Why trust is a strong incentive for environmentally conscious business

As countries meet in an effort to propel action on climate change at COP29, a study has revealed that social trust plays a critical role in influencing corporate environmental behaviour.

The research, conducted on a large sample of Chinese firms, provides new insights into how businesses can be guided by societal norms to act more responsibly.

Many companies often neglect their ethical duty to protect the environment, and if caught, penalties include fines, seizure of assets, imprisonment, civil sanctions, and enforcement undertakings.

Environmental violations - including  pollution, improper waste disposal, deforestation and permit breaches -  can have serious consequences for the environment and human health. They also damage the trust between businesses and the communities they operate in.

As the climate crisis intensifies, regulatory measures alone may not be sufficient to prompt meaningful corporate environmental responsibility. 

Social trust reflects the degree of confidence individuals have in their society and its members. In regions where social trust is high, people generally expect ethical behaviour from one another, including from businesses. 

New research has explored whether high levels of social trust discourage firms from engaging in harmful environmental practices. The findings suggest that firms located in high-trust regions are less likely to violate environmental norms due to the pressure to conform to societal expectations and the fear of reputational damage.

In regions with high social trust, firms are also more likely to engage in restorative actions, such as environmental cleanups or investing in greener technologies, as a way to rebuild trust and demonstrate their commitment to environmental responsibility.

Co-author, Professor Jia Liu, Director of the University of Portsmouth’s Centre for Innovative and Sustainable Finance (CISF), said: “Our research underscores the importance of social trust as a powerful motivator for ethical corporate behaviour. By integrating societal norms with corporate governance, we can encourage businesses to act as responsible stewards of the environment, contributing to a more sustainable and just world.”

China, the world’s largest polluter, served as the focus of this research due to its significant regional variations in social trust and its complex regulatory environment. 

The study analysed data from nearly 6,000 firm-year observations between 2007 and 2022. By developing a novel time-varying measure of social trust, the researchers found that firms in high-trust areas were over a third (36 per cent) less likely to commit environmental violations and were more proactive in taking remedial actions after violations occurred.

The findings have several important implications:

1. Policy Development: Governments should consider integrating social trust into environmental regulations. This could involve promoting transparency, stakeholder engagement, and corporate social responsibility initiatives that build trust between businesses and the public.
2. Corporate Strategies: Companies can benefit from fostering trust through ethical business practices, stakeholder engagement, and proactive environmental stewardship. This approach not only enhances corporate reputations but also supports long-term business sustainability.
3. Role of Media and Institutions: Media coverage and institutional scrutiny amplify the effects of social trust, holding firms accountable and encouraging them to adhere to environmental norms.

Co-author, Yasir Shahab, Associate Professor of Accounting in the School of Accounting at Xijing University, said: “Our novel findings highlight the fact that social trust is crucial and that firms that breach this by polluting the atmosphere should perform moral repair by undertaking remedial actions in the aftermath of environmental breaches. We thus emphasise the importance of understanding  the significance of promoting positive corrective actions, underscoring the role of social mechanisms in advancing ethical recovery.”

The paper, published in the Journal of Business Ethics, concludes that its findings can be equally relevant to other economic contexts. Although the differing levels of social trust likely to be found in other countries mean that no single solution will apply in all arenas, similar research in different nations will generate insights that could be vital in the global struggle to combat climate change.

The research was a collaboration between the University of Portsmouth in England, Xijing University and China Agricultural University in China, and the University of Queensland in Australia.