Tough environmental standards lead to high profits

Large US companies that adopt strict environmental standards in developing countries are rewarded with higher stock market performance, according to a new report.

The study, published in a journal of the Institute for Operations Research and the Management Sciences (INFORMS), found that firms choosing to employ their own strict global environmental standard are found to have an individual value of approximately $10.4 billion higher than those using less stringent US standards(see related story).

“We have found a significant and positive relationship between the market value of a company and the level of environmental standard it uses,” say the authors of the report. They also warn that developing countries using lax environmental regulations to attract foreign investment may bring in poorer quality and less competitive firms.

“This paper refutes the idea that adoption of global environmental standards by multinational enterprises constitutes a liability that depresses market value,” say the authors. “On the contrary, the evidence from our analysis indicates that positive market valuation is associated with the adoption of a single stringent environmental standard around the world.”

There are several possible interpretations for their findings, say the researchers:

  • campaigners and NGO’s expose unsound corporate environmental practices, raise consumer awareness, and put pressure on governments to put pressure on polluters, leading managers to maintain a high level of environmental practice;
  • firms that adopt high environmental standards are those that strive for eco-efficient production systems, pursuing technologies and processes that increase resource productivity;
  • lower quality firms engage in a ‘race to the bottom’ to gain short-term financial advantage instead of generating less pollution and attempting to be the best in all their operations.

The researchers admit that they were unable to determine if environmental measures undertaken in one year result in higher market value in the subsequent year.

The report, ‘Do corporate global environmental standards create or destroy market value?’, is in the current issue of Management Science.

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