Pilot Programme for the Promotion of EnvironmentalManagement in the Private Sector of Developing Countries

(P3U)

ISO 14001: an Indian Case Studyand General Conclusions

P3U-Working Paper No. 13e September 1998

Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ) GmbH/Abt. 44

Published by:

GTZ-Pilot Programme for the Promotion of Environmental Managementin the Private Sector of Developing Countries (P3U)Wachsbleiche 1, 53111 BonnTel.: (+49) 0228 604710 Fax: (+49) 0228 98570-18E-mail: gtzp3u@aol.comHomepage: http://www.gtz.de/p3uResponsible: Dr. Edith Kürzinger (Head of GTZ-Programme P3U)Author: Wiebke Schlömer

©P3UGTZ: Reproduction possible with authorization of P3UGTZ

Table of Contents

Abbreviations .............................................................................................................. 1

Abstract....................................................................................................................... 2

1. Introduction ............................................................................................................. 2

2. Brief introduction into an Environmental Management System according to ISO 14001....................................................................................................................... 4

3. ISO 14001: A Case Study on Indian Experiences .................................................. 6

3.1 Objectives and Methodology of the Study ......................................................... 6

3.2 Profile of the companies.................................................................................... 7

3.3 Major findings of the case study ........................................................................ 8

3.4 Conclusions from the case study..................................................................... 13

4 Lessons learned from the Case Study ................................................................... 14

4.1 ISO 14001 as a policy instrument.................................................................... 14

4.2 ISO 14001 and its suitability for SMEs ............................................................ 16

5 Conclusions and recommendations for P3U.......................................................... 19

References ............................................................................................................... 23

Annex: Questionnaire

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Abbreviations

EMAS Environmental Management and Audit Scheme

EMS Environmental Management System

GTZ Deutsche Gesellschaft für Technische Zusammenarbeit GmbH

IMS Integrated Management System

P3U Pilot Programme for the Promotion of Environmental Management in

the Private Sector of Developing Countries

SIDBI Small Industry Development Bank of India

SME Small and Medium-sized Enterprises

USAID United States Agency for International Development

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Abstract

Globalisation and the subsequent pressure to increase competitiveness as well asthe deterioration of the environment are the reasons why environmental managementsystems (EMS) according to ISO 14001 are becoming increasingly popular indeveloping countries. The following article presents the results of a case study onexperiences with the introduction of ISO 14001 in India. Special attention is given tothe underlying motivation to adopt ISO 14001 as well as to obstacles encounteredand economic and environmental benefits identified during implementation. Apartfrom the company-level perspective towards ISO 14001, this article examines thepotential economic and ecological effects of ISO 14001 from a policy perspective andfinally discusses the applicability of this EMS to small and medium-sized enterprises(SMEs).

1 Introduction

With regard to private sector development on the one hand and industrial pollution onthe other, entrepreneurs in developing countries are actually facing two majordefiances which require prompt and adequate action. Firstly, they have to adapt tonew market developments resulting from globalisation. Due to stronger internationalbusiness relations, trade liberalisation and, consequently, increased international andnational competition, enterprises in developing countries have to raise the economicefficiency of their production. They also have to cope with new environment-relatedstandards as well as increased consumer demand in industrialised countries forenvironmentally sound products. Secondly, the overall environmental degradation atall levels demands reaction and a change of behaviour of every single actor includingthose in developing countries.

The case study on Indian experiences with ISO 14001 was carried out by the supra-regional Pilot Programme for the Promotion of Environmental Management in thePrivate Sector of Developing Countries (P3U) of GTZ, the German Agency forTechnical Co-operation in collaboration with the Environment Management Divisionof the Confederation of Indian Industry (CII). The P3U Pilot Programme aims atelaborating an integrated concept for the promotion of environmental managementand at testing it by way of example in selected countries. The concept is supposed tobe demand-driven and consensus-based and expected to enhance environmentallysound production processes and products in developing countries, thus contributingto the prevention and reduction of negative environmental impact caused by industry.Targeting at Small and Medium-sized Enterprises (SME), P3U currently developsfour instruments of environmental management which are expected to be implemen-ted easily and at low cost. All P3U instruments are supposed to identify andimplement win-win measures which allow for achieving economic and environmentalbenefits at the same time.

As P3U is working in the field of environmental management, the international,certifiable environmental management system (EMS) ISO 14001 is an important topicto – sooner or later – deal with. Due to the fact that an internationally recognisedcertification can be obtained, a rising interest can be observed particularly in develo-

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ping countries. The overall positive public attitude towards this EMS, however,seems to be based on general, theoretical and intuitive assumptions while littleempirical analysis of experiences has been conducted so far. The suitability of ISO14001 for developing countries has not been examined in detail and little empiricaldata can be found on its applicability for SME in developing countries. Finally, thereare no quantitative data to substantiate that and to what extent ISO 14001 helps toimprove the environmental performance of the certified companies.

The major motive for P3U to undertake a study on ISO 14001, constisting of a deskstudy and a case study on experiences in India1, is to figure out if, to what extent or inwhich manner P3U should focus on this certifiable EMS in the second phase of itsproject. Therefore, the objectives of the study are:

• to learn about the effects (costs/benefits) of ISO 14001, especially in developingcountries such as India that already counts with a considerable number of certifi-cations;

• to determine motivational factors, major achievements and problems encounteredwhen implementing ISO 14001;

• to learn about the role of intermediary institutions like business associations,chambers etc. with regard to the promotion of ISO 14001;

• to explore information on the environmental effects (improvement) of this EMS;

• to draw conclusions whether ISO 14001 could be an appropriate instrument forSME, or for a certain type of SME respectively;

• to develop ideas about adequate approaches for the introduction of ISO 14001 inSMEs.

