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oikos Ph.D. summer academy 2008

Entrepreneurial Strategies for Sustainability

Corporate Responses to Climate Change: the Resource-Based View

This is a work in progress. Please do not cite without permission of the author.

Younsung Kim
Department of Environmental Science and Policy
George Mason University
4400 University Ave.,
Farifax, VA 22030-4400, USA
E-mail: ykih@gmu.edu

Abstract
As climate change has been emerged as the most pressing sustainability issue, there has
been an increase of corporate responses to climate change in terms of market strategies
(economic responses to tackle climate change by reducing carbon footprints) and political
strategies (policy responses to shape climate change policy making). When heterogeneity
exists in corporate responses rather than conformity, three corporate political responses are
identified: supportive, defensive and neutral. The research draws on the resource-based the-
ory of the firm to explain why some firms are motivated to support strict regulations to ad-
dress climate change, and simultaneously why other firms are motivated to defend or wait-
and-see climate mitigation regulations. It asserts that a firm will choose among politically
supporting, defending or reacting strategies towards climate change policies based on its
organizational resources and capabilities. The study further posits that the motivations for
carbon reductions can moderate the relationship between organizational capabilities and
policy responses. The study will contribute to a better understanding of the dynamics of cor-
porate policy responses that have shaped regulations to reduce greenhouse gas emissions.

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1.
Introduction
Climate change has increasingly attracted business attention in the past decade, because
businesses are likely to be affected both by climate change itself and by policies to address it
(Kolk and Pinkse, 2004; Llewellyn, 2007). In response, some businesses have adopted car-
bon mitigation programs and actively engaged in climate change policy making, while other
businesses are still in a preliminary phase to manage carbon and relatively apathetic to cli-
mate change policy making (Jeswani et al., 2007). In terms of active engagement in climate
change policy making, interestingly enough, main policy responses have diverged from firms
that recognize climate risks and support carbon mitigation regulations, to those who doubt
the certainty of climate change science and oppose climate change regulations (Levy and
Kolk, 2002; Kolk and Pinkse, 2007).

With the increase in and diversification of corporate responses, there have been a number of
studies that examine corporate climate actions regarding both market strategies and non-
market (political) strategies1 over the few years (Dunn, 2002; Skjaerseth and Skodvin, 2003;
Levy and Newell, 2005; Hoffman, 2005; Kolk and Pinkse, 2004; Cogan, 2006; Hoffman 2007;
Kolk and Pinkse, 2007;). As the evolution and development of climate change policy, such as
Kyoto Protocol in 1997 and European Union Emissions Trading Scheme (EU-ETS)2 in 2005,
have taken place within the recent decade, the research has been done to examine how
businesses face climate change issue. The studies have focused on (1) describing the dis-
tinguished features of corporate responses from opposition against climate measures to a
more proactive approach or a ‘wait-and-see’ attitude, (2) introducing how proactive compa-
nies address climate change, or (3) identifying emerging climate strategies. However, there
are three limitations to these previous studies.

First, so far there is not enough information about the motivations for corporate responses to
climate change regulations. While some management researchers have attempted to exam-
ine the motivations for heterogeneity of corporate responses, they viewed corporate re-
sponses through an institutional lens (Jeswani et al., 2007; Kolk and Pinkse, 2007; Pulver,
2007). According to this type of analysis, as climate change risks are different at the indus-
trial sectoral level and climate change regulations have not been uniformly developed at the
global level, industrial pressures or firms’ location are considered as the main drivers of het-
erogeneous responses, rather than firms’ specific characteristics. Additionally, although cor-
porate responses to regulations of greenhouse gas emissions (i.e., political strategies) and
carbon management strategies (i.e., market strategies) are tightly interwoven, prior research
has not much considered the potential link between firms’ heterogeneous resources and ca-
pabilities by carbon management and political activities to regulations (Kolk and Pinkse,
2004; Hoffman, 2005).

1
Kolk and Pinkse (2004) divided market strategies and political strategies for climate change, indicat-
ing that the latter focuses on corporate activities to shape climate change policy making, while the
former is related to economic responses to tackle climate change by reducing the carbon footprints.
2
European Union Emissions Trading Scheme (EU-ETS) is the largest emission tradable permits pro-
grams developed by the European Union. Launched in 2005, EU-ETS allows emissions trading
among major GHG emitting industries (e.g., Power/combustion, steel & iron, cement, oil refining, ce-
ramics, lime & glass, pulp & paper, etc.), enabling EU countries to comply with Kyoto targets
(European Commissions, 2008).
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Second, unlike previous studies’ argument that as the climate change issue matures, corpo-
rate climate strategies would be convergent in a way to proactively manage carbon and sup-
port regulations (Levy and Kolk, 2002; Dunn, 2002 ), we still see corporate responses to cli-
mate change are uneven and diverse. Examining firms’ responses at the current state is im-
portant since international post-Kyoto agreements as well as national (e.g., U.S.) climate
change policies is in the process of rule set.

