Does it pay to be green? Is there any evidence that firms that are more environmental are more profitable than other firms? If this were true then the case for green business should be easy. More environment more money. Everybody wants to be green. And then all business education would be about how to be more green. However, it is not so simple. If green investments do yield higher returns, does that automatically mean that all firms can do so? The firms that are successfully green might be different than other firms. And if you’re not one of the different ones, then you can’t be successful. And if we don’t find any evidence that green firms are not more financially successful, does that mean it never pays to be green? And therefore, no firms should invest in green? Let’s look into some evidence. In a study by professors at the HBS and LBS they compared the performance of 180 US companies. The companies were separated into 90 High Sustainability companies that had a comprehensive set of corporate environmental policies. And 90 Low Sustainability companies that did not. Characteristics of the High Sustainability group included board level responsibility for sustainability, and senior executive compensation for meeting environmental and social metrics. The LS group corresponded with a more traditional perspective of profit maximization where environmental issues are treated as an externality outside the responsibility of management. They tracked their financial performance for an 18 year period using stock market data. They found that investing $1 in the beginning of 1993 in a portfolio of High Sustainability companies grew to $22.6 by the end of 2010. In contrast, investing $1 in the beginning of 1993 in LS companies would have only grown to $15.4. The authors conclude that HS companies achieve this higher financial performance because of the way in which they incorporate sustainability into how the company is run. The board is accountable, senior executives are accountable, they have much deeper stakeholder engagement, they report on how they’re doing, they have a longer-term time horizon in their thinking, they choose their suppliers carefully for environmental performance, and they are more transparent with disclosing nonfinancial information. In another study, a 2014 Carbon Disclosure Project study of S&P500 companies found that firms that are actively planning for climate change as part of their core business strategy have an 18% higher ROE than firms that don’t. What does this tell us? These studies strongly suggest that firms that have chosen to go for a high level of sustainability appear to have higher performance and receive a premium in the market. On the upside, it is encouraging to know that firms doing good get a reward. This has not gone unnoticed and has spawned a whole industry of SRI and activist investors. On the downside, it doesn’t tell us exactly how this is done. Does it apply to all firms or only certain types of firms? Does it depend on how green initiatives are implemented? Does it depend on product, industry, leadership or what? Many firms have other motivations to go green besides financial returns. They might be responding out of necessity to a crisis. They might see opportunity where others see none. They might see future pressure on their firms to reduce environmental harm. Or, as in many cases, maybe they just “get it” and see it as the right thing to do. And is money the only reward? Perhaps being green gives them new skills. Or makes them a more desirable firm to work for. Perhaps it makes it more attractive to certain types of investors. Clearly, the question “does it pay to be green” is more complicated than it seems at first. But, understanding this makes you more sensitive to the subtle decisions in how to green a firm. Now, what you really want to know is given the firm that you are looking at, can green initiatives create a competitive advantage for this firm? And that leads us into the discussion of green business strategy.