This paper will give a short introduction to ISO 14001 in section 2 in order tosummarise basic information needed for the further assessment of ISO 14001.Chapter 3, the main part of this report, presents the Indian experiences with ISO14001. Based on the basic information on ISO 14001 and the findings of the casestudy, chapters 4-6 will comment on ISO 14001 from a policy perspective, discuss itssuitability for SME and finally draw conclusions for the work of the P3U pilotprogramme.

1 I am particularly grateful for the assistance of and fruitful discussions with Mr. K P Nyati, Head of theEnvironment Management Division of the Confederation of Indian Industry (CII) and his colleague Mrs.Ranjana Ganguly when conducting the case study in India.

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2 Brief introduction into an Environmental Management System according to ISO 14001 An environmental management system (EMS), in simple terms, is a structuredsystem integrated with the rest of a company’s operations. It is developed to ensurecompliance with the company’s own stated environmental policies and objectives. ISO 14001 describes the basic requirements of an EMS, which is the standard thatcompanies will implement and the standard to which they will either self-declareconformance or seek third-party registration. The basic model for this EMS includes afive-step process: 1. Definition of an Environmental Policy

2. Planning− Environmental aspects− Legal and other requirements− Objectives and targets− Environmental management programmes

3. Implementation− Structure and responsibility− Training, awareness and competence− Communications− Environmental management system documentation− Document control− Operational control− Emergency preparedness and response

4. Checking and Corrective action− Monitoring and measurement− Non-conformity and corrective and preventive action− Records− Environmental management system audit

5. Management review

The ISO 14001 standard is relatively short, the requirements are straightforward anddeceptively simple. Companies that have well-developed management systems inplace will be well along the road to complying also with ISO 14001 requirements,while in companies with less-developed systems or rudimentary management theimplementation may take a considerable time.

The standard is supposed to be applicable to all types and sizes of organisations, i.e.it is by no means restricted to industry. It is meant to accommodate diverse geo-graphical, cultural and social conditions and to be successfully applied everywhere.

One key point issue that will facilitates the an understanding of theis standard is this:the ISO 14001 standard is a process-oriented – not a performance-oriented –standard. Consequently, it does not tell companies what type or level ofenvironmental performance they must achieve. Instead, it offers companies thebuilding blocks for a system that will help them to achieve their own goals. The basic

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assumption is that improved environmental management will automatically lead toimproved environmental performance.

As ISO 14001 is a process-oriented standard, it implies a commitment to continuousimprovement. Notably, this continuous improvement only refers to the improvementof the management system and not to the improvement of environmentalperformance itself, which is supposed to be the indirect result of an improved EMS.

Comparison ISO 14001 and EMAS

As this study focuses on experiences with ISO 14001 in developing countries, thereis no obvious relation to the European Environmental Management and AuditScheme (EMAS). Since, however, this study is supposed to assess ISO 14001 anddraw conclusions for the further work of the P3U Pilot Programme, it is useful tocompare it with another EMS in order to discover and evaluated both critical andpositive aspects more easily.

There are some basic differences between EMAS and ISO 14001.

1. As EMAS is the European standard, it applies only to sites within the EuropeanUnion (EU) while ISO 14001 is applicable worldwide.

2. EMAS focuses more directly on the improvement of environmental performance

than does ISO 14001, which concentrates on establishing and improving theEMS, while considering the improvement of environmental performance as animplicit, but not a indispensable consequence.

3. EMAS requires the publication of a validated environmental statement and an

annual simplified statement. In contrast, ISO 14001 does not require a publicstatement and simply calls on companies to consider external communication. It isup to the company to decide what and how much information to communicate. Inaddition, while EMAS requires the company to make information on its policies,programmes and EMS system publicly available, ISO 14001 only requests theenvironmental policy to be made available to the public.

4. EMAS is site-specific and relates to industrial activities only, whereas ISO 14001

applies to activities, products and services across all sectors, including non-industrial activities such as government and other services.

5. According to EMAS, a company must adopt an environmental policy that,

implicitly, provides compliance with all regulatory requirements. With respect toISO 14001, the company shall define its environmental policy so that it includesthe explicit commitment to comply with relevant environmental legislation.

6. EMAS prescribes the “economically viable application of best available

technology“ (BAT), while ISO 14001 says that the organisation should consider “itstechnological options“ when setting its objectives and targets.

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3 ISO 14001: A Case Study on Indian Experiences

3.1 Objectives and Methodology of the Study

The case study on Indian experiences with ISO 14001 was carried out by the supra-regional Pilot Programme for the Promotion of Environmental Management in thePrivate Sector of Developing Countries (P3U) of GTZ, the German Agency forTechnical Co-operation in collaboration with the Environment Management Divisionof the Confederation of Indian Industry (CII). The reason to undertake such aresearch in India was that there already exists a comparatively large number ofcompanies that have either been certified according to ISO 14001 standards or are inthe process of implementation. This is to a large extent due to the proactive role ofCII’s environment division, as well as to the response of Indian firms to newinternational developments.

This study does not intend to be representative in accordance with criteria of quanti-tative statistical methods. The approach however aims at getting some qualitativeappreciation and first-hand information about practical experiences with ISO 14001 inselected companies according to criteria such as sector, region and size. Of specificinterest were the companies’ motivation to introduce this environmental managementsystem (EMS), the problems which arose during the implementation process and - asfar as already known – costs and benefits, both economic and environmental. Asexpected, most of the firms that have introduced ISO 14001 so far, are relativelylarge, progressive and innovative. This is also reflected in the sample of companiesvisited.