Third, prior research has not much considered policy implications for climate change mitiga-
tion. Since research on corporate responses to climate change has been dominated by stra-
tegic management scholars and market researchers, more focus has been on business im-
plications (Kolk and Pinkse, 2005; Pinkse 2007).

This study thus aims to deal with these gaps by exploring the actual dynamics behind corpo-
rate responses to more stringent policies towards climate change. To understand what fac-
tors and dynamics account for differentiation of these corporate political responses, the study
will draw on the resource-based view of the firm (RBV). Since the RBV suggests that differ-
ences in firm performance are primarily the result of heterogeneous resources and capabili-
ties across firms (Barney, 1991), it posits that the responses of businesses to regulations are
a reflection of their resources and capabilities.

The structure of this paper will be as follows. In the first section, I will provide a general over-
view about how firms have responded to climate change with respect to their political actions.
I will then review the RBV, highlighting how the RBV has been applied to organizational
management research. Applying the tenets of the RBV, propositions will be developed to
discuss whether variations in corporate responses relate to firms’ varying abilities to develop
capabilities and allocate resources. Further, the study will explore the motivations for engag-
ing in carbon management (e.g., participation in emissions trading scheme) as a moderator
of the relationship between firms’ capabilities and corporate responses to climate change
policy initiatives. It assumes that if an organization’s carbon management is motivated by
legitimation, the organization is less likely to support stricter climate change regulations. Fi-
nally, contributions of the study will be introduced; the paper will contribute to provide a more
comprehensive understanding about how firms’ motivations for managing carbon influence
their organizational capabilities and corporate responses to climate change policy.

2. Theoretical Background
2.1 Kyoto Protocol as a regulatory context
Since climate change is a global environmental problem, it has been necessary to
adequately address climate change at a global level. As an international regulatory context to
reduce greenhouse gases (GHG), the Kyoto Protocol has been adopted in 1997 and entered
into force 2005. It has been mandated that 38 countries in industrialized and transition
economies (Annex I countries) should reduce their emissions of GHG by an average 5.2
percent by 2008-2012 from their 1990 level (UNFCCC, 1997; Grubb et al., 1999).

The Protocol is a landmark agreement in climate change policy in that (1) it sets the targets
for emission reductions and imposing legal penalties for failure to compliance; and (2) it
provides market mechanisms to help countries, more importantly, the companies responsible
for much of GHG emissions achieve their targets in the most economically efficient way
possible (Coninck and Linden, 2003; Nichols, 2008).

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2.2. Evolution of corporate responses to climate change

Corporate responses to climate change have evolved with the developments in climate
change policy, especially in the wake of the adoption and implementation of the Kyoto Proto-
col. When climate change started to become an important policy issue for firms in the early
1990s, distinguishable corporate responses to climate change have been developed by mul-
tinational companies (MNCs) in a more political way to influence the direction and shape of
the regulation of GHG emissions (Kolk and Pinkse, 2007).

At the initial stage of policy making, the predominant response was to oppose the Kyoto Pro-
tocol in which the legally-binding emissions targets were mandated. Reflecting the traditional
dilemmas between environmental regulations and corporate responses to the regulations,
opponents contested that imposing caps on GHG emissions will negatively impact organiza-
tions’ economic performance by incurring costs on the process of production and deliver-
ance. In particular, companies in the energy intensive sectors (e.g., coal, oil, steel, aluminum,
chemicals, automobiles, and paper and pulp) showed strong opposition to the Kyoto Protocol
individually or by joining the organizations such as Global Climate Coalition and the Coalition
for Vehicle Choice (Gelbspan, 1997; Leggett, 2000; Kolk and Levy, 2001). Yet, particularly
after governments adopted the Kyoto Protocol in 1997, some companies such as BP, Shell,
and Toyota changed their approach in favor of climate measures (Kolk and Levy, 2001; Mar-
golick and Russell, 2001; anon, 2005). In this approach, some businesses have acknowl-
edged the reality of climate change and their responsibility for addressing the issue. While
two approaches are in opposition, they appeared to be common in that they try to influence
and shape climate change regulations to determine their institutional contexts.

Much diversity in corporate responses to climate change has been seen with the split of the
international policy regime. The U.S., the largest GHG emitter accounting for about 20% of
the global GHG emissions, rejected the ratification of the Kyoto Protocol in 2001. In contrast,
EU started emission trading scheme to help the member states to achieve the Kyoto emis-
sions target in 2005. In response, some companies, particularly in the U.S., have continually
opposed against the Kyoto Protocol, while other companies have advocated mandatory
regulations setting emission targets and taken concrete steps to reduce carbon emissions.
On the other hand, some companies just take a neutral stance and wait-and-see the conver-
gence of the international climate change regulation (Kolk and Pinkse, 2005; Kolk and
Pinkse, 2007). Although the opposing stance appears to be lessoned due to the increasing
societal demand for addressing climate change (Ball, 2007), heterogeneous and uneven
corporate responses are still clearly seen (Jones and Levy, 2007). More importantly, this di-
versity of corporate responses is continually expected under the uncertainty about the policy
context after 2012 when the 1st commitment period (2008-2012) of the Kyoto Protocol ends.

