Prior Research on Non-Financial Performance Targets

Pinkse and Busch (2013) summarized four broad factors enabling and constraining the use of carbon norms. These carbon norms reflect public declarations and voluntary commitments to constrain their firms’ impact on the global climate and are thus largely equivalent to climate change targets. Both company image and aim are argued to shape how firms seek to improve their strategic positioning by using climate change targets (Pinkse and Busch 2013). The authors distinguish between aims of strategic differentiation from competitors and standardization to level industry practices. By contrast, companies can also set targets to signal either a desired future image or an improved current image. In the latter cases, the underlying intention is one of symbolic impression management and legitimacy enhancement, often associated with accusations of greenwash (Berrone et al. 2017; Delmas and Burbano 2011; Pinkse and Busch 2013). This variation in approaches is explored in four Dutch case studies by Kolk and Perego (2014) who struggled to find unanimous evidence on whether corporate social performance (CSP) targets in executive remuneration reflect either substantive efforts to address social responsibility or more symbolic efforts of window dressing, potentially even the gaming of bonus payment schemes. Exploring the use of climate change targets in carbon reduction projects, Ioannou et al. (2016) found that firms setting more difficult targets complete a higher percentage of their carbon emissions reduction targets and that this relationship is negatively moderated by the provision of monetary incentives. Arguably, target difficulty could be equated to substantive intentions reflecting more sincere attempts to improve environmental performance.

Maas and Rosendaal (2016) also explored the use and nature of broader sustainability targets in executive remuneration among a sample of global multinationals finding significant variation in target-setting behaviors. Yet although targets could generally vary by temporal focus (short term and long term) and by sustainability content (environmental, social or a combination of both), they were chiefly used by firms in dirtier industries and predominantly focused on short-term outcomes and social issues. Studying the effectiveness of corporate social performance targets among the S&P 500, Maas (2016) found that that while qualitative, soft CSP targets in executive compensation appear to be mainly used for symbolic reasons, only quantitative, hard targets were showing improved CSP results, thus being suggestive of substantive intentions. Further evidence on targets and compensation regimes suggests that when tied to financial incentives, such targets may lead to environmental performance improvements (Berrone and Gomez-Mejia 2009; Cordeiro and Sarkis 2008; Russo and Harrison 2005).

In sum, extant findings paint a patchy, and particularly often executive-level focused, picture of the use and effectiveness of non-financial performance targets. Importantly, however, the repeated calls for and references to drawing a distinction between substantive and symbolic intentions underpinning target-setting behavior in this context highlight the need for both conceptual and methodological clarity during hypothesis specification.

Conceptual Model

Our theorization of the relationship between firms’ climate change targets and their environmental outcomes is grounded in prior research that recognizes that a wide range of intentions underpin firms’ environmental management activities (Berrone and Gomez-Mejia 2009; Kolk and Perego 2014) and that the relationship between these activities and environmental outcomes is therefore complex (di Norcia 1996). Ambiguous evidence in relation to environmental management practices in general (Hussain et al. 2016), and particularly target setting (Berrone and Gomez-Mejia 2009; Cordeiro and Sarkis 2008; Russo and Harrison 2005), has fueled debate regarding the limitations of prior research and the merits of various approaches to managing environmental impacts (Maas and Rosendaal 2016; Hahn et al. 2016; Wright and Nyberg 2016).

