Boyd, J., Searching for the Profit in Pollution Prevention: Case Studies in the Corporate Evaluation of Environmental Opportunities, Office of Pollution Prevention, EPA  Washington (1998)   This study was funded by the Environmental Accounting Project of the Office of Pollution Prevention and Toxics at the United States Environmental Protection Agency. The study attempts to understand why three global chemical manufacturers headquartered in the United States chose not to invest in a new pollution prevention technology.  According to the author, understanding the decision making process utilized by these companies will help us reason how all companies make decisions about new pollution prevention technology.  Specifically, the author addresses whether “firms are really passing up [pollution prevention] opportunities that could save them money?”  Although the author acknowledging that his study is “based on a very limited sample,” he concludes that “the evidence contradicts the view that firms suffer from an inability to appreciate profitable [pollution prevention] investments.”  He explains that “the investments were financially unattractive because of significant unresolved technical difficulties, uncertain markets conditions, and, in some cases, regulatory barriers or insufficient emissions enforcement.”  The paper is helpful to us because it provides an outline of concerns that we should address when trying to convince a firm to take on a new pollution prevention technology.  back to bibliography

Dowell, G., S. Hart, and B. Yeung, "Do Corporate Global Environmental Standards Create or Destroy Market Value?," Management Sci 46 no:8, 1059-1074 (2000). The authors of this article conclude, “countries that use lax environmental regulations to attract foreign direct investment may end up attracting poorer quality, and perhaps less competitive, firms.”  They come to this theory after analyzing the global environmental standards of a sample of U.S.-based multi-nationalenterprises in relation to their stock market performance, and finding that firms adopting a single stringent global environmental standard have much higher market values.  This may suggest, they note, that “externalities are incorporated to a significant extent in firm valuation.”The authors are hopeful stating that  “There appear to be forces that encourage MNEs to integrate and standardize their environmental practices globally. Indeed, it may make business sense in some cases to adopt global standards that exceed those required by some local laws or regulations, especially when environmental laws and regulations become more stringent as an economy grows. By investing in state-of-the-art technology and processes in developing countries, MNE facilities may be able to achieve simultaneously world-class cost, quality, and environmental performance. In addition, MNE’s may reap standardization benefits and other intangible advantages like positive reputation effects.”The methodology used by the authors is to examine whether adopting a single stringent corporate environmental standard enhances firm value compared to those MNEs defaulting to less stringent or poorly enforced host country standards.“We find that firms adopting a stringent global environmental standard have higher market values, as measured by Tobin’s q (market value over replacement costs of tangible assets). Our results have strong implications: “Better firms” appear to adopt higher environmental standards and pollute less. However, we cannot identify with our data any causal (time series) relationships between either past changes in environmental standards and current change in firm value, or past change in firm value and current change in environmental standards.”The authors point out that earlier studies linking proactive environmental management to superior stock performance demonstrate that“(1) news of high levels of toxic emissions results in significant negative abnormal returns; (2) firms with strong environmental management practices have better stock price returns than firms with poor practices after a major environmental disaster, such as the Exxon Valdez accident; and (3) environ-mental performance awards result in significant positive abnormal returns.”The first and second results, they conclude, indicate that investors expect that firms incur non-trivial costs for environmental cleanup and that these costs are lower for firms with better environmental records. The third result suggests that recognition of environmental performance has a positive reputation effect which possibly augments firm value.” back to bibliography

King, A. and M. Lenox, "Does it Really Pay to be Green? Accounting for Strategy Selection in the Relationship between Environmental and Financial Performance," Journal of Industrial Ecology 4 no:4 Fall, (2001).The authors analyzed 652 U.S. manufacturing firms over the time period 1987–1996 in an attempt to discover the relationship between high environmental performance and profit.  They do find evidence of an association between lower pollution and higher financial valuation, but they find that a firm’s fixed characteristics and strategic position might be the actual cause this association.  They conclude that it may only pay to be green in certain circumstances.  “Our findings suggest that ‘When does it pay to be green?’ may be a more important question than ‘Does it pay to be green?’” back to bibliography