As such, based on the literature review, main corporate responses can be identified in three
ways: Supportive, Neutral, and Defensive (Table1). The supportive posture involves active
engagement in policymaking in support of climate change legislation. Companies in this pos-
ture regard climate change as a real threat to the globe and agree with the scientific evi-
dence of climate change announced by Intergovernmental Panel on Climate Change

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(IPCC).3 Firms emphasize a proactive approach to address climate change, and thus publicly
call for mandated carbon regulations under which their emissions would be curbed and addi-
tional costs in their manufacturing or service processes would incur. In defensive approach,
companies doubt on scientific evidence about climate change and point to the uncertainty
surrounding the issue. They are thus basically opposed to setting emissions targets, but ap-
pear to prefer voluntary approach to reduce emissions. In a neutral posture, firms wait and
see until strong policy signal appears, taking a cautious approach to reduce carbon emis-
sions. Firms find it risky to take an early mood, but sometimes join voluntary programs for
carbon emissions control or take voluntary initiatives to gather information about policy de-
velopment or gain external legitimacy (Kolk and Pinkse, 2004; Kolk and Pinkse, 2007; Jones
and Levy, 2007).

Table 1. Types of corporate responses to climate change regulations

Extent of influence
Types Main Characteristics
in regulations

Supportive Active - Support of climate change measures to reduce emis-

- sions
- Pressuring international or national policy regime such
- as G8
- Request for a long-term, global climate change regime
Defensive Active - Opposition of Kyoto’s global emission reduction ap-
- proach
- Doubts on scientific evidence about climate change
- (Support for the R&D fund to debate the scientific
- evidence)
- Advocacy of voluntary approach to reduce emissions
Neutral Inactive - Appreciation of climate change issue
- Cautious view of the Kyoto Protocol and its related
- national policy proposals
- In favor of voluntary initiatives and programs, but lack of
- active engagement in both carbon reduction programs
- and policy-making process

(Adapted from Kolk and Pinkse, 2007; Jones and Levy, 2007)

2.3. The Resource-based view

Understanding the sources of sustained competitive advantage has become a major realm
of research in strategy management. Traditional strategy theorists such as Porter (1980)
have focused mostly on the company’s external competitive environment. In this industrial

3
The Intergovernmental Panel on Climate Change (IPCC) is a scientific intergovernmental body set up
by the World Meteorological Organization (WMO) and by the United Nations Environment Programme
(UNEP), with the aim of providing the decision-makers and the public with an objective source of in-
formation about climate change. Since the first Assessment Report of 1990, the IPCC has issued four
assessment reports and provided scscientific, technical and socio-economic information concerning
climate change, its potential effects and options for adaptation and mitigation. The IPCC Second As-
sessment Report of 1995 provided key input for the negotiations of the Kyoto Protocol in 1997 (IPCC,
2008).
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organization (IO) model, firms’ resources within the same institutional context are identical
and a firm’s success is wholly determined by its external environment (Porter, 1980). The
resource-based view (RBV) of the firm contrasts the IO model, highlighting the link between
firms’ heterogeneous resources and competitive advantage (Barney, 1991).
In the RBV, firm resources are the fundamental units in production processes and can be
classified into physical, human, and organizational assets (Barney, 1991). Capabilities are
capacities to deploy resources, usually in combination, to integratively perform a task or an
activity (Amit and Schoemaker, 1993; Christmann, 2000; Darnall and Edwards, 2006). Sus-
tained competitive advantage is said to exist when a firm implements a value creating strat-
egy not simultaneously being implemented by any current and potential competitors and
when other firms are unable to duplicate the benefits of this strategy, thus retaining competi-
tive advantage on a long-term basis. In terms of the link between resources and competitive
advantage, firms will achieve sustained competitive advantages over competitors, if firms
accumulate resources that are rare, valuable, non-substitutable, and imperfectly imitable
(Barney, 1991).

As a result, under this perspective, firms’ abilities to make resources rare, valuable and non-
imitable under their external environment can determine firms’ performance. Barney (1991)
pointed out that for a firm’s resource to become valuable, it must allow the firm to “exploit
opportunities or neutralize threats” in the firm’s environment (Barney 1991:106). Recent de-
velopments of the RBV have also emphasized the importance of inner capabilities to organi-
zational performance under the changing and complex external environment (Verona and
Ravasi, 2003). The RBV thus suggests that differences in firm performance can be the result
of heterogeneous valuable resources and capabilities across firms.