Substantively, research has highlighted in increasingly nuanced ways processes and mechanisms by which stated, observed, or communicated environmental intentions in companies might be systematically unrelated to, or “decoupled” from, their emissions and impacts (Delmas and Montes-Sancho 2010). Classically, the absence of clear reductions in emissions and impacts associated with a range of environmental management practices, communications, and stated intentions has been understood to reflect willful, strategic attempts to mislead stakeholders through “greenwashing” activities (Aragón-Correa et al. 2016). Where the introduction of environmental initiatives reflects predominantly legitimacy-enhancing intentions, scholars speak of symbolic adoption and implementation (Bansal and Clelland 2004; Berrone and Gomez-Mejia 2009; Boiral 2007; Delmas and Toffel 2008; Delmas and Montes-Sancho 2010), whereby firms’ intent to achieve specific environmental ends is partial at best. In the context of setting climate change targets, prior research has suggested that target setting reflects attempts to present a certain image designed to create favorable stakeholder impressions of the company’s operations and ambitions (Pinkse and Busch 2013). These legitimacy-driven intentions may be caused by significant stakeholder pressures, including those from NGOs, media, and investors (Bansal and Clelland 2004; Darnall et al. 2010; Flammer 2013). Alternatively, growing adoption of various environmental practices may simply reflect companies mimicking each other’s behavior or attempts to pre-empt regulatory intervention, once again with ambiguous implications for firms’ environmental impacts (Bansal 2005; Pinkse and Busch 2013). More recently, more sympathetic accounts have emphasized alternative processes by which such decoupling arises and persists (Pache and Santos 2013; Wright and Nyberg 2016).

What these discussions share is the recognition that understanding the underlying intentions and commitment to addressing environmental impacts is essential to examining the relationship between a given environmental management initiative and its effects on environmental outcomes. Broadly, these intentions reflect an underlying spectrum of the degree to which they embody a commitment to improving environmental outcomes, with relatively symbolic (low environmental commitment) intentions at one end of the spectrum and relatively substantive (high environmental commitment) intentions at the other. For simplicity, our conceptual model (summarized in Fig. 1) dichotomizes the spectrum of underlying intentions for environmental practices into two alternative “modes” of intentions that underpin firms’ decisions to set climate change targets. In the first, targets are primarily conceived of as tools of impression management among external stakeholders—they are classically symbolic in nature and are not associated with any real intention to improve environmental performance. In the second mode, targets are substantive in nature and reflect a firm’s aim to understand, manage, and reduce its environmental impacts over time. Since “true” intentions are unobservable, we propose that the nature of climate change targets as expressed through key target characteristics acts as a proxy for underlying intentions. We then hypothesize that there is a relationship between this degree of substantiveness of climate change targets and improvements in environmental performance. Moreover, to account for varying firm and industry-level contingencies affecting target-setting behavior and potential for environmental improvement, we differentiate our analysis by firms’ carbon dependency.

Fig. 1 Research model summarizing impact of climate change target characteristics on firms’ environmental performance Full size image

The Influence of Climate Change Targets on Environmental Performance

Having outlined our overall model, we begin by exploring firms’ intentions and considerations when setting emissions targets. Building upon the dichotomy between substantive and symbolic intentions for setting climate change targets, we argue that only when substantive intentions to improve environmental performance underpin target-setting behavior will they be effective. Substantive intentions may be altruistic or instrumental, or both (Hahn et al. 2016), but they must be minded toward measurable performance improvements (di Norcia 1996). In these circumstances, carbon performance targets provide firms with an opportunity to develop unique organizational capabilities, which both address environmental impact and may be of value to the firm’s broader financial performance and strategic aspirations (Bansal 2003; Sharma 2000).

Consequently, substantive climate change targets have the potential to affect both environmental performance directly and wider organizational performance more obliquely (Foss and Lindenberg 2013). By aspiring to improve their environmental performance in a significant manner, firms commit themselves to outcomes hitherto unthinkable and unobserved. Targets trigger cognitive and motivational processes (Sitkin et al. 2011; Zhang and Jia 2013) which direct, energize, and encourage persistence needed to work toward their achievement, and which indirectly stimulate changed behaviors inside the organization (Locke and Latham 2009). Consequently, targets have the potential to unleash creativity, urgency, and excitement among employees with the purpose of collaborating, learning, innovating, and deviating from existing routines, habits, and practices to drive significant performance improvements (Halme 2002; Winter 2000). Substantive goals therefore provide the vital link between individual actions and organizational achievement by affecting the necessary cognition and joint production motivation of all organizational members, not just of top management (Foss and Lindenberg 2013). By contrast, firms chiefly motivated by a desire to enhance their reputation among stakeholders are likely to set targets for reasons unrelated to actual or significant performance improvements. We therefore develop the following baseline hypotheses:

Hypothesis 1 (H1)

There is no overall relationship between the presence of climate change targets and improvements in environmental performance (i.e., reductions in emissions).

