue Engel (Blue Angel);

• Canada: Environmental choice;

• Japan: Eco-Mark;

• Nordic countries: Nordic Swan;

• United States: Green Seal;

• France: NF-Environnement;

• Netherlands: Milieukeur;

• European Union: EU Eco-label;

• Spain: AENOR-Media Ambiente.

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Third party ecolabelling for organic foods

• Australia: Biological Farmers of Australia;

• Germany: Natürland;

• Netherlands: Skal Eko-Label;

• U.K.: Soil Association Organic Standard;

• United States: California Certified Organic Farmers;

• United States: Food Alliance;

• United States: Salmon Safe (Wild Salmon, Oregon).

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Indirect environmental marketing techniques

• Environmental reports, and signalling ISO 14001 certification of the firm’s EMS, inform the firm’s clients and other stakeholders of the environmental quality of its products and/or services.

• ISO 14001 is primarily a system of third-party certified EM norms, but it can be used as a way of signalling the environmental quality of products.

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From cradle to grave: Life Cycle Assessments (LCA’s)

• A Life Cycle Assessment (LCA) is an invaluable eco-marketing tool;

• This is because comparisons between the environmental characteristics of a good are only meaningful on a lifecycle or "cradle to grave" basis;

• The life cycle of a product includes conception, development, manufacturing, consumption, and final disposal.

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Environmental

impactsPre-

production Production Distribution Utilization Disposal

Waste relevance

Soil pollution and

degradation

Water and air contamination

Noise

Consumption of energy

Effects on ecosystems

Consumption of

natural resources

An environmental impact evaluation matrix

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The demand for environmental quality: a game for the rich? (1)

• What are the segments of consumer markets that are concerned with the environmental quality of the products they buy?

• Most American consumers seem sceptical; in the case of clearly authentic environmental quality, consumers in the upper income bracket) will accept to pay a slight premium for environmental quality. Markets for organic foods are strongly growing.

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The demand for environmental quality: a game for the rich? (2)

• In what countries are consumers sensitive to the environmental quality of goods?

• In terms of ISO 14001 certifications, rich countries, emerging countries and more generally many developing countries integrated into world trade networks are strong in their numbers of certifications;

• Other developing and poor countries, together with some countries with economies in transition, are rather weak in their numbers of ISO 14001 certifications.

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The ISO 14001 norms, and globalization :number of certified enterprises per country (2003)

The rich• Australia: 835; Belgium : 264;

Canada: 1112; Finland: 800; France: 1780; Germany: 3820; Italy: 2405; Japan: 12392; Netherlands: 1431; Norway: 336; Sweden: 2961; Switzerland: 1016; UK: 2917; USA: 3032…

The emerging• Argentina: 308; Brazil: 900;

China: 2802; India: 805; Hongkong: 265; Israel: 112; Mexico: 369; Singapore: 441; South Korea: 1269; Taiwan: 1308…

The economies in transition

• Czech Republic: 471; Hungary: 597; Lithuania: 51 ; Poland: 434; Russia: 33…

The developing and the poor

• Guatemala: 2; Egypt: 101; Lebanon: 5; Morocco: 11; Niger: 1; Nigeria:10; Pakistan: 21; Peru: 20; Philippines: 50; Saudi Arabia: 8; South Africa: 264; Sudan:1; Tunisia: 18; Zambia :2; Zimbabwe: 10…

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Conclusion

• Eco-marketing seems to be one of the most interesting issues related to environmental management;

• Environmental quality is related to credence quality attributes, for which the average consumer has to rely on trustworthy signalling, hence the importance of third-party certification ecolabelling;

• Consumer sensitiveness seems restricted to wealthy and emerging countries, and, among these, to the the most affluent segments of the market .