Another key issue that has stimulated the development of environmental
performance indicators has been the question of the relationship between
environmental and financial performance. The basic analytical concern has been
with whether corporate environmental management is rational in economic
terms. Specifically, do market actors (firms, investors and customers) take
environmental factors into account in making economic decisions so that there
are competitive advantages to be gained through environmental management?
The aim has been to test the standard assumption that environmental effort by
companies implies a trade-off with financial performance. If this assumption is
not borne out empirically, environmental management could be justified in
financial terms (either in terms of profitability or in the value of stocks and
shares), and the opportunities for integrating environmental objectives into
business management would be enhanced. A number of arguments have been
proposed for a positive relationship:
E resource savings: more efficient use of resources by a firm will bring cost
savings that feed through to higher profitability
E avoidance of environmental liabilities: better environmental management
will reduce costs of spills, leaks, accidents and longer-term decontamination
and decommissioning costs
E competitive positioning relative to industry standards: ‘environmental
leaders’ are likely to dominate industry-led efforts to set higher environmental
standards
E competitive positioning relative to regulatory standards: ‘environmental
leaders’ are likely to face fewer costs in responding to more stringent regulations
E evidence of good management: environmental performance can be seen as a
proxy measure of the quality of business management, and therefore also of
future profitability (the converse may also be true: poor environmental
performance may herald poor profitability)
E greener product innovation: ‘greener’ companies are more likely to be able
to exploit new market opportunities for greener products and services.
Klassen and McLaughlin, Reed and Wagner provide reviews of the
literature. Broadly, statistical analysis falls into four categories: event studies;
regression analyses; model portfolios; and the addition of environmental
variables to existing valuation models. Event studies compare the financial
performance of groups of stocks after the announcement of news about a
company’s environmental performance or regulatory position (either good or
poor). Consistently, these studies find that the market penalizes reports of poor
performance and rewards reports of good performance. Investors appear to be
R. D. Klassen and C. P. McLaughlin, The impact of environmental management on firm
performance, Manage. Sci., 1996, 42 (8), 1199—1214.
D. J. Reed, Green Shareholder Value, Hype or Hit?, World Resources Institute, Washington DC, 1998.
M. Wagner, A Review of Studies Concerning the Empirical Relationship between Environmental and
Economic Performance of Firms: What Does the Evidence Tell Us? Centre for Environmental
Strategy, University of Surrey, Guildford, 1999.
J. T. Hamilton, Pollution as news: media and stock market reactions to the toxic release inventory
data, J. Environ. Econ. Manage., 1995, 28, 98—113.
Corporate Environmental Performance
173
performance indicators has been the question of the relationship between
environmental and financial performance. The basic analytical concern has been
with whether corporate environmental management is rational in economic
terms. Specifically, do market actors (firms, investors and customers) take
environmental factors into account in making economic decisions so that there
are competitive advantages to be gained through environmental management?
The aim has been to test the standard assumption that environmental effort by
companies implies a trade-off with financial performance. If this assumption is
not borne out empirically, environmental management could be justified in
financial terms (either in terms of profitability or in the value of stocks and
shares), and the opportunities for integrating environmental objectives into
business management would be enhanced. A number of arguments have been
proposed for a positive relationship:
E resource savings: more efficient use of resources by a firm will bring cost
savings that feed through to higher profitability
E avoidance of environmental liabilities: better environmental management
will reduce costs of spills, leaks, accidents and longer-term decontamination
and decommissioning costs
E competitive positioning relative to industry standards: ‘environmental
leaders’ are likely to dominate industry-led efforts to set higher environmental
standards
E competitive positioning relative to regulatory standards: ‘environmental
leaders’ are likely to face fewer costs in responding to more stringent regulations
E evidence of good management: environmental performance can be seen as a
proxy measure of the quality of business management, and therefore also of
future profitability (the converse may also be true: poor environmental
performance may herald poor profitability)
E greener product innovation: ‘greener’ companies are more likely to be able
to exploit new market opportunities for greener products and services.
Klassen and McLaughlin, Reed and Wagner provide reviews of the
literature. Broadly, statistical analysis falls into four categories: event studies;
regression analyses; model portfolios; and the addition of environmental
variables to existing valuation models. Event studies compare the financial
performance of groups of stocks after the announcement of news about a
company’s environmental performance or regulatory position (either good or
poor). Consistently, these studies find that the market penalizes reports of poor
performance and rewards reports of good performance. Investors appear to be
R. D. Klassen and C. P. McLaughlin, The impact of environmental management on firm
performance, Manage. Sci., 1996, 42 (8), 1199—1214.
D. J. Reed, Green Shareholder Value, Hype or Hit?, World Resources Institute, Washington DC, 1998.
M. Wagner, A Review of Studies Concerning the Empirical Relationship between Environmental and
Economic Performance of Firms: What Does the Evidence Tell Us? Centre for Environmental
Strategy, University of Surrey, Guildford, 1999.
J. T. Hamilton, Pollution as news: media and stock market reactions to the toxic release inventory
data, J. Environ. Econ. Manage., 1995, 28, 98—113.
Corporate Environmental Performance
173