aware of environmental information and to respond to it. Only event studies
provide evidence of the causal relationship between environmental and economic
performance, indicating that poor (good) environmental performance causes
poor (good) economic performance. A link between market reactions to poor
performance and subsequent more rapid improvements in environmental
performance suggests a feed-back relationship between environmental and
economic performance at the firm level. The apparent value placed on
corporate environmental information has led to the proliferation of ‘environmental
ratings’ services, including the Dow Jones Group Sustainability Index and the
German Corporate Responsibility Rating.
Regression studies explore the statistical correlation between environmental
and financial performance. These studies compare indicators of environmental
performance with indicators of financial performance for panel data for
companies, using a number of different techniques. Most come to a similar
conclusion: that there is a small, but statistically significant positive correlation
between environmental and financial performance, although this relationship
varies by type of industry and form of environmental performance measure used.
Model portfolio studies use the same panel data as regression analyses, but
screen out companies with ‘poor’ environmental performance. The financial
performance of the resulting portfolio of firms is then compared with an
unscreened sample. The issue being considered here is whether environmental or
ethical screens imposed by investors will limit returns, as conventional analyses
would suggest. The evidence appears to be that they do not, although not
unequivocally. Significantly, some studies show that environmentally screened
portfolios can significantly out-perform unscreened portfolios. Last, Feldman et
al. take conventional models for predicting the value of firms and tests whether
environmental and quality variables can improve the explanatory power of the
models. The study suggests that environmental and quality variables can add to
the power of a model of risk for stocks.
While these statistical studies represent a rich and innovative programme of
research, each of them suffers from the same problems as managers and investors
— a lack of comprehensive and standardized measures of environmental
performance. Statistical studies are generally serendipitous in their choice of data
sets, and tend to have been dominated by analyses of US industry where more
environmental information is available from official and private sector sources.
The situation is now beginning to be improved in the EU with the emergence of
environmental ratings agencies, although the derivation of environmental indices
remains in many cases opaque. A second problem is that statistical analyses
S. Konar and M. A. Cohen, Does the Market Value Environmental Performance? Owen Graduate
School of Management, Vanderbilt University, Nashville, 1997.
S. L. Hart and G. Ahuja, Does it pay to be green? An empirical investigation of the relationship
between emission reduction and firm performance, Business Strategy Environ., 1996, 5, 30—37.
S. Johnson, Environmental performance evaluation: prioritising environmental performance
objectives, Corporate Environ. Strategy, 1996, Autumn, 17—28.
M. A. Cohen, S. A. Fenn and J. Naimon, Environmental and Financial Performance: Are They
Related?, Owen Graduate School of Management, Vanderbilt University, Nashville, 1995.
S. J. Feldman, P. A. Soyka and P. Ameer, Does improving a firm’s environmental management
system and environmental performance result in higher stock price?, J. Investing, 1997, 6 (4), 87—97.
F. Berkhout
174
provide evidence of the causal relationship between environmental and economic
performance, indicating that poor (good) environmental performance causes
poor (good) economic performance. A link between market reactions to poor
performance and subsequent more rapid improvements in environmental
performance suggests a feed-back relationship between environmental and
economic performance at the firm level. The apparent value placed on
corporate environmental information has led to the proliferation of ‘environmental
ratings’ services, including the Dow Jones Group Sustainability Index and the
German Corporate Responsibility Rating.
Regression studies explore the statistical correlation between environmental
and financial performance. These studies compare indicators of environmental
performance with indicators of financial performance for panel data for
companies, using a number of different techniques. Most come to a similar
conclusion: that there is a small, but statistically significant positive correlation
between environmental and financial performance, although this relationship
varies by type of industry and form of environmental performance measure used.
Model portfolio studies use the same panel data as regression analyses, but
screen out companies with ‘poor’ environmental performance. The financial
performance of the resulting portfolio of firms is then compared with an
unscreened sample. The issue being considered here is whether environmental or
ethical screens imposed by investors will limit returns, as conventional analyses
would suggest. The evidence appears to be that they do not, although not
unequivocally. Significantly, some studies show that environmentally screened
portfolios can significantly out-perform unscreened portfolios. Last, Feldman et
al. take conventional models for predicting the value of firms and tests whether
environmental and quality variables can improve the explanatory power of the
models. The study suggests that environmental and quality variables can add to
the power of a model of risk for stocks.
While these statistical studies represent a rich and innovative programme of
research, each of them suffers from the same problems as managers and investors
— a lack of comprehensive and standardized measures of environmental
performance. Statistical studies are generally serendipitous in their choice of data
sets, and tend to have been dominated by analyses of US industry where more
environmental information is available from official and private sector sources.
The situation is now beginning to be improved in the EU with the emergence of
environmental ratings agencies, although the derivation of environmental indices
remains in many cases opaque. A second problem is that statistical analyses
S. Konar and M. A. Cohen, Does the Market Value Environmental Performance? Owen Graduate
School of Management, Vanderbilt University, Nashville, 1997.
S. L. Hart and G. Ahuja, Does it pay to be green? An empirical investigation of the relationship
between emission reduction and firm performance, Business Strategy Environ., 1996, 5, 30—37.
S. Johnson, Environmental performance evaluation: prioritising environmental performance
objectives, Corporate Environ. Strategy, 1996, Autumn, 17—28.
M. A. Cohen, S. A. Fenn and J. Naimon, Environmental and Financial Performance: Are They
Related?, Owen Graduate School of Management, Vanderbilt University, Nashville, 1995.
S. J. Feldman, P. A. Soyka and P. Ameer, Does improving a firm’s environmental management
system and environmental performance result in higher stock price?, J. Investing, 1997, 6 (4), 87—97.
F. Berkhout
174