Related to environmental issues, the RBV has been applied to incorporate the constraints
imposed and opportunities offered by the natural environment (Hart, 1995). According to
Hart’s natural-resource-based view, environmental management strategies beyond compli-
ance (e.g., pollution prevention, product stewardship with the objective of minimizing the en-
vironmental impact of product systems) would be strategic capabilities to contribute to com-
petitive advantages by lowering production costs or preempting limited resources. This view
thus encourages businesses to embrace and internalize the challenge by the natural envi-
ronment, arguing that environmentally oriented resources and capabilities can yield sustain-
able sources of competitive advantage. This argument has been proven true in empirical
studies, showing that proactive environmental strategies are associated with organizational
capabilities (e.g., capabilities for continuous innovation and for higher order learning) which
in turn link to firms’ performance. (Sharma and Vredenburg, 1998; Russo and Fouts, 1997).

On the other hand, some management scholars have applied the RBV into their studies on
corporate political activities (i.e., corporate responses to public policy). According to Hillman
(2003), firms make specific political action choices based on differential resources. For ex-
ample, firms with plentiful resources are more likely to take individual political action,
whereas resource-poor firms will use reactive or collective political action. However, more
insightful application of the RBV in this area would be that the types of firms’ political activi-
ties are dependent on firms’ capabilities to manage their political environment (Oliver and
Holzinger, 2008).

In the context of climate change, organizational and technological capabilities would play a
significant role in adapting or mitigating climate change. As it has been argued that organiza-
tional responses to climate change has many similarities with processes for organizational
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learning (Berkhout et al., 2006), both operational and dynamic capabilities have been seen
as core determinants of firms’ adaptation patterns. Likewise, firms’ measures to mitigate cli-
mate change (e.g., emissions trading, carbon offset projects etc.) require higher order learn-
ing, organizational culture for improvement in operational energy efficiencies, technological
capabilities to reduce carbon emissions. In turn, organizational and technological capabilities
would contribute to competitive advantage not only by lowering production costs but also by
helping firms to influence carbon-emission regulations in favor of their sustained benefits.

Accordingly, applying the tenets of the RBV to corporate responses to climate change would
be very useful, since this study aims to explain how organizational resources and capabilities
to manage carbon relate to firms’ strategic choices to shape their regulatory context: in other
words, why some firms actively engage in climate change policymaking and support man-
dated regulations to reduce greenhouse gas emissions, while other firms are relatively unre-
sponsive and often opposed to climate change regulations.

3. Hypotheses and Research Model

3.1 Organizational capabilities and corporate political responses to climate

change

From a resource-based view point, firms would be motivated to create or maintain their value
in political environments by influencing policy formation (Oliver and Holzinger, 2008). That
means, firms would perceive their political environments as a set of opportunities for
leveraging firms’ strategic assets and competencies to earn economic gains (Shaffer,
1995), not an institutional constraints on firms (DiMaggio and Powell, 1983). Thus, profit-
driven and value-creating firms might make use of their political environments (1) by lobbying
for standards that they already can meet, but which they know will be harder (more costly) for
competitors to meet or (2) by lobbying for legislation that will create a market for their newly
developed products or services. On the other hand, firms that intend to maintain their value
might differently take advantage of their political environments (1) by lobbying to increase
entry barriers, especially in slowly-growing industries, or (2) by actively advocating the status
quo (McWilliams et al., 2002).

However, if firms are not equipped with resources and capabilities to allow them to influence
policymakers, it is difficult to sustain competitive advantages using political environments.
Oliver and Holzinger(2008) argue that organizational capabilities to manage their political
environments would determine whether firms gain or maintain their value in the
contemporary political and competitive environments.

In the context of climate change, the resources and capabilities required to shape firms’
political environment can vary widely, based on whether firms can manage (or reduce) their
GHG emissions or not. If a firm makes an early move or an innovative move in reducing
carbon and thus succeeds in updating its knowledge-based skills and techniques on
emissions reduction, it might be possible to create competitive advantage by leveraging
policy making process. According to Starik and Rands (1995), ecologically responsive firms
develop skills to enhance organizational and technological capabilities to “ raise the floor”
in that regard. Yet, if a firm is content with spending its resources maintaining its current
value rather than creating new value, the firm might lag behind competitors in enhancing
capabilities to manage carbon and in advising policymakers who might seek to find the way

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to reduce carbon in some way. An environmental manager at Shell, one of the most
environmentally proactive companies, points out that “to validly have a seat at the table, you
have to bring experience. You cannot just take a seat because you are interested” (Hoffman,
2007:8).

