Environmental Corporate Social Responsibility Certification Amidst One-Way International Trade: A Comparative Analysis of Non-Governmental and Governmental Certification Approaches

Abstract

This article examines the strategic decision of a domestic firm to certify its Environmental Corporate Social Responsibility (ECSR) efforts, with certification provided either by a social planner or a non-governmental organization (NGO), in the context of competition with an uncertified foreign firm. We analyze whether the NGO and the social planner align or diverge in their pollution standardization. Our findings indicate that the NGO consistently selects a non-optimal ECSR standard, whereas the optimality of the social planner's standard depends on the severity of the environmental damage. Notably, both certifying entities tend to converge on non-optimal ECSR standards when the environmental damage severity is high, aligning with the domestic firm's ECSR investment capacity. However, divergence in the standards and their optimality occurs when the environmental damage severity is low. In this context, shifting from NGO to social planner certification reduces supply and price but increases profit for the domestic firm, as well as overall gas emissions. Despite the negative impact on consumers, this shift is socially beneficial due to the significant reduction in the ECSR investment cost. The results suggest that under lower damage severity, firms favor the social planner over the NGO as the certifier. The study underscores the importance of aligning ECSR standards with environmental conditions and firm incentives, highlighting the need to incentivize ECSR investment, balance standards, and, where necessary, transition to social planner certification for optimal and sustainable outcomes.