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RESEARCH BRIEF: Environmental Reporting Increases Market Value

Takeaway: Environmental reporting, and the adoption of environmental management processes, boost market value.

Suggested Audience: Top leadership, corporate citizenship leaders, CSR professionals, sustainability report preparers, environmental managers, investors

There are multiple metrics for assessing environmental performance. Different ratings agencies have different ways of measuring environmental performance—a recipe for information overload. In this study, researchers looked at a number of widely used environmental performance indicators from the big ratings agencies KLD, Trucost, and Sustainable Asset Management (SAM), and categorized their metrics into two broad categories of measures: environmental processes (e.g., adoption of environmental management practices, reporting, or alternative or lowered traditional resource inputs) and environmental outcomes (environmental outputs such as waste or emissions).

A better environmental processes score, the researchers found, was linked to a higher market valuation of the firm (a one-standard-deviation jump in the processes score was associated with a 6% increase in market value relative to assets.). Reporting is a component of this score, indicating that transparency contributes to market value.

Interestingly, researchers found no link between environmental outcomes and financial performance, suggesting that transparent communication around performance and risk might be what is driving the price premium. Remarkably, processes and outcomes were statistically distinct entities, indicating that a company’s environmental practices have less bearing on environmental outcomes than their transparency about them—regardless of performance.

This research does not suggest a green light for green-washing. Previous research (Godfrey et al., 2009) has shown that, if exposed, this behavior is swiftly and severely punished by the market. Moreover, the researchers predict, markets will eventually learn to reward outcomes as well as processes: it is simply a matter of developing consistent measures of sustainability performance.

Keywords: Environmental performance, KLD, Trucost, Sustainable Asset Management, environmental indicators, transparency, environmental processes, environmental outcomes, financial performance, market value

If citing, please refer to original article: “Triangulating environmental performance: what do corporate social responsibility ratings really capture?” Academy of Management Perspectives, 2013, Magali A.

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