The Green Payoff: Is There a Relationship Between Green Business Practices and Financial Performance?

Recently, I was elected to be the director of the sustainability studies program academic unit on our campus. My research over the past couple of years has focused on sustainability and business. There is little valid argument against the contention that both businesses and consumers benefit from green business practices. Efficiencies gained through pursuing green business practices provide companies with a potential source of competitive advantage. And as was highlighted in A Call to Eliminate the Green Premium, green consumers pay premium prices. But do green businesses practices translate to better financial performance? Research to date reports mixed evidence regarding the existence of a positive correlation between corporate social responsibility reporting practices and profits. Two studies in which I’ve participated in the past year find no significant difference in financial performance when comparing businesses who embrace sustainable business practices with those who do not.

International Standards Organization (ISO) 14001 and Corporate Financial Performance

In one study, co-authored with Jiangning Zhao, we compared 106 companies with ISO 14001 Environmental Management System certification with 106 matched (by industry and asset size) companies from Standard and Poor’s (S&P) who do not possess ISO 14001 certification. Matched data from a three year period compared Return on Revenue (ROR) and Return on Assets (ROA). Using analysis of covariance, all the statistical analyses were conducted using log-transformed data (both pre- and post-scores of the two dependent variables) to calibrate skew of data distribution.

The results indicate that ISO 14001 registration yields a reduced ROR in the two-year period and no change in the third year. ROA was not associated with ISO 14001 registration. Furthermore, the adjusted means for ROR and ROA were lower in the ISO companies than in the matched comparison companies, indicating that there was a reduction in ROR and ROA for the ISO companies compared to the matched comparison companies. Early adoption, the length of ISO registration and the size of the company did not affect the relationship between ISO registration and financial performance.

Corporate Responsibility (CR) Reporting and Financial Performance

In a study co-authored with Adam Sulkowski, we compared the financial performance of the largest 250 companies from the S&P 500 for whom we could determine participation in the Global Reporting Initiative (GRI). GRI reporting (yes versus no) confirmation was found for 113 of the 250 companies (35 yes, 78 no). Firms using GRI reporting were compared to firms not using GRI reporting across a number of financial and non-financial variables.

The variables selected include three financial measures (market capitalization, total equity, total liabilities), two financial ratios (Price-to-Book and Tobin’s Q) and two measures of pollution (total metric tons of carbon and a newly proposed ratio, Carbon-to-Equity). The final measure, Carbon-to-Equity, is proposed to measure the impact of company size on the amount of pollution generated.

The results of the logistic regression (GRI: Yes=1, No=0) indicate that none of the seven measures investigated significantly predicts whether or not a firm will use GRI reporting. That is, neither market capitalization, total equity, total liabilities, price-to-book ratio, Tobin’s Q ratio, total metric tons of carbon dioxide released nor carbon-to-equity ratio affect the likelihood that a firm will engage in the most widely-embraced type of CR reporting.

Summary

The results of both studies are limited, as are all academic research exercises, by data assumptions, collection methods and level of statistical robustness. The interesting finding is the consistent lack of impact of sustainable business practices across the two studies (ISO 14001 certification and GRI reporting) on firm financial performance.

Clearly other factors are driving the movement to green business practices. A 2008 study of CR reporting by KPMG found that executives perceive a number of perceived non-financial benefits of adopting green business practices including increased levels of innovation and learning, a positive impact on reputation or brand and increased employee motivation. Other perceived benefits include risk management or reduction, strengthened supplier relationships and access to capital or improving shareholder value. The bottom tier of perceived benefits includes the potential for increased market share, improved relationships with government and finally, cost savings.

More research is needed if the goal is to attribute higher financial performance, including shareholder value, to corporate green business practices. Once financial rewards become attributable to green business practices, green business practices will become the norm rather than the exception.

UMass-Dartmouth and GRI

Both UMass-Dartmouth Global Reporting Initiative Campus Sustainability reports developed by the UMass-Dartmouth chapter of NetImpact over the past two fiscal years have been accepted and listed on the website of the Global Reporting Initiative (GRI), the world’s preeminent standards-setting organization for sustainability reporting making us the first U.S. university to be listed on the site. We are proud to be among the college and university world leaders embracing GRI reporting.

Click on the highlighted links for more information about our Sustainability Initiative and our award-winning NetImpact chapter.

You, as consumers, drive green business practices through your purchase decisions. Demand that enterprises, including universities, with whom you do business embrace and implement green business practices. Together we can change the world and build the legacy of a sustainable future.

References:

Sulkowski, Adam and D. Steven White (2010 forthcoming), “Financial Performance, Pollution Measures and the Propensity to Use Corporate Responsibility Reporting: Implications for Business and Legal Scholarship”, Colorado Journal of International Environmental Law and Policy, Vol. 21, No. 3.

Zhao, Jiangning and D. Steven White (2010), “Dynamic Capability: Explaining the Impact of ISO-14001 on Corporate Financial Performance”, International Journal of Services and Operations Management, Vol. 6, No. 4, pp. 470-488.

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