Notwithstandiong the fact that P3U’s target group are small and medium-sizedcompanies (SMEs), these large companies had to be considered in the case study,as no smaller companies had seriously started to adopt ISO 14001 in India at thetime of the interviews. The main objective of the study therefore was to learn aboutexperiences with an EMS according to ISO 14001 standards in order to draw con-clusions on whether or to what extent the findings, such as experienced benefits andobstacles, are applicable to all sizes of companies. In the meantime CII has initiateda pilot programme which introduces ISO 14.001 into companies of different sizes,including a small and a medium-sized firm.

The total number of firms taken into consideration by the study was comparativelysmall, i.e. 67, consisting of all ISO 14001-certified companies (32) and those in theprocess of implementation (35). Considering the above mentioned criteria, as well asaspects such as the availability of knowledgeable people at the time of the interviewsetc., a sample was proposed by CII. Out of 13 companies targeted for interviews andvisits of the factory, 11 companies were actually visited, as two appointments hadbeen cancelled at short notice.

Each company was personally visited by a team consisting of one person from GTZ-P3U as interviewer and one from CII's Environment Management Division asfacilitator. Each interview was followed by a tour of the company. The interviews wereconducted according to an interview guideline which contained open as well asclosed questions and a short assessment of motives, benefits and problems in

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connection with the introduction of IS 14001 in order to make the different answersmore comparable. The entire guideline is contained in annex 1.

3.2 Profile of the companies

With regards to sectors, the companies belonged to either the automotive, textile,electronics, ceramics, tobacco or the services sector. Since the idea of the casestudy was not to focus on one region, but to get impressions from at least threedifferent geographical industrial areas, companies from the Delhi, Bangalore,Bombay and Ahmedabad region were included in the sample.

Measured according to the number of employees, the size of the companies varied:

Number of employees Number of companies100-499 4500-999 3

1000-4999 3> 5000 1

With exception of the services company, the costs for materials and inputs repre-sented the major part of the companies’ costs, amounting to 45-50% on an average(measured as a percentage of the turnover), whereas the share of labour costs wasat an average of only 10% of the annual turnover. Therefore, a major starting pointfor cost reductions could be a more efficient use of raw materials and other inputs.

The organisational and hierarchical structure of the interviewed companies is charac-terised by the existence of various management levels including a pool of qualified,technical personnel who in many cases is responsible for the implementation of topmanagement decisions.

Regarding the markets served by these companies, only three of them currentlyexport more than 20% of their total production, the major markets being Europe,North and South America, Australia and the Gulf countries. For the rest, exports playa minor role, with destinations in the neighbouring countries like Sri Lanka,Bangladesh, Nepal and Pakistan, or no role at all.

Environmental management before the implementation of ISO 14001

Whereas all companies had already established quality management systems (QMS)according to either ISO 9000 ff. or, in the automobile sector, QS 9000 respectively,none of them had introduced any environmental management system before theimplementation of ISO 14001. Most of them had concentrated on pollution control,mainly by installing treatment plants. Preventive technologies had hardly been intro-duced in the production process. Two rather progressive enterprises had startedinitiatives to reduce losses or minimise waste during the production process.

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More than half of the companies interviewed had a person or even a division withenvironmental responsibilities, often combined with a responsibility for safety issues.

3.3 Major findings of the case study

Motivation for the implementation of ISO 14001

What makes an EMS according to ISO 14001 attractive for companies and conse-quently, why do they decide to implement this type management system is one of themost interesting questions for policymakers and intermediary institutions.

For the interviewed enterprises, the most important aspect was to improve thecompany’s image and add a “green“ component to the overall perception. Thetarget group to be influenced by this “green“ impression includes customers, both innational and, what is more important, in international markets, but also governmentalinstitutions like the State Pollution Control Boards (SPCB) and the general public.

The second major motivational factor was the implementation of so called win-winmeasures, which refer to a realisation of economic benefits through cost reductionsor increases in productivity, while simultaneously achieving ecological benefitsthrough a more efficient use of natural resources. Possible cost reductions or increa-ses in productivity as well as an improved image are expected to help secure thecompanies’ competitive position, mainly in export markets, and even enhance theexpansion of the market share in foreign markets in the long-term. These aspectswere primarily mentioned by the export-oriented companies. Companies focusing onthe domestic market, however, are likewise convinced to be able to secure or evenexpand their competitive position in the national market due to cost reductions.

A third motivational force was that by following an EMS they were offered a verystructured, determined and comprehensive approach to address environmentalmatters and, at the same time, to establish a flexible, yet certifiable managementsystem. By this, the enterprises can assure that all, or at least the major divisions ofthe company are taken into consideration during the environmental audit and thatrecommended measures do not only focus on selected, single problems but dointegrate them into a systemic approach. Subsequently, one expected result was thatthe operational and administrative efficiency would be improved. Since ISO 14001standards include the commitment to continuous improvement, the companiesappreciate starting a process which, on the one hand, offers a clear line to follow, buton the other leaves flexibility to prioritise specific problem areas.

Fourthly, the anticipation of an increase in energy and, to a lesser extent, watercosts, and an envisaged water shortage motivated companies to start an EMS whichis supposed to assist in using these resources more efficiently. Consequently,companies expect to be less severely exposed to such price increases or shortagesof supply than without an EMS.