Hypothesis 1 (H1a)

Firms with substantive climate change targets are associated with improvements in environmental performance (i.e., reductions in emissions).

Characteristics of Substantive Climate Change Targets

Climate change targets are highly heterogeneous in multiple dimensions, and thus, once a firm has decided to articulate explicit environmental objectives, there is a need to agree on and specify more technical/operational details (Maas and Rosendaal 2016; Pinkse and Kolk 2009). For example, choices include target purpose (internal substantive improvement tool vs. external symbolic signal); whether to target absolute emissions reductions or relative improvements (e.g., per unit of output, energy intensity); target coverage (energy use and/or GHG emissions); organizational scope (direct and/or indirect emission); and geographic scope (local and/or global or a combined, differentiated approach) (Pinkse and Kolk 2009). We argue that the detailed characteristics of firms’ targets are critical in diagnosing the underlying intentions that accompany them and therefore their likely impacts on environmental outcomes.

In relation to evaluating the relative degree of substantiveness when examining a firm’s climate change targets, we build on prior literature by identifying the following four target criteria: target type (absolute vs. relative emissions reductions targeted); target scope (broad vs. narrow scope of emissions reductions targeted); target ambitiousness (scale of emissions reductions targeted); and target time frame (period over which emissions reductions are targeted) to develop our main hypotheses (Fig. 1). Effectively, we argue that substantive intentions to reduce firms’ GHG emissions can be diagnosed by climate change targets that are absolute, include a broader range of emissions scopes, are more ambitious, and include longer target time frames. By contrast, we would characterize climate change targets that are intensity-based, include a narrower range of emissions scopes, are less ambitious, and include shorter target time frames, as comparatively symbolic in their intention to address climate change and thus likely to be more consistent with greenwash.

Target type Companies mainly distinguish between two different types of climate change targets: First, absolute targets which envisage a reduction in firms’ total levels of GHG emissions over time. By contrast, intensity targets reflect ambitions to improve energy efficiency and/or greenhouse gas emissions at a more relative level (for example, to reduce CO 2 emissions per $ of sales, or per employee) which therefore do not necessarily translate into absolute (or total) greenhouse gas emissions reductions at the firm level (Slawinski et al. 2017; Pinkse and Kolk 2009), a key criterion in the efforts behind international climate change mitigation policies and associated reduction pathways (Stern 2006; UNFCCC 2015). There is thus a need to critically assess the contribution of intensity targets as a means of driving significant environmental performance improvements. Specifically, we see intensity targets as relatively weaker, outward-looking, and potentially more symbolic expressions of firms mainly seeking to enhance corporate image. Given that they are designed to allow for unconstrained growth in corporate activity, they are more easily achievable compared to absolute targets which foresee complete decoupling of economic growth and emissions. Intensity targets also exemplify widespread belief that relative efficiency improvements are closely associated with cost savings (Porter and Van der Linde 1995), thus providing extrinsic incentives regardless of organizational attitudes toward climate change. This puts into question the effectiveness of intensity targets beyond what is generally seen as best practice from a micro-economic perspective. By contrast, absolute targets set an inward-looking hard goal more closely aligned with societal interests of climate change mitigation and whose achievement is prima facie antithetical to a company’s overall performance (Pinkse and Kolk 2009). We therefore hypothesize:

Hypothesis 1b (H1b)

Firms with absolute climate change targets are associated with improvements in environmental performance (i.e., reductions in emissions).

Target Scope Firms’ next choice about specifying their climate change targets relates to the different types of scopes of emissions. A primary distinction is drawn between direct (“scope 1” emissions) and indirect emissions (“scope 2” emissions). Direct emissions stem from activities immediately controlled or owned by the reporting firm (for example, from on-site production processes, direct use of fossil fuels in boilers and furnaces, and in-house power generation); indirect emissions arise from firms’ use of purchased electricity as provided by the grid. A third but significant category of emissions (“scope 3” emissions) includes emissions derived chiefly from a firm’s supply chain (i.e., carbon embodied in procured goods and services), from business travel, and those associated with external distribution (WBSCD/WRI 2011). Since scope 3 emissions are harder to evaluate and measure accurately, these data remain comparatively patchier and less reliable but have become an emerging topic of research (e.g., CDP 2017; Chen 2017).