For businesses, measures to manage carbon can include setting GHG inventory systems,
setting internal greenhouse gas targets, engagement in emissions trading schemes,
involvement in carbon-offset projects, research and investment into energy efficiency, fuel
switching and new technologies, and new products development to reduce emissions
(Hoffman, 2007). Among those, participation in GHG emissions trading, process and product
innovations including improving energy efficiency, fuel switching and developing new
products and technologies can be considered as more advanced carbon management
practices by than others, while GHG inventory systems or emissions target setting are
regarded as preliminary steps (Boiral, 2006; Hoffman, 2007). Those advanced carbon
management practices would contribute to build organizational resources and capabilities to
create sustained competitive advantages.

3.1.1 GHG emissions trading experience

In this section, I discuss how a firm’s experience in emissions trading can lead to support for
mandatory GHG regulations. Since emissions trading has been advocated by economic
environmentalists as the most cost-effective way to meet the environmental goal at the
lowest marginal cost and its efficacy has been empirically tested in the U.S. sulfur trading
system, major approach to control GHG under the Kyoto Protocol has focused on emissions
trading (Dunn, 2002; Egenhofer, 2007).

Emissions trading is essentially a cap-and-trade program, which involves setting limits on

GHG and then allowing companies to buy and sell emission permits. If firms can easily re-
duce GHG and meet emission targets, they will be able to make a profit by cutting their
emissions and selling their extra permits; emissions trading thus provides incentives for firms
to reduce carbon emissions. If firms that find it very expensive to reduce emissions, they will
purchase permits instead (Kosobud, 2000). For this reason, emissions trading would go be-
yond conventional environmental policy (i.e., command-and-control policy) by allowing com-
panies to reduce carbon emissions or to buy permits in a cost-effective way (Egenhofer,
2007).

As the Kyoto Protocol has not been fully implemented at the global level, various but
fragmented emissions trading schemes at the regional, national, and state level has been in
place: European Union Emissions Trading Scheme (EU-ETS), UK-ETS, Netherlands ETS,
U.S. Regional Greenhouse Gas Initiative (RGGI), Australia ’ s New South Wales
Greenhouse Gas Abatement Scheme (NSW). Also, voluntary trading schemes such as the
U.S. Chicago Climate Exchange (CCX) and internal emissions trading schemes at the
company level have been developed. Recently, even the U.S, in which the Kyoto Protocol
has not been ratified, is seriously considering the national GHG emissions trading system to
slash greenhouse gases by 2050 (Eilperin, 2008).

Under this trend towards emissions trading, it would be likely that emissions trading contin-
ues to be a crucial pillar of future global or national climate change policies as an instrument
to reduce GHG. This facet thus highlights the importance of familiarity in emissions trading
and offers a strong impetus for the firm’s early move towards emissions trading. Previous
experience in emissions trading would provide opportunities to shape their institutional con-

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text. The first step of emissions trading would be to know the amounts of GHG they produce
through GHG measurement systems (Hoffman, 2005). After then, they can develop trading
skills through external or internal emissions trading schemes. As emissions trading is rela-
tively new to most firms (Bailey and Rupp, 2004), firms that have already built expertise in
measuring and trading can create competitive advantage, if GHG reductions are mandated
at the global or national level. As a result, firms that develop knowledge-based tacit informa-
tion about trading would ask for stricter regulations to address climate change. The enact-
ment of new emissions laws can shift the market environment, creating opportunities for
those that are already prepared.

Engaging in emissions trading can also help firms to fundamentally shift their culture to re-
duce emissions and to create employee awareness of money-saving emission controls, be-
cause a firm’s extra allowances can be translated into monetary gains. A firm’s commitments
and culture towards carbon reductions would become internal competencies that contribute
to positioning themselves favorably in future regulation schemes. Once competencies are
built, firms could gain external public support by credible actions and persuade policy makers
that emissions trading is an effective approach to reduce GHG emissions. Based on these
internal competencies and external reputations, firms would call for mandatory GHG regula-
tions to sustain competitive advantages. For example, with BP’s experimental intra-company
ETS experience, BP claimed that the trading system helped to elicit specific information and
to create awareness about carbon-related costs across business units. Depending on exten-
sive employee involvement, BP initiated simple ways to reduce emissions, thus successfully
reducing carbon-related costs (Victor and House, 2006). In turn, the change in organizational
culture and early commitments to the ETS enabled BP to build a reputation as a leader in
carbon management and made it possible to access and influence policymakers who had
considered emissions trading in the UK and EU (Hoffman, 2005; Markussen and Svendesen,
2005).