Fifthly, due to pressing environmental problems, not only within India but globally,many companies anticipate new national legislation as well as international

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environmental standards to become tighter and stricter. By implementing ISO14001 at an early stage, they hope to be better prepared for meeting these challen-ges. As this EMS is designed in a flexible way and committed to continuousimprovement, it offers a large variety of possibilities for adjustment to specificconditions which may arise in the future.

Sixthly, while in many industrialised countries the private sector is confronted withincreased pressure from the environmental movement, this has not yet becomean important factor for Indian industry so far. Hence, as no or hardly any suchpressure is experienced by the interviewed companies, it was not a drivingmotivational force for the implementation of ISO 14001.

Seventhly and finally, it was discussed with all the companies whether the mainmotivation was to implement an environmental management system or whether amajor incentive evolved from the certification of this EMS.The answers to this question were rather diverse. Four companies put a strongemphasis on the management system itself and clearly stressed the advantages andbenefits resulting from its structured, systematic approach. In addition, they pointedout that most of the monetary benefits, such as costs reductions, resulted rather fromincreased efficiency of production through the EMS than from the marketing effects ofthe certificate. Three companies, however, highlighted the important marketing andimage effect of the certification and their lack of interest in an EMS which is notcertifiable. In summary, all companies agreed that the certification is at least avaluable “by-product“ which could be understood as a “reward“ for a certain perfor-mance or “result“ after a sometimes difficult process of implementing the EMS.

Graph 1: Major Motivational Forces for Implementing ISO 14001

Im proving Company

Image

Im plem enting W in-W in M easures

Securing/S trengthening

Com petitive Position

Following a S tructured

Approach

Antic ipating H igher

Energy/W ater C os ts Expecting

a T ighter Legis lation

Increased P ressure from

"G reen G roups"

Very Important

U nim portant

Im portant

Less Important

Source: own calculations; average values calculated on the basis of the companies’ assessment of the variousaspects with 1=very important down to 4=unimportant

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Benefits derived from ISO 14001

Although the sample companies had either received their certification only shortlybefore the interview or were still in the implementation process, some concretebenefits had already been derived and could be named.

First, the most important benefits were monetary benefits derived from reducedenergy costs as a result of increased energy efficiency. At the same time, the EMShad led to environmental benefits, i.e. reduced overall energy consumption. Onecompany reported an increase in energy efficiency of 5% during the last two years.Apart from energy, reduced consumption of water and other raw materials was alsoreported. One impressive example is the reduction of fresh water consumption by68,7% in one company since its certification in June 1996, i.e. in less than two years.

Second, various “soft“ benefits were achieved by the companies. They reportedabout improved industrial relations with either the government or with competitorsfrom their sector, as well as with business associations. In addition, greatershareholder and customer confidence was observed. Most of these achievementswere supposed to result from their “pioneer status“ acquired in the field ofenvironmental management in India.

Third, an increase in labour productivity was observed, although not yet quanti-fiable; this was attributed to improved work ethics and corporate identity. Since anEMS according to ISO 14001 is based on the participation of the entire staff, itenhances the integration of every single worker and motivates him/her feel to activelyparticipate in changes within the enterprise. It is, however, particularly the initiation ofthis participatory process that is accompanied by problems which will be discussedlater.

Fourth, companies expected increased sales as a result of positive marketingeffects due to the certification and improved industrial relations. Nevertheless, theinterviewed Indian companies could hardly confirm or quantify this potential benefit,as most of the companies either had not yet or had just recently been certified.

Fifth, another benefit often associated with the adoption of an EMS is that it helps toaddress a trend among insurance companies to exclude certain pollution incidentsfrom their insurance coverage or place a surcharge on certain polices. In order toremove or reduce increases in the insurance premiums , companies may use ISO14001 to decrease the potential risks and the probability of environmental liabilities.For the companies interviewed, this benefit is of no relevance at present, although itmight become an issue in future.

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Graph 2: Major Benefits resulting from ISO 14001

Inc reas ed S ales

Inc reas ed Labou r P roduc tivity

Inc reas ed E nergy E f f ic ienc y Low er

R es ou rc eC os ts

Im proved Indus tr ial R elations

R educ edIns u ranc eP rem ium s

V ery Im portan t

U n im portan t

Im portan t

Les s Im portan t

Source: own calculations; see Graph 1

Obstacles and constraints for the implementation of ISO 14001

Several obstacles were experienced during the introduction of the EMS. A generalproblem - not only in the context of ISO 14001 - and thus an important factor forenvironmental pollution of Indian industry is the lack of common disposal facilities.This complicated the implementation of ISO 14001, as all companies that wanted toincorporate the adequate disposal of toxic or other waste into their environmentalpolicy needed their own treatment plants or disposal facilities, a fact that involvedsignificant investment costs.

ISO 14001 standards are based on the participation and involvement of all staffmembers. This, however, implies various problems. Especially in developing coun-tries like India, there is a severe lack of environmental consciousness amongworkers. Consequently, it is difficult to make them understand why they shouldchange some of their operations and their usual behaviour. In general, changingbehaviour can rarely be achieved within a few months, it is rather a long-termprocess. At the same time, resistance to changes is often experienced and is hard tobe overcome. Moreover, if a company has a hierarchical structure, the employees atlower levels are not used to participating in discussing changes and may thereforenot respond to ideas or suggestions in the expected way. In addition, managers maynot be sufficiently prepared to modify hierarchical behaviour and assist workers inadequately carrying out the necessary changes.

Another constraint experienced by the Indian companies is a lack of skilled trainersor consultants for in-house training and consultancy during the implementationprocess. All interviewed companies had been assisted by CII, but apart from thisinstitution, there hardly seem to be other organisations or individual consultants who

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could offer adequate support. Should the private sector’s interest in ISO 14001should increase, there will thus be a strong need for training qualified intermediariesand for broadening the base of private consulting services in the field of environ-mental management.

