SOCIAL TOPICS (Archive): ENVIRONMENT

Published, August 1995

       Despite the current harangue in Washington against environmentalism, a quieter common wisdom is emerging that promises reconciliation between environmental and economic concerns. The new “win-win” strategy says both business and the environment benefit from pollution prevention measures. No longer a cost of doing business, environmental initiatives can be a catalyst for innovation, new market opportunity and wealth creation.

       This vision has been espoused by companies like DuPont, Monsanto, Bristol Myers Squibb and 3M whose twenty-year-old Pollution Prevention Pays program has been a model for scores of others. Plenty of anecdotal evidence suggests that corporate greening really does produce bottom-line results. However, until recently there has been little hard data.

       Enter Stuart L. Hart, director of the corporate management program at University of Michigan’s School of Business Administration, and Mark A. Cohen of Vanderbilt’s Owen Graduate School of Management. In two separate studies released in the last nine months, Hart and Cohen produced new evidence that it can pay to be green. Coincidentally, both researchers relied on data from Investors Responsibility Research Center (IRRC) to measure environmental performance of Standard & Poors (S&P) 500 firms.

       The Hart study makes a strong case for pollution prevention programs by linking emissions reductions to operating and financial performance. Using 127 companies involved in mining, manufacturing or production of some kind, Hart analyzed statistically the effects of reducing releases of toxic chemicals in 1988 and 1989 on financial performance from 1988 to 1991. His findings show that emissions cutback efforts appear to drop to the bottom line within one or two years after initiation. Operating performance (measured by return on sales and return on assets) is significantly better the following year while it takes two years before financial performance (return on equity) is lifted. The study accounted for such variables as research and development intensity and capital spending.

       Naturally, the biggest polluters reaped the most benefits from curbing pollution because they had plenty of opportunities for low-cost improvements. But Hart also suggests that most companies could slash emissions dramatically before hitting a point of diminishing returns.

       Cohen’s study, conducted in collaboration with IRRC researchers, produced similar results when it compared the financial returns of “high pollution” portfolios with the those of “low pollution” portfolios. Overall the study found that cleaner corporations perform as well or better than dirtier firms within their industries on several financial indicators.

       Cohen’s evaluation of company environmental performance was broader than Hart’s. He examined the track records of S&P 500 firms on such indicators as compliance penalties, number of spills, litigation proceedings and Superfund sites, in addition to toxic chemical releases. He then developed two comparable portfolios made up of companies with low environmental scores and those with high scores for each of these indicators. Portfolios were constructed with the same number of companies within each industry. He then compared the returns and financial performance of the portfolios over various time periods.

       The findings showed that low pollution portfolios outperformed high pollution portfolios 80% of the time based on return on equity, return on assets, total return to shareholders and risk-adjusted return to shareholders. When comparisons were restricted to risk-adjusted stock returns, about 75% of the time low pollution portfolios outperformed those in the high pollution category.

       Both studies leave open the question of whether good environmental management leads to enhanced profitability or whether more profitable and well-managed companies tend to invest in pollution prevention activities. Either way, green investors are not penalized financially for applying environmental screens to their portfolios.