A study tying high corporate environmental standards with greater market value adds to the growing body of evidence that poor environmental performance does not pay.
To some multinationals, deciding corporate environmental standards for operations in developing countries is a no brainer. Use the lowest standards possible to reduce costs and increase profits. A study published in Management Science refutes that strategy, stating that companies employing such practices decrease their own market value in the long run.
In the study, entitled "Do Corporate Global Environmental Standards Create or Destroy Market Value?," the authors write "The evidence from our analysis indicates that positive market valuation is associated with the adoption of a single stringent environmental standard around the world."
Researchers Glen Dowell, Stuart Hart and Bernard Yeung arrived at this conclusion after answering the question: Is the application of stricter global environmental standards associated with greater market value?
Paring down the list of firms in Standard and Poor’s 500 Index, 89 mining and manufacturing companies with production operations in developing countries were chosen for analysis. Market value and environmental practice data from 1994 to 1997 served as the basis for the research.
The environmental practices employed by the companies were broken down into three categories: strict internal environmental standards, less stringent U.S. standards, and lax local environmental standards. Surprisingly, in over half of the cases where environmental practices were measurable, the corporations applied strict internal standards. Host-country standards were chosen in less than 30 percent of the cases.
After accounting for factors such as advertising and research and development, the researchers found that the market valuation of companies employing strict internal environmental standards for their operations was significantly higher than companies using local standards. And just as noteworthy, the valuation of companies employing less stringent U.S. standards was determined to be nearly as low as the companies adopting host-country environmental standards.
The reason for this higher valuation, the authors suggested, is that investors may be taking into consideration the risks and liabilities associated with environmental performance in assessing a company’s value. Using lax local standards may be perceived as leading to future cleanup costs and bad publicity, both of which can lower profitability. Those companies also may be viewed as not being competitively positioned if local standards change as the economy grows.
The conclusions of this study should serve as a wake-up call to corporations with lagging environmental practices. In the global economy, even U.S. environmental standards negatively affect market value. Social investors should feel reaffirmed that their instincts are right on the money.