Konar, S. and M.A. Cohen, “Does the Market Value Environmental Performance?,” The Review of Economics and Statistics, 281, Vol. LXXXIII, No. 2 (2001).Konar and Cohen report on a study that related the market value of firms in the S&P 500 to objective measurement of their environmental performance.  After controlling for variables traditionally thought to explain firm-level financial performance, they found that bad environmental performance is negatively correlated with the intangible asset value of firm.  The average “intangible liability” for firms in their sample was $380 million—approximately 9% of the replacement value of tangible assets.  They conclude that legally emitted toxic chemicals have a significant effect on the intangible asset value of publicly traded companies.  For example, according to their findings a 10% reduction in emissions of toxic chemicals resulted in a $34 million increase in market value.  The author notes that the magnitude of these effects varies across industries, with larger losses accruing to the traditionally polluting industries. back to bibliography

In their study on competitiveness and industrial ecology, M. Porter and D. Esty found “in many circumstances and in many respects, a fundamental alignment between good environmental performance and recent innovation-driven views of what produces competitive advantage.”This recent work on corporate competitiveness focuses on “ …the dynamic nature of business and the importance of innovation” casting doubt about traditional economic thinking “that competitiveness positions are built on low-cost inputs…” 

According to the authors, it is enhanced “resource productivity” that make companies truly competitive.  “Some aspects of industrial ecology address opportunities to improve environmental performance and simultaneously to increase the value of a product or to lower direct costs.  For example, producers, made more attentive by industrial ecology thinking and life-cycle analysis to waste disposal problems their customers face from the products they have sold, may make changes in a product’s design to facilitate recycling or reuse.  Such [designs for the environment] strategies can lower the customers’ costs and therefore enhance the product’s value.  Likewise, a manufacture who adopts a waste minimization strategy may find he can recapture and reuse raw materials and thus purchase fewer inputs, thereby cutting his direct costs of production.”

The authors answer the question of why companies have not already taken full advantage of these hidden opportunities.  “First, some companies are finding these resource-saving opportunities inside and outside the firms that are bringing down costs and improving efficiency.  Second, corporate managers have limited time and capacity to focus, and many are just now beginning to appreciate the depth of the opportunities presented by paying attention to resource flows.  Finally, to obtain resource productivity gains managers must comprehensively reexamine their operations and think about their firms’ activities in new ways, and not everyone has the ability to make the requisite shift in thinking.” back to bibliography

Pratt, L., “Rethinking the Private Sector-Environment Relationship in Latin America”  (unpublished)(background Paper for the Seminar on the “New Vision for Sustainability: Private Sector and the Environment”)(2000).
The authors conclude, “there are many positive links between competitiveness and improved environmental performance.” Material in paper is based on more than three years of research on Central America conducted by CLACDS with the Harvard Institute for International Development. In the introduction the authors go over their general theory that Latin America depends upon her natural resources and must protect them in order to remain competitive in an increasiningly competitive global economy.  Here follows some facts and quotes.

Latin American possess:

• 29% of the worlds renewable water resources and 20% of the worlds hydroelectric potential
• 23% of the world’s potentially arable land.
• 23% of the world’s forests and 46% of the world tropical forests
• 27% of the world’s mammals, 34% of its reptiles, 43% of its birds, and 47% of its amphibians.

• in all countries, except Uruguay, was between .3% and 3% from 1990 to 1995, reflecting a loss of tens of thousands of square kilometers of forest, countless species and other benefits (World Bank 1999)

• average annual GDP growth of 5%, but the country was becoming rapidly poorer when the costs of environment and human health damages were considered.
• From Peace to Sustainable Development, FUSADES, San Salvador, El Salvador, 1996
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This paper examines the link between corporate environmental responsibility –measured by environmental reputation indices—and shareholder wealth.  It concludes that investments in a portfolio of firms enjoying above-average reputations for corporate environmental responsibility earn risk-adjusted returns significantly greater than either the overall market or portfolios composed of less environmentally-responsible firms.  The author used information collected and published by the Council on Economic Priorities (CEP) to proxy a firm’s environmental reputation.  CEP is best known for its publication Shopping for a Better World, an annual guide rating the social performance of numerous consumer products firms, and its industry reports have been used by many different researchers to gage the environmental performance of different firms.  Stock return information was gathered from the Center for Research in Security Prices.  Firm’s intent to pursue responsible environmental policies were measured by its formal adoption of the CERES nee Valdez Principles, a corporate code of environmental conduct that had been adopted by 56 companies as of June 1995.  Financial performance was determined using Jensen’s alpha, a widely-used method of measuring portfolio performance. back to bibliography