Targeting environmental protection expenditures in the manufacturing sector

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Michael Bordt, Environment Accounts and Statistics Division, Statistics Canada; Markus Biehl, Schulich School of Business, York University; and Robert D. Klassen, Ivey Business School, University of Western Ontario

Note: this article is based on Building the Business Case for Sustainable Manufacturing: Linking Lean and Green Management to Performance a report for Industry Canada by Markus Biehl and Robert Klassen.

Canadian industry makes significant expenditures to reduce its impact on the environment. In 2004, Canadian manufacturers spent approximately $6.8 billion to comply with environmental regulations.1 Depending on which aspect of the firm was targeted by these investments, a broader range of business performance benefits was also realized.

Investments can be made in pollution control, pollution prevention or environmental management practices (see text box "Detailed expenditure categories" for more detail):

  • Pollution control comprises "end-of-pipe" installations that are not an integral part of production, and site reclamation and decommissioning.
  • Pollution prevention encompasses technologies, equipment or processes that reduce or eliminate pollution at the source. This includes the redesign or reformulation of materials, components or products.
  • Environmental management practices include monitoring, assessments and auditing, administering environmental programs, environmental training, and information programs.

Although these investments could, in general, be made for a variety of reasons including compliance with regulations, price changes or corporate policy, the Survey of Environmental Protection Expenditures (SEPE) includes only expenditures
made to anticipate or comply with regulations, conventions or voluntary agreements.

What you should know about this study

- The study combined data from two Statistics Canada surveys and one Environment Canada database. Environmental expenditures data for 2004 were drawn from the biennial Survey of Environmental Protection Expenditures (SEPE). This survey uses a sampling design that is weighted toward larger establishments with detailed questionnaires being administered to 10 manufacturing sub-sectors (at the 3-digit NAICS level). Environmental protection expenditures that are covered include only those made to comply with or to anticipate Canadian and international environmental regulations, conventions or voluntary agreements.

Business performance data were then matched at the establishment-level using data from the Annual Survey of Manufactures and Logging (ASML) from 2003 to 2005 for manufacturing revenue, cost, profitability, and inventory levels. Cost data in specific areas were scaled by total direct manufacturing costs, defined as the sum of raw materials, packaging, labour and energy costs.

In parallel, environmental performance was derived from the publicly available National Pollution Release Inventory (NPRI). The NPRI database contains data on more than 300 toxic pollutants that are released, recycled or disposed of by individual manufacturing plants. These data also were matched to the specific establishments.

Data quality

The ASML contains two types of data: self-reported and imputed.  Because imputed data are developed using industry ratios and a variety of other means that may mask important individual differences between establishments, only self-reported data were used to estimate regression models for business performance. This combined dataset included approximately 450 establishments with detailed environmental expenditure and business performance data.

The NPRI dataset presented more complex challenges, as the quality of corporate reporting to Environment Canada appears to vary considerably between firms and industries.


Regression models were employed to analyze relationships between environmental expenditure variables (level and allocation) and business and environmental performance outcomes. For business performance, additional variables were included to control for prior performance, industry, size, revenue growth, spending on research and development, and depreciation.

Regression models involving NPRI variables displayed severe levels of non-normality. This required the use of very conservative estimation methods. These methods detect only the most statistically significant relationships.

This paper represents the views of the authors and does not necessarily reflect the opinions of Statistics Canada.

Detailed expenditure categories in the Survey of Environmental Protection Expenditures

  1. Pollution control
    • Examples of these types of equipment or processes include scrubbers at the end of emission stacks, biological and chemical systems for treating water (such as a water treatment plant), filtration systems, cyclones or other barrier systems.
  2. Pollution prevention
    • Product design or reformulation
    • Equipment or process modifications (integrated process)
    • Recirculation, on-site recycling or reuse or recovery of materials or substances
    • Materials or feedstock substitution, solvent reduction, elimination or substitution
    • Prevention of leaks and spills
    • Other
  3. Environmental management practices
    • Environmental management system
    • Life Cycle Management, Life Cycle Assessment or Design for Environment for decision making
    • ISO 14000 certification
    • Plan to obtain ISO 14064 certification
    • A pollution prevention plan
    • Good operating practices or pollution prevention training2
    • An environmental voluntary agreement or voluntary environmental program (Examples include Environmental Performance Agreements, Canadian GHG Reductions Registry© or Canadian Industry Program for Energy Conservation)
    • Improved inventory management or purchasing techniques, including a "green" procurement policy2
    • Goods certified by an environmental program, such as the "Enviro Choice Program" and Ecologo
    • Annual or other reports on environmental performance or sustainable development

Pollution control accounted for 58% of environmental protection expenditures. Pollution prevention (21%) and environmental management practices (21%) made up the remainder.

The study found that investments in environmental management practices were more beneficial to the firm than expenditures on pollution prevention or pollution control. Firm benefits were measured both in terms of environmental and financial performance.

No statistically significant relationship was found between the firm's bottom line and expenditures on either pollution prevention or pollution control.  The same also was true for pollution reduction. One exception was in the area of energy efficiency, where expenditures on pollution prevention reduced energy consumption. However, across a broad range of establishment sizes, locations and industries, expenditures on environmental management practices generated significant improvements in both environmental and financial performance.

The analysis states results in terms of the effect of reallocating a fixed environmental protection budget among the three expenditure categories. For example, a dollar that is reallocated to environmental management practices could come from prevention or from control.

With respect to environmental performance, reallocating 1% of a firm's environmental expenditures from pollution prevention and control to management practices translated into a 1.3 tonne reduction in toxic pollutant releases over two years. Alternatively, spending one additional dollar on management practices yielded a reduction of 0.34 tonnes of releases. While results generally pointed into the same direction for pollution prevention and control, they were not as strong and not significant. 

In terms of business outcomes, for every dollar additionally invested in management practices, raw material costs were reduced by over $3 per two-year period. Also, a change in allocation of $1 to environmental management practices (from pollution prevention and control) translated into a two-year reduction of over $1 in total inventory holding costs, and over $2 in labour costs. In addition, for small establishments, a $1 greater allocation of environmental expenditures toward management practices yielded almost $3 in reduced energy costs.

It is possible that effective environmental management works by heightening awareness of opportunities for pollution prevention. However, one overarching message is clear: environmental management practices provide a very effective return on investment.


  1. Statistics Canada, 2007, Environmental Protection Expenditures in the Business. Sector, 2004, Catalogue no. 16F0006X. The analysis was based on 2004 data. A report on the 2006 data was released in 2008.
  2. These two groups appear on the questionnaire as pollution prevention practices but were reclassified by the study as management practices.
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