Finally, many companies mentioned that they missed legal incentives forenvironmental protection in general, such as market-based instruments, and for theimplementation of environmental management systems in particular. Possibleincentives for ISO 14001 certified companies could either be financial, or, moreimportant, administrative, such as the exemption from the annual control by the StatePollution Control Board or a change to one control every two years. This would re-duce the rather bureaucratic, time-consuming procedures of the annual surveillance.

Graph 3: Problems encountered during implementation of ISO 14001

Lack of Common Disposal Facilities

Lack of Skilled Consultants

Lack of Env.Conscience among

Personnel

Resistance to Change

Lack of Legal

Incentives

Very Important

Unimportant

Important

Less Important

Source: own calculations; see Graph 1

The Role of Intermediary Institutions

The role of intermediary institutions, i.e. the Confederation of Indian Industry and, inparticular, its Environment Management Division in the context of the case study,refers to two different fields:

− Its role in motivating companies to agree to the introduction and establishment ofISO 14001;

− Its role during the implementation process such as consultancy, training etc. With respect to the motivation of companies, half of the interviewed companiesstressed the important role of CII in raising their awareness for ISO 14001 throughintroductory seminars or workshops on environmental management. Furthermore,one third of the companies underlined that CII was particularly helpful in motivatingand convincing the top management of the companies to introduce an EMSaccording to ISO 14001. Most of the companies emphasised full top managementcommitment as a precondition for the successful implementation of ISO 14001, and a

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business association (confederation) like CII can contribute enormously to settle theconditions for this type of activities within their member companies. During the implementation process of ISO 14001, CII played a major role inoffering consultancy to the companies as well as in carrying out training courses forthe responsible staff. The advisory work mainly referred to the design of theenvironmental policy and the EMS in general as well as to methodology and contentsof the in-house training programmes for the staff. Moreover, CII assisted in develo-ping an adequate and realistic timetable for the individual steps of the implementationprocess. As all interviewed companies had already established a qualitymanagement system according to ISO standards, they were familiar withdocumentation requirements and the rationale behind a management system ingeneral. Thus, they predominantly needed support in ISO 14001-specific issues. One sample company was part of the United States Agency for InternationalDevelopment (USAID) “Sustainable City Project“. While establishing ISO 14001, thiscompany was assisted by both USAID and CII. Notably, the company reported thatboth institutions were complementary as USAID offered valuable information on theEMS and excellent documents while CII provided the country- and company-specificknowledge.

3.4 Conclusions from the case study The case study on experiences with the implementation of ISO 14001 by selectedIndian companies gives valuable information on expected as well as realised benefitson the one hand, and on problems and constraints on the other. The major benefits were:

− For large and progressive companies the major motivational aspects are toimprove the company’s image and to strengthen the company’s competitiveposition, both in the domestic and in international markets.

For all interviewed companies, the realised and potential economic and other benefitsshow that the problems and costs associated with the establishment of the EMSoutweighed the effort.

− The interviewed companies, however, have not yet registered a net economicbenefit resulting from the implementation of ISO 14001. Although they reportedsome economic benefits, amortisation of investments and/or other costs incurredby the implementation had not been realised at the time of the interviews. Moreand especially long-term experiences of companies will have to be evaluated toclearly prove the cost-effectiveness of their EMS.

When more practical experience has been gathered with the EMS, it will be easier todeal with the various problems.

− Addressing the training needs of personnel is to a large extent a long-term processwhich requires adequate training methods and a more participatory managementstyle.

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− The lack of skilled consultants might be mitigated once ISO 14001 becomes morepopular in India and, as a consequence, the demand for qualified externalfacilitators is rising along with their qualification.

− As there is a comparatively large number of international companies andorganisations promoting ISO 14001 in developing countries already, they shouldensure the availability of the required know-how and expertise in India, ifrequested enen on a short-term basis.

− Training of local consultants and thus the formation of multipliers needs to beintensified and supported by national as well as international organisations.

With respect to intermediary institutions, the important role of CII in promoting andestablishing ISO 14001 as well as addressing the respective problems was con-firmed. Particularly at this early stage of environmental management in developingcountries, the work of institutions like CII on EMS is crucial. The following two chapters contain further conclusions and recommendationsresulting from the case study. These mainly refer to a policy perspective and to thequestion of whether and to what extent ISO 14001 is suitable for SMEs.

4 Lessons learned from the Case Study

The results of the Indian case study lead to the question of what lessons can belearned about ISO 14001. The first part of this chapter will discuss some ideas thatmay be of interest to policymakers and intermediary institutions working in the field ofeither environmental policy or private sector development. The second part willanalyse the question of whether and to what extent ISO 14001 might be a suitableand applicable EMS for SMEs in developing countries.

4.1 ISO 14001 as a policy instrument

1. ISO 14001 may not necessarily improve the overall environmental situation.

ISO 14001 encompasses the objective of promoting or supporting an instrumentwhich helps to improve the environmental performance and competitiveness of theprivate sector. By promoting the EMS, one aims at improving the overallenvironmental performance of companies, thus contributing to the reduction ofindustrial pollution. In order to understand the ISO 14001 standard it is important to note that it is aprocess-oriented – not a performance-oriented – standard. Consequently, it does notprescribe any specific environmental performance to companies. Due to its focus onthe process and the development of the EM system, companies have a certainfreedom to prioritise some activities while postponing others. Hence, a company's

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environmental priorities may differ from priority areas and activities as seen from anenvironmental policy’s perspective. In addition, as ISO 14001 is a process-oriented standard, it implies a commitment tocontinuous improvement. This continuous improvement, however, refers to theimprovement of the environmental management system, not necessarily to theimprovement of the environmental performance as such, which is supposed to be theresult of an effective EMS. Thus, an improved environmental performance could beinterpreted as a nice side-effect: if it does not happen,, it does not impede the(renewal of the) certification as long as an improvement in the management systemhas been achieved.