For the purposes of this research, we mainly distinguish between broad and narrow scopes of emissions reductions targeted whereby only a broader, all-encompassing view of a firm’s scope of emissions is considered reflective of substantive intentions to improve environmental performance. In other words, we argue that only climate change targets including at least two types of scope signal substantive intentions to fully address climate change concerns. By contrast, narrower scopes of emissions targeted evoke the image of “cherry-picking” whereby firms symbolically target specific scopes of emissions that are either most likely to yield reductions anyway (for example, due to fuel switching), or are least likely to matter in the grand scheme of their corporate carbon footprints (Pinkse and Kolk 2009). We therefore hypothesize:

Hypothesis 1c (H1c)

Firms with a broader scope of climate change targets are associated with improvements in environmental performance (i.e., reductions in emissions).

Target ambitiousness The third target characteristic reflects general ambitiousness regarding the scale of emissions reductions targeted. More specifically, it relates to the core premise behind target setting in that ambitious targets, that is, those including a larger percentage of emissions to be reduced, are more likely to be effective given our initial discussion on the target-setting literature (Ioannou et al. 2016). Quantitatively more ambitious targets (Maas 2016) therefore reflect substantive intentions which create the internal conditions needed to spur large-scale innovation and performance improvement (Collins and Porras 1994; Halme 2002; Winter 2000) but which must also take into account “historical achievements, growth paths, and future plans of the company in industry and (inter)national contexts” (Pinkse and Kolk 2009, p. 65).

One issue is that this level of ambition is likely to be context dependent. Given the debate over the relative merits of intensity vs. absolute targets (H1b), one argument could be that simply having an absolute target is by itself reflective of significant ambition. Deciding exactly what level of ambition to target is subject to much debate and is, for instance, considered in more detail by the “Science-Based Targets” initiative, which provides a methodology for setting climate change targets consistent with climate science. Several contextual factors play a role in this process of deciding on the level of target ambition, including industry and the time frame (H1e) over which they apply. For the purposes of our research, we argue that while overly ambitious targets may demotivate individuals’ responses to these targets, quantitatively greater climate change targets are reflective of greater ambition, which is needed to provide a radical stimulus for innovation and organizational change that could subsequently lead to environmental performance improvements.

Hypothesis 1d (H1d)

Firms with more ambitious climate change targets are associated with improvements in environmental performance (i.e., reductions in emissions).

Target time frame Finally, while target ambitiousness certainly represents one key metric of substantive intentions, the period over which such targets apply adds further nuance. Firms that set relatively short-term targets (Maas and Rosendaal 2016) may do so because of some form of prior knowledge about the likelihood of achieving said targets, for example, because there is some form of certainty about reaching them (“low-hanging fruits”) and/or a coincidence with remuneration cycles (e.g., bonus payments) (Kolk and Perego 2014). In these instances, the reductions do not fulfill the criteria associated with substantive targets. By contrast, firms committing to long-term emissions reductions are presumably more realistic about the need for implementing significant long-term goals as advocated by climate science and international policy (Slawinski et al. 2017). Rather than chasing quick wins, firms with long-term targets are more likely to aim for fundamentally challenging and major strategic change. In that sense, the longer the period of emissions reductions targeted (typically the further into the future the target year), the more these organizations appreciate the need for investment in a broad range of activities and collaboration to identify cross-sector solutions (Slawinski and Bansal 2012, 2015). One plausible counter-argument, however, could be that long-term goals may reflect managerial decisions to shift the firm’s climate change responsibility to future generations of executives and employees, for example, by relying on a technology yet to be commercialized, or by deferring instant implementation to avoid stakeholder scrutiny (Delmas and Burbano 2011; Pinkse and Busch 2013). Given such ambiguity, we state our hypothesis in line with our main argument, while acknowledging the potential for opposite effects to materialize:

Hypothesis 1e (H1e)

Firms with longer climate change target periods are associated with improvements in environmental performance (i.e., reductions in emissions).

