• Business and the environment

Business and the environment

This paper evaluates the self-regulatory practice known as self-policing among businesses, which involves encouraging regulated entities to monitor their own compliance with the law and report and correct violations they discover. The paper examines the following issues:

• whether the self-policing required under the Audit Policy affects the behaviour of regulators and regulated facilities and the relationship between them
• whether self-policing is associated with improved environmental performance at participating facilities
• whether regulators reduce their scrutiny over self-policing facilities

The paper finds that:

• compared to similar non-disclosing facilities, self-disclosing (self-policing) firms on average reduce the number of abnormal episodes in which toxic chemicals are released to the environment
• this outcome arises from improvements made by the self-disclosers with clean compliance histories relative to non-disclosing firms with clean compliance histories
• there is no evidence of improvement when self-disclosers are compared with non-disclosers among firms with poor compliance histories
• regulators interpret the voluntary self-disclosure signal accurately, rewarding effective self-disclosers, but not ineffective self-disclosers, with an inspection holiday

This suggests that self-policing can enhance the environmental performance of facilities that are already good compliers, but that historically poor compliers do not see significant gains from self-policing. Regulators reward self-policing facilities that already had clean past compliance records with an inspection holiday, but do not significantly decrease scrutiny of poor past compliers, and are therefore effectively sorting the good facilities from the bad.

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