2. Legal incentives for ISO 14001 may have a counterproductive effect by enhancing rent-seeking behaviour.

Some interviewed companies proposed the introduction of legal incentives such astax reductions, subsidies for technology or exemption from the annual surveillance bythe State Pollution Control Boards for the introduction of an EMS according to ISO14001 standards. From the perspective of environmental policy, such legal incentivesmust be carefully considered: they might have a counterproductive effect, i.e. inparticular a loss of control since the certification is conducted by private consultantsand not by the government. In order to receive the benefits from such incentives, companies’ interest in voluntaryapplication of environmental management, especially of certifiable systems, mightincrease. The reason for such a rising interest, however, would not be that the com-panies recognise the importance of environmental management and the objective ofimproved environmental performance. Their intention would only be to benefit fromlegal incentives through certification as such. Therefore, there is a danger that publicincentives for the adoption of these voluntary schemes at company level might leadto a rent-seeking behaviour, i.e. an inefficient use of scarce resources to takeadvantage of artificial, non market-induced privileges. This behaviour might either notcontribute to the improvement of the industry’s environmental performance or, if itdoes, it would lead to an improvement which is below the level that could beachieved without incentives, i.e. to a sub-optimal solution.

3. A reliable, impartial accreditation system and qualified, external certifiers of integrity are needed to avoid “inflationary“ tendencies with a certifiable EMS.

With respect to rent-seeking behaviour, companies would try to invest resources onlyto receive the certificate of ISO 14001, mostly without establishing an effective EMS.Theoretically, this should not be possible due to external certification. But sincecorruption does exist in the real world, such rent-seeking activities are likely tohappen. Even if there are no legal incentives to re-enforce the interest in ISO 14001,it is important to count on a reliable, impartial accreditation system for certifiers. Asexperiences with the quality management system according to the ISO 9000 series inIndia have shown (as reported in the interviews), the interest in such a certified

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management system just for its own sake - and not for the economic and ecologicalbenefits of a functioning system - is increasing rapidly once the economic benefitsresulting from the mere certificate are clear. If the certifying agencies are primarilyprofit-oriented, the certification process may easily not be conducted as carefully as itshould. As a consequence of this tendency, the value of a certification according toISO 9000 has deteriorated considerably in India. In order to prevent such inflationary tendencies with an EMS following the ISO 14001standards, it is important to carefully examine and (re)design the accreditationresponsibilities and procedures. Each country needs to have a reliable accreditationauthority or council staffed with trustworthy and competent environmental personnel,capable of assessing the quality of expertise and personnel of certification agenciesrequired to undertake serious environmental certification. In India as well as in manyother countries, there is a great danger that an EMS loses its value sooner or laterdue to inadequately set incentives which provoke rent-seeking activities. Such asituation may also reduce the possibilities for local consultants to successfullycompete with foreign consultants, who may be considered more reliable and effectiveby exporters or foreign clients.

4. Command-and-control regulations, market-based instruments and voluntary environmental management schemes need to be complementary.

Legal incentives may help to promote the establishment of EMS in the private sectorand may contribute to an improvement of the environmental performance of industry.However, such incentives should only be adopted if the system, into which they areto be integrated, can prevent misuse. All in all, voluntary environmental managementschemes, command-and-control regulations and market-based instruments need tobe complementary. Voluntary schemes should remain as independent and voluntaryas possible, since they represent a chance to mobilise the entrepreneurs’ owninterest in a good environmental performance beyond compliance, and to stimulatetheir permanent commitment to a process of continuous improvement of economicand environmental performance.

4.2 ISO 14001 and its suitability for SMEs Although SMEs are very often referred to as a specific type of enterprise, it should betaken into consideration that it is a very heterogeneous group, encompassing allkinds of size, owners, sectors as well as traditional and export-oriented firms. As it isvery difficult to draw conclusions for SMEs in general, the following considerationsare based on the results of the Indian case study and some general reflections onSMEs, whose specific problems and constraints have to be taken into account inorder to assess ISO 14001’s suitability for environmental management in SMEs.

1. The costs of the EMS, particularly the consultancy and certification fees, may be prohibitive for SMEs.

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When asking about problems and obstacles, none of the companies in the casestudy considered financial aspects or the costs of ISO 14001 as a problem. However,various costs are connected with the implementation of the ISO standard, likeconsultancy fees and the certification itself. These costs may be prohibitive for SMEs, particularly if the rate of return cannotclearly be quantified and if financial incentives for the establishment of the EMS arenot available. Proposed investments and needs for changes identified during theenvironmental audit, however, may not necessarily imply costly investments. Veryoften, the audit suggests a reorganisation of operations, low-cost adjustments in thetechnical production process or simply a more careful use of resources in order toincrease efficiency. This is especially true for SMEs, who often have not (fully) tappedthe no-cost/low-cost options to improve productivity and resource use. If, however,larger investments are implied, loans are hardly available from financial institutions,.thus turning the scarcity of financial resources into a major problem for SMEs.