In the framework of the RBV, therefore, informal tacit knowledge, trading skills, organiza-
tional culture committed to reducing carbon emissions can be valuable resources and capa-
bilities that create competitive advantages. These resources and capabilities can further sus-
tain competitive advantages in the longer term, if future climate change policy mandates
emissions trading either at the global or national level (in regions where the Kyoto Protocol
remains unratified). In particular, for firms that now operate globally and adhere to multiple
regulatory settings, it is important that GHG regulations are implemented at the global level,
so that they can play in the uniform playing field. At the current status of fragmented emis-
sions trading schemes, multinational corporations may experience confusion about different
institutional contexts of emissions trading schemes (Pinkse, 2007). Thus, firms that partici-
pated in emissions trading schemes would hope for the certainty of the global trading
scheme so that they minimize the risks of adopting the limits on GHG emission in countries
where emissions trading has not been implemented. Moreover, in regions where Kyoto re-
mains unratified, firms that voluntarily engaged in emissions trading schemes would strongly
call for mandated GHG regulations including emissions trading, so that they can enhance
their benefits in the mandated carbon emissions market.

Hypothesis 1: firms with experience in emissions trading are likely to support, as opposed
to defend, international or national regulations to reduce GHG emissions.

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3.1.2 Process improvement and product development

Process improvement and product development would be organizational capabilities that

lead to firms’ support for stricter regulations to reduce GHG. It has been widely studied that
process improvement and product development would create competitive advantages and
expand market prospects (Hart, 1995; Russo and Fouts, 1997), although there is an argu-
able debate that the practices going beyond compliance would accrue costs and reduce a
firm’s overall competitiveness (Wally and Whitehead, 1994). Central to the process and
product improvements linked to market performance are dematerialization of production
processes, developing more efficient manufacturing processes, utilizing green materials and
processes, and developing eco-designed products (Ashford 1993; Hart, 1995).

As GHG controls can be commonly translated into reduced use of fossil fuels, process im-
provement in GHG reductions has been focused on achievement of higher energy efficien-
cies and substitution of fossil fuels by carbon-free renewable energy (Kolk and Pinkse,
2004). Process improvements also involve measures to diminish the use of other green-
house gases, recycling of materials, and waste heat recovery. The focus of product devel-
opment has been on both redesigning packages and lowering products’ carbon emissions,
thus resulting in higher energy efficient products. Product development also involves creating
new products such as biomaterials that use less fossil-fuel energy, and hybrid-engine car
(Kolk and Pinkse, 2004; Hoffman, 2005).

It has been suggested that reducing emissions in manufacturing processes and in end-
products are path-dependent and there is a sequential logic to the implementation of envi-
ronmental strategies (Hart, 1995; Hart, 1997). In particular, Hart (1995) suggested that firms
will only be able to successfully adopt sustainable development strategies as the highest
environmental management initiative, if they have first made significant progress in the im-
plementation of pollution production (i.e., process improvement) and product stewardship
(i.e., product development) practices. In that regard, once companies are adept at reducing
their GHG emissions by altering their products or processes, it means that they already have
basic competencies for sustainable development strategies to address climate change, the
most pressing sustainability issue. Thus, they would hope for strict GHG regulations and con-
trols. When firms take an environmental leadership in climate change by supporting for regu-
lations to control GHG, firms would increase reputations and favorable relationships with ex-
ternal stakeholders, which will enhance profitability.

In particular, if new products and processes are linked with a fundamental shift in climate-
friendly technologies, firms would support GHG regulations more strongly. For example, if a
firm has developed bio-based materials (e.g., bio-polymers, bio-fuels) using the bio-based
method instead of traditional petrochemical processes, firms’ competitive advantages would
increase, especially when reductions in carbon emissions are mandated; their market pros-
pects would be subject to policy development in curbing GHG emissions from fossil fuels and
forcing the use of renewable materials or renewable energies. Further, using clean technolo-
gies require substantial capital investment, but often rewards do not come in the short term
(Grubb, 2004). Thus, it is important for early movers (firms that have taken early steps) to get
the certainty of global and national regulations on climate change.

Hypothesis 2: firms with process improvement and product development are likely to sup-
port, as opposed to defend, regulations to reduce GHG emissions.

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3.2 Motivations for carbon reductions

The relationship between organizational capabilities and corporate responses to climate

change may be more complex, if motivations for carbon reductions are considered. In other
words, when organizations participate in emissions trading and pursue process and product
improvements to address climate change, their motivations for engaging in these activities
would be important to determine to which extent they can achieve competitive advantages.

It has been suggested that firms’ motives for ecological responsiveness are regulatory pres-
sures, stakeholder pressures, economic opportunities, and ethical motives (Lawrence and
Morell, 1995). Those motives can be largely divided into (1) competitiveness as the potential
for ecological responsiveness to improve long-term profitability, (2) legitimation as the desire
of a firm to improve the appropriateness of its actions within an established set of regula-
tions, norms, values, or beliefs, and (3) ecological responsibility as firms’ social obligations
and values or a sense of philanthropy (Bansal and Roth, 2000).