The Moderating Influence of Firms’ Carbon Dependency

Having developed our hypotheses on how the characteristics of firms’ climate change targets influence the likelihood that they lead to reductions in firms’ emissions, next we discuss contingencies that are likely to shape their effectiveness. Prior research has noted that the achievement of targets can be impeded when actors find it difficult to identify with them, or when targets provoke disappointment and demotivation because progress is slow. Particularly since climate change targets may by their nature be associated with significant uncertainty in relation to the processes and strategies for implementation, they can create internal resistance (Mishina et al. 2010; Sitkin et al. 2011; Zhang and Jia 2013). For example, there is the recognition that technological and operational “lock-in” due to long and large-scale investment cycles determines firms’ performance levels for years if not decades (Unruh 2002). Firms’ industry sector, size, and existing environmental footprints can constrain the scope for performance improvements, thus reducing the salience and level of strategic prioritization given to environmental issues (Bundy et al. 2013). Pinkse and Busch (2013) referred to this as carbon dependency, defined as a firm’s “potential to reduce its GHG emissions over time in a cost-effective way” (p. 640). This carbon lock-in or carbon dependency indicates firms’ level of economic feasibility for significantly and credibly reducing their carbon footprints over time. Often there are also powerful economic forces at play whereby carbon dependency either remains a costless externality or only has a marginal impact on overall financial performance. In these instances, environmental improvement is economically disincentivized, thus impacting on managerial decision making in response to the presence of climate change targets (Eccles et al. 2012).

For example, the interpretation of environmental issues as potential threats to the established business model or industry order (Sharma 2000) forms a significant challenge for firms with high carbon dependency (Ioannou et al. 2016; Pinkse and Busch 2013). Coupled with inconsistent stakeholder engagement, for example, when firms with high carbon dependency seek to make improvements while at the same time lobbying against regulatory measures, this can result in managerial tension and confusion regarding the real intentions and incentives behind corporate behavior (Hahn et al. 2014). In other words, despite the formal existence of climate change targets, managers and employees in highly carbon-dependent firms may not actually be making efforts to reach them. For example, Cordano and Frieze (2000) found a positive relationship between a facility’s amount of past source reduction activity and environmental managers’ preference to implement source reduction activities in the future. Similarly, Branzei et al. (2004) studied the intra-organizational feedback loops involved in environmental strategy formation and found that organizational goals adjust in response to performance signals—success stimulates more difficult goals, whereas failure triggers downward adjustments in goals or withdrawal of effort. Thus, where managers interpret past performance as failure and a losing course of action, climate change targets are less likely to lead to improved performance but are viewed with suspicion and apprehension and resisted by individuals who interpret them as a threat to their identity and organizational strategy.

From a symbolic perspective, then, research suggests that firms within polluting industries (i.e., those likely to be associated with high carbon dependency) are more likely to adopt environmentally friendly processes including targeted CEO rewards to achieve legitimacy (Berrone and Gomez-Mejia 2009; Maas and Rosendaal 2016; Russo and Harrison 2005). Consequently, high carbon dependency can undermine the confidence in the achievement of the targets and so reduce commitment to those aspirations. By contrast, in sectors with low carbon dependency, substantive climate change targets may lead to significant innovation to address a relatively less salient, but easier to address and, nonetheless, highly competitive issue. Combined with the fact that industries with lower carbon dependency also tend to be end-consumer facing, there is potentially a stronger argument for these companies to express substantive intentions for addressing climate change concerns. Hence, we hypothesize that carbon dependency affects our hypotheses on the effectiveness of substantive climate change targets:

Hypothesis 2 (H2)

For firms with low carbon dependency, the use of substantive climate change targets will be associated with positive effects on environmental performance (i.e., reductions in emissions).