2. The availability of and access to technology may cause severe problems for SMEs.

This aspect likewise was not mentioned as a problem by the interviewed companies,but it is likely to impose restrictions to SMEs. If a company intends to make invest-ments as a result of the EMS, the lack of knowledge about state-of-the-art technologyin the domestic market as well as the restricted access to information about importedtechnologies may be a problem. In addition, the costs for imported technologies maynot be affordable for SMEs, particularly as long as import tariffs do exist.

3. The time horizon of SMEs may be too short for a mid-/long-term and time-consuming EMS like ISO 14001.

The time horizon of SMEs normally is rather limited. They are not used to or cannotafford to plan within a long-term dimension since their primary objective and need isto survive actual market pressures. The establishment of ISO 14001 standards, how-ever, is a rather time-consuming process which may only pay off in the mid or long-term. The case study stated an average time for the implementation (from thedecision to establish the EMS up to its certification) of about one to one and a halfyears. This might be less for smaller units, but still it only refers to the time required toimplement the EMS. Benefits, particularly net monetary benefits are unlikely to beachieved during this period, which is a major obstacle for SMEs.

4. The documentation requirements may be too comprehensive for SMEs, requiring too much personnel and knowledge.

The implementation of ISO 14001 requires a comprehensive, detailed andcontinuous documentation of all activities undertaken and results achieved. None ofthe interviewed (larger) companies considered this a major obstacle, primarilybecause all of them had already established a documentation system whenintroducing the ISO 9000 series. Notably, they all admitted that at that time the

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development of the documentation involved many problems and delayed thecertification since the building of a documentation system and its continuous updatingwere time-, personnel- and knowledge-intensive procedures. This aspect might therefore imply enormous problems for SMEs and might evenprevent them from introducing ISO 14001. Still, once a tailor-made, lean and effectivedocumentation is established, it may help them in more easily detecting inefficienciesdue to increased transparency and information.

5. The implementation of an environmental management system according to ISO 14001 may be too complex for SMEs, although a systematic approach may help them to reduce inefficiencies.

ISO 14001 is an environmental management system. It might be difficult for smallerenterprises to understand the complexity of the approach and the various dimensionscomprised by a management system. Although SMEs do manage their companyaccording to some “system“, often they are not aware of the underlying rationale andhave not questioned it so far. In addition, the typical, strictly hierarchical set-up ofsmall enterprises with one owner/manager who is taking all decisions on one hand,and a pool of unskilled workers on the other, may cause major problems with regardto increased participation and active involvement of everybody concerned. Changingthis attitude can be a real challenge for SMEs, both for the owner/manager and theworkers, and will consequently require some time. Some comparative advantages of SMEs should, however, be considered: If there is abasic commitment to the introduction of an EMS by the owner, there are lesspossibilities for middle management or workers to oppose or undermine action. InSMEs it is relatively easy to generate consensus and disseminate information withinthe factory – whereas these activities absorb a lot of energy in larger enterprises. Allin all, a systematic approach to deal with productivity and environmental problemsand to get a general perception about an effective management system can beparticularly helpful for SMEs. Inefficiencies can be eliminated by considering everysingle operation more systematically and by establishing measures accordingly.

6. The commitment to continuous improvement may encourage SMEs to address environmental matters due to the self-imposed timetable.

The commitment to continuous improvement prescribed by ISO 14001, i.e. thestarting of a process, allows SMEs to take some time for certain actions, setting goalsaccording to their own capacities, particularly if there are many different areas whereimprovement can be achieved. The introduction of the EMS helps to raise awarenessfor environmental as well as organisational/managerial and productivity issues whichare supposed to be crucial for the survival and development of SMEs. Furthermore,certification can be a strong motivational force for modern SMEs, as it is a reward fortheir commitment and their willingness to adopt changes.

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5 Conclusions and recommendations for P3U

1. Environmental management tools ISO 14001 may be a useful environmental management tool for well-established,mainly medium-sized enterprises whose organisational, financial and personnelstructure is able to quickly take advantage of the benefits ISO 14001 offers, andwhich can cope with its costs in terms of time and money. Furthermore, specific sectors seem to favour an EMS according to internationalstandards such as ISO, and it may in the long run be expected from all companieswithin these sectors. Thus SMEs, and particularly SMEs that are exporting orsupplying exporters in developing countries, will have to follow this trend in order toremain in the business. Nevertheless, rather than encouraging strategically ambitious environmental planningin SMEs, environmental management tools for SMEs have to focus on successfullydealing with day-to-day operations and quick positive economic results. The predomi-nant aim of environmental management for SMEs is to save energy and otherresources, reuse and recycle waste, improve its management, and to start acontinuous learning process in the firm, possibly supported by improved informationand co-operation within and among SMEs. These objectives might be more effectively – i.e. less costly, but faster - achieved byinstruments which are less complex than ISO 14001. Such instruments could includean EMS without certification, a simple environmental audit focusing on Good House-keeping (GHK) measures, Environmental Cost Management (ECM) or an IntegratedManagement System (IMS) which combines selected core aspects of environmentaland quality management as well as work place safety, tools developed or adapted byP3U2. For SMEs, tools should be designed in such a way that certification is possiblein the long run, but that positive short-term results, especially economic benefits, canbe achieved without too much effort and time. When adopting instruments forenvironmental improvement, it is of crucial importance for SMEs that they enablethem to reduce production costs and improve product quality, and that economicbenefits are realised as quickly as possible. The experiences made in India with an EMS according to ISO 14001 give valuableinformation for P3U, as they show that it should not concentrate its activities on thisEMS due to several reasons:.