Specifically, corporate climate actions have been driven by regulatory pressures under the
Kyoto Protocol or competitive reasons in the absence of regulations (Okereke, 2007). Firms’
intentions to involve in emissions trading show these different motivations (Pinkse, 2007).
Corresponding to whether emissions trading scheme has been emerged as public initiatives
(e.g., EU-ETS) or private initiatives (e.g., Chicago Climate Exchange), firms’ motivations may
vary. Some firms engage in emissions trading to conform to mandated regulations, while
other firms do as a voluntary commitment. As a consequence of different motivations, the
fact that firms participation in an emission trading does not necessarily imply that firms will
exhibit the same degree of active trading, thereby creating the same degree of competitive
advantages.

In fact, firms committed to emissions trading without regulations should forfeit its profits ac-
quired by merely externalizing carbon-related costs. Further, a higher level of proactive envi-
ronmental activities going beyond compliance implies substantial investment and a long-term
commitment to market development (Hart, 1995). As such, if some companies engage in
emissions trading in the absence of regulations, they are more likely to take innovative ap-
proaches to reduce their environmental impacts by increasing their energy efficiencies or by
investing low-carbon-emitting technologies and efficient plants to limit emissions (Hoffman,
2005). They thus may create cost advantages by selling a surplus of emission allowances. If
they realize profits and develop intangible capabilities, they would be more likely to support
climate change regulations to create more certainty for their long-term investments.

In contrast, some companies who participate in emissions trading for the compliance reason
may be less active in the intensity of engaging in emissions trading. Inactive engagement
may represent their minimal efforts to reduce carbon without appropriate, innovative meas-
ures, and develop less organizational capabilities. It is being suggested that that if a firm per-
ceives larger risks (costs) rather than opportunities (gains) by emissions trading, the firm
minimize its investments in emissions trading and seek the way to avoid compliance instead
(Pinkse, 2007). In this way, if firms’ participation is driven by legitimation, their prevailing atti-
tude would be far from building organizational capabilities, which, in turn, would be a key
factor to call for stricter regulations to address climate change.

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Hypothesis 3: If firms’ participation in emissions trading is motivated by competitiveness

compared to legitimation, they are more likely to support stricter regulations to reduce
GHG emissions.

Firms’ motivations for carbon reductions would also moderate the relationship between proc-
ess and product innovations and corporate responses to climate change. While process im-
provement focusing on higher energy-efficiencies can bring emissions reductions, some en-
ergy efficiency practices can be easily implemented without disruptive technologies, thus
allowing firms to pick “low-hanging fruits.” Likewise, firms can develop products or services
by lessoning existing products’ carbon emissions (in terms of energy efficiency) without tech-
nology innovations (Kolk and Pinkse, 2004).
However, as a firm’s environmental performance improves, further reductions in emissions
become progressively more difficult, often requiring significant changes in processes or even
entirely new production technology (Frosch & Gallopoulos, 1989; Hart, 1995).
If firms are responding to climate change in a strategic manner and looking for the longer
term advantages, firms would be more innovative in reducing emissions and progressively
consider further reductions in emissions, and then pursue positive engagement in policy for-
mation to raise the floor. A firm’s innovative actions may come out of a sense of obligation,
responsibility, or philanthropy beyond self-interest, often through the environmental leader-
ship by top managements or a single individual who had championed their ecological re-
sponses (Buchholz, 1991; L’Etang, 1995; Bansal and Roth, 2000). For example, with respect
to the impetus for climate change strategies, Alcoa, the world’s leading producer of primary
aluminum, states that “sustainability is a primary driver since Alcoa defines sustainability as
financial success, environmental excellence, and social responsibility” (Hoffman, 2007: 104).”
Consistent with the motivations, Alcoa’ primary focus on GHG reduction efforts rests more in
innovative practices beyond improving energy efficiency, while the firm has systematically
focused on energy efficiency which results in reduced energy use in refining bauxite into
alumina. Alcoa has made greater investments in reducing perfluorocarbons (PFC) through
anode effects, regarded as being routine in the smelting process, and increasing the use of
recycled materials. As these innovative practices have been initiated by environmental lead-
ership of Paul O’Neill, CEO, since 1992, it has been possible that Alcoa invest in green tech-
nologies, fundamentally shift the aluminum smelting process and achieve huge emissions
reductions through process improvement. Once technological capabilities are built, Alcoa
took an initiative in a voluntary agreement with the EPA to reduce Anode effects (Hoffman,
2007). Accordingly, it can be assumed that process and product innovations motivated by a
firm’s market prospects in the longer term and ecological responsibility may strengthen their
support for regulations to reduce GHG emissions.

Hypothesis 4:
If organizations with carbon reductions by altering products and processes are motivated by
competitiveness and ecological responsibility, they are more likely to support stricter regula-
tions to reduce GHG emissions.

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<Research Model>
Motivations Carbon Management Policy Responses
Innate innovation
Competitiveness Organizational Capabi- Supportive
Cost savings lities
Market prospects Neutral
Emissions Trading Ex-
Defiant
perience
Corporate Social Process Improvement
Responsibility
Product Development

External legitimation
Regulatory Pres-
sures
Stakeholder Pres-
sures (Investors,
NGOs, Consumers
etc.)

