Going green improves firms' financial performance, but market growth undermines progress

May 9, 2021
Companies have a tough time walking the line between growth and going green. (Unsplash/Anton Eprev)

Companies have a tough time walking the line between growth and going green. (Unsplash/Anton Eprev)

Companies that aim to reduce their environmental impact through greenhouse gas emissions demonstrate enhanced cost savings, improved financial performance and higher market value over the short and long term, new research suggests, although firms' emissions over time remain highly dependent on their market growth.

Angeloantonio Russo, co-author of the research, professor of management, and vice rector for research and sustainability at LUM University, told The Academic Times he was inspired to investigate the interplay between corporate sustainability and market performance because of a common dilemma facing many companies: how to demonstrate sustained financial growth while minimizing the environmental impacts of their operations. Maintaining the proper balance between the two is complex, requiring continued collaboration between corporations and academia in the years ahead if the consequences of climate change are to be averted.

"Corporations are constantly under pressure for their impact on the natural environment, being the first defendants for the well-known phenomena of climate change," Russo said. "That is particularly true if we look at the recent decades, where corporations have played a critical role in both a positive and negative direction."

On the one hand, he said, corporations have seemed willing to invest in research and development "to try and limit their exposure to external pressures, such as the environmental pressures."

"On the other hand," Russo said, "climate change is still far away from [being] solved."

Building on previous research that pointed to a positive relationship between environmental performance and financial results, this study, published April 6 in Business Strategy and the Environment, conducted a longitudinal analysis of 782 publicly traded companies worldwide from the S&P 1200 list, including 6,761 firm-year observations between 2004 and 2016.  Nine industries were included in the model, including consumer goods, utilities, metals and mining, and health care. Non-polluting industries, primarily banking and insurance, were eliminated from analysis. The researchers used random effect generalized least squares regression models, a statistical technique used to perform linear regressions when there is correlation between the observed value and mean value in a regression model.

Researchers found that sustained improvement in a firm's environmental performance via reduced greenhouse gas emissions led to statistically significant improvements in its operating performance, as measured by both return on assets and return on sales. Eco-efficiency was not found to significantly affect a company's return on equity, but was significantly related to market value.

Russo and his colleagues also found that the primary driver of pollution is companies' market growth as measured by sales. A positive, statistically significant relationship was found to exist between a firm's market performance and its greenhouse gas emissions at the corresponding time.

Russo said these findings corroborate previous studies that found a relationship between eco-efficiency and growth at the macro level.

"The robust relationship between sales and GHG emissions that we found at the firm level over the short, medium and long term confirms that the growth eats away the improvement per unit of production," Russo said. 

Unsurprisingly, when controlling for industry effect, Russo said the findings suggest that firms in high-pollution industries "reveal a direct impact on the environment."

"Furthermore, emissions increase for larger firms, where the size of plants and assets in general have a positive impact on the absolute emissions of the firm," he said.

This discussion sheds new light on the relationship between environmental pressures and corporate growth, with the potential to inform future environmental strategies and harm reduction efforts. Barring an absolute reduction in pollution, which Russo refers to as "eco-effectiveness," relative corporate sustainability measures are likely to continue to clash with the demands imposed by continued growth and sales. Avoiding such constraints will require what the Organization for Economic Cooperation and Development calls "decoupling," or breaking the link between "economic goods" and "environmental bads," through worldwide collaboration and economic transformation.

"Despite the fact that our investigation confirms the 'business case' of corporate greening, namely that doing good for the environment also does good for the firm, evidence is provided that a firm's environmental performance is strongly dependent on its strategic orientation toward the growth of its markets, sales and performances," Russo said. "This means that, despite a strategic orientation toward eco-efficiency, firms able to improve their market performance are not necessarily able 'to be green,' reaching the goal of eco-effectiveness."

The study, "Paving the road toward eco-effectiveness: Exploring the link between greenhouse gas emissions and firm performance," published April 6 in Business Strategy and the Environment, was authored by Angeloantonio Russo, LUM University; and Stefano Pogutz and Nicola Misani, Bocconi University.

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