• First, only a sub-group of SMEs, notably the more advanced, probably medium-sized enterprises working in the modern, export-oriented sectors, may benefitfrom applying the complex and time-consuming ISO 14001 standards. Thus, itseems more advisable that P3U continues to focus on less comprehensive andeasier to-implement instruments. As a potential certification may also encouragesmaller companies to address environmental issues, a modular approach seemsto be most adequate. It should allow the combination of different instrumentswhich are immediately beneficial and should help to prepare the way for the

2 P3U Working Papers No. 9e (1998) and 10e (1998), P3U Document on Integrated ManagementSystem (1998)

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application of more complex instruments, including certification, in the long run.For example, the development of a non-certifiable Integrated ManagementSystem (see above) involves the establishment of a comprehensive managementsystem. Such a system may present a basis which could later facilitate anupgrading to an EMS according to ISO 14001.

• Second, an important objective and factor for the success of P3U is to achievebroad dissemination of its methodological approach and instruments. As ISO14001 is a rather time-consuming and complex approach with long-term benefits,it seems unlikely that it will be widely diffused among SMEs. As the case of Indiashows, CII has been actively promoting ISO 14001 on the Indian subcontinentsince the second half of 1996. Some 20 months later, about 65-70 companies, allof them large ones, either have been certified or are in the implementationprocess.

• Third, many international and national, private as well as development assistanceagencies are already active in the promotion and establishment of ISO 14001,especially through classical seminars and consultancies. Therefore, P3U may dobetter continuing to invest its (scarce) resources in developing and practicallyimplementing instruments which (still) are less popular in public but possibly moresuitable and beneficial for SMEs in developing countries (and probably alsoindustrialised ones). New findings and practical experiences on ISO 14001should, however, be continuously observed and analysed and – as far as possible– integrated into the methodological approach of P3U.

2. The role of intermediary institutions The case study in India clearly underlined the importance of an intermediaryinstitution, in this case the Confederation of Indian Industry, for the promotion of ISO14001. Business associations, chambers and other intermediary institutions,including banks, play a major role in disseminating information on and supporting notonly an EMS according to ISO 14001, but the various approaches to environmentalmanagement. These institutions are valuable multipliers and can convincinglydemonstrate the necessity of an effective environmental management which leads toboth economic and environmental benefits. Their work on EMS is particularlyimportant in this early stage of environmental management in developing countries.Furthermore, like CII has started in India, these institutions need to initiate andfacilitate co-operation among enterprises, not only with regard to ISO 14001, but tonon-certifiable instruments as well. P3U should continue and enhance contacts and co-operation with intermediaryinstitutions, since they are closely linked to the target group, know about their specificneeds and interests, and can influence them either because they provide services totheir members (like chambers, associations or confederations) or because of theirbusiness interests (like financial institutions and insurance companies). In particular,an emphasis on the activities of financial institutions may be recommended in orderto better approach these potential multipliers (see: 4. Open questions, Follow-up)

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3. Group-centred approaches Due to the existing problems discussed in chapter 4, there is a clear need for externalsupport to SMEs when implementing ISO 14001 or other environmental managementtools. A possibility to cope with problems like scarce finances, restricted availability ofinformation etc. could be group-centred approaches which enhance and facilitatecollaboration among SMEs. Potential objectives for co-operation could includeshared access to information, exchange of experiences, co-operation on know-howand technology. The co-operation is likely to , bring down costs for externalconsultancy, improve collaboration with regard to the reuse, recycling and generalmanagement of waste as well as to joint training and collective lobbying. Majorbenefits resulting from such group-centred approaches are the exchange ofexperiences, lower costs due to “economies of scale“, and probably an increasedmotivation to follow the process of continuous improvement, as the participatingcompanies understand that they are not alone with their problems. Such jointlearning processes may greatly facilitate the broader dissemination of environmentalmanagement amongs SMEs. P3U has already gained comprehensive information about successful group-centredapproaches in Brazil3 and to a lesser extent in India4. This group-centred approachcan be combined with each and every one of the instruments developed by P3U, asit offers many advantages for SMEs. 4. Open questions – Follow-up The Indian case study on the introduction of an environmental management systemaccording to ISO 14001 brought some useful empirical information for general re-flections on the pros and cons of this EMS and its suitability for SMEs. For P3U,some questions might have remained unanswered, and certain activities could beconsidered for the follow-up.

• Regarding group-centred approaches and the integration of smaller companiesinto the promotion of ISO 14001: CII has recently adopted a “sector approach“,launched in the pulp and paper, textiles and automobiles/automotive componentssectors. This approach, which is supported by USAID, is meant to assist onesmall, medium and large company respectively in each sector to design andimplement an EMS and become certified according to ISO 14001. P3U shouldclosely follow the results and experiences of this approach in order to complete itsknowledge on the specific needs of different company sizes.

• Regarding intermediary institutions: the focus on financial institutions could bestrengthened since these are in close contact with and have detailed informationon their customers. With respect to ISO 14001, it could be interesting to carry outa survey about how development banks/financial institutions assess ISO 14001and, which “value“ it has in their perspective.

3 P3U Working Papers No. 7e (1997) and 16e (1998) 4 van Berkel (1997)

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• Furthermore, it might be helpful to examine existing financial support schemes forthe introduction of ISO 14001 or – if not yet available – ISO 9000 in order to learnabout their effectiveness and to find out whether they could be useful for thedissemination of other instruments of environmental management. One exampleis a support scheme for ISO 9000 offered by the Small Industry DevelopmentBank of India (SIDBI) which reported little interest among companies, andtherefore does not consider any initiatives regarding ISO 14001. The results of ananalysis of success factors of such schemes could be offered to intermediaryinstitutions or the respective public institutions in order to influence the design offuture schemes.

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