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RESEARCH BRIEF: Good environmental performance offers potential for financial benefits
Takeaway: Firms can achieve increased revenues or cost reductions from improved environmental performance when efforts to improve performance align with firm characteristics.
Suggested Audience: Environmental managers, corporate citizenship managers, CFOs
In this study researchers reviewed empirical evidence of improvement in both environmental and economic, or financial, performance of companies, analyzing the mechanisms involved in potential revenue increase or cost reduction resulting from better environmental practices.
The researchers examined three areas of potential revenue increase and four areas of potential cost reduction related to environmental practices. In each case, the researchers sought to identify the circumstances most likely to lead to a both better environmental and financial performance and suggested the type of firms most likely to benefit.
Potential areas for revenue increase
B2B market share: Public sector interest in green purchasing and increase in private firms paying attention to their suppliers’ environmental performance, means firms selling to governments or other businesses (as opposed to consumers) can obtain better access to certain markets by improving their environmental performance.
Differentiated products: A differentiation strategy is more likely to work when the information about the environmental features of the product is credible, consumers are willing to pay for extra environmental features, or there is a barrier, such as a patent, to imitation by competitors.
Potential areas for cost reduction
Risk management and relations with external stakeholders: Better environmental performance may make the relations between the firm and its external stakeholders (e.g., government, ecological groups, media, and communities) easier and reduce the risk associated with these relations. Companies most likely to benefit from these cost reductions are those that are heavily regulated and scrutinized by the public.
Capital: A large majority of all types of studies show that better environmental performance is associated with better, or at least not worst, financial performance. Long-term studies find that lower environmental performance leads to lower financial performance, and thus to a higher cost of capital.
Labor: There is no direct empirical evidence of cost reductions but indirect evidence from surveys indicates that companies are aiming at better environmental performance to improve the satisfaction of their employees. This is especially true in cases where:
- Their emissions can affect their workers’ health
- They seek to attract young, well-educated workers, such as scientists, MBAs, and engineers
- They are located in areas where sensitivity to environmental concerns is more acute
If citing please refer to the original article, “Does It Pay to Be Green? A Systematic Overview”, Academy of Management Perspectives, November 2008, Stefan Ambec and Paul Lanoie