4. Contributions of the study

As climate change has emerged as the most serious environmental challenge, climate
change itself and policies to address climate change significantly have captured businesses’
attention. In response, heterogeneous responses to climate change regulations have oc-
curred; some organizations proactively support regulations to reduce GHG emissions, while
other organizations are taking neutral or defensive stances to governmental regulations to
address climate change. Drawing on the tenets of the RBV, this study aims to identify the
reasons why corporate policy responses to climate change are diverse and uneven. The
study posits that heterogeneous corporate responses would be attributed to organizational
resources and capabilities related to GHG emissions reductions. Further, the study attempts
to link firms’ motivations for carbon reductions, degree of firms’ inner capabilities and corpo-
rate responses to climate change. The study may identify the actual dynamics behind corpo-
rate policy responses by examining how motivations for carbon reductions affect the degree
of inner capabilities, and in turn external responses to climate change.

The contributions of this study will be threefold. First, the study considers corporate re-
sponses to climate change with the emphasis on their organizational resources and capabili-
ties. As climate change regulations showed differences at the national level, prior research
has focused on uneven corporate responses by institutional contexts. However, examining
corporate responses based on resources and capabilities would further expand our under-
standing about firms’ strategic choices in both climate change mitigation and political re-
sponses. The application of the RBV of the firm to the analysis of corporate responses to
climate change would thus highlight the importance of heterogeneity in firm resources and
capabilities.
Second, examining corporate responses to climate change at the current status would be
meaningful and timely. As the regulatory uncertainty after the Kyoto Protocol remains and
post-Kyoto agreement are being discussed, firms’ heterogeneous responses exist. Although
oikos Ph.D. summer academy 2008 – Entrepreneurial Strategies for Sustainability 13
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the opposed position seems to be weak compared to the past (Ball, 2007), some companies
under a fragmented and weak policy regime continue to act in opposition to climate change
regulation at all levels (Jones and Levy, 2007). Supportive actions are seen, asking for even-
tual international agreement, greater certainty in emissions regulation, and uniform national
action compared to state level rules. Regardless of whether corporate political actions are for
or against curbing industrially emitted GHG, both opposite streams on climate change will
shape further climate change policy formation. Thus, classifying firms’ climate responses into
three categories (supportive, neutral, and defensive) at the current status might be a predict-
able indicator of how international or national climate policies will be evolved.

Third, this study will provide implications for both policymakers and business managers. For
business managers, it would offer an increased understanding about firms’ organizational
capabilities that create sustained competitive advantages. Firm that have capabilities built by
emissions trading, process improvement, and product development might benefit, when
emissions reductions regulations are certain in the longer term. For this reason, firms would
support stricter climate change regulations that enable them to sustain their competitive ad-
vantages. If this assertion is true, managers need to look back on their resources and capa-
bilities by carbon management practices not only in the near term but also in the longer term.
More importantly, for policy makers, this study may provide insights into why some firms are
less supportive for regulations to address climate change, as climate change policies signifi-
cantly depend on corporations’ cooperation (Skjaerseth and Skodvin, 2003). Identifying the
motivations for different policy responses could help policymakers to better understand about
underlying business investment in carbon emission reductions. Put another way, it can be
inferred that without uniform, certain international GHG regulations and stricter national regu-
lations (including mandatory caps), many firms that take defensive or neutral stances would
be continually passive in investments in the carbon emission reductions and build less orga-
nizational capabilities for sustainability. Therefore, for policymakers, this study may offer a
rationale for more robust climate change legislation that can improve firms’ investment in
carbon reductions and contribute to addressing climate change for the global public good.
Further, another policy implication may be drawn: if firms’ innovative actions in production
processes and products are less motivated by regulatory pressures (From Hypothesis 4),
policy makers also may consider some initiatives (e.g., incentive programs) to encourage
firms’ innovative actions with respect to clean technologies and renewable energies, along
with market-based climate change regulations.

5. Taking the next step

For the development of this study, further steps will include two things: 1) to identify an ap-
propriate methodology to empirically test hypotheses, and 2) to further develop theoretical
assumptions. The use of regression analysis can be considered as an option to examine the
relationship between organizational resources and capabilities by carbon management and
corporate political responses. Thus, the Carbon Disclosure Project (CDP) that shows firms’
views on climate change issue, emissions trading history, and firms’ activities to reduce car-
bon emissions from the world’s largest companies, may be an available data source (CDP,
2007). However, as the survey of the CDP bases upon self-reported of account of their activi-
ties on climate change, it would be challenging to gain firms’ divergent policy responses. As
the explanatory focus in this study is on corporate political actions, it would be critical to col-
lect effective data that shows firms’ actual actions on climate change, so that the validity and
reliability of the study can be secured.

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