The Link Between Company Environmental and Financial Performance (Routledge Revivals)

David Edwards

• Publisher: Routledge
• Year: 2014
• ISBN:
  9781317574996
• Edition: 1
• Topic: Economics
• Subtopic: Environmental Economics
• Index: Economics

The Link between Company Environmental & Financial Performance, first published in 1998, is a detailed investigation into the effects of environmental performance – resource efficiency, regulatory compliance, new product and service opportunities – on corporate financial performance. This report makes essential reading for company management, investors and other stakeholders.

It demonstrates the quantitative links between environmental and financial performance for the UK's best and worst environmental performers across a range of business sectors. It shows that there is no financial penalty for being environmentally proactive, and confirms US findings that good environmental performance improves a company's financial performance.

CHAPTER 1

INTRODUCTION

It is unlikely that any company can be truly sustainable in its operations (Shrivastava and Hart 1992); however, the World Business Council on Sustainable Development (WBCSD), with 120 members in 35 countries representing more than 20 industrial sectors, has set itself a mission ‘to provide business leadership as a catalyst for change toward sustainable development, and to promote eco-efficiency in business’ (Schmidheimy and Zorraquin 1996). Thus has the need for serious progress in standards of environmental performance by industry been publicly acknowledged by industry itself.

The motivation for companies to take the path towards sustainability may be encouraged by a variety of factors. Some are negative and reactive, such as the fear of noncompliance or the wish to avoid bad publicity; some are positive and proactive, such as new market opportunities and resource cost savings. This research aims to explore these motivators and examine quantitatively and qualitatively the effect of environmental performance, good and bad, on the financial bottom line of a company.

Background

In recent years a number of influential voices in the environmental arena have proposed the apparently paradoxical notion that the goals of business and environment might be reconcilable. These protagonists have insisted that companies can profit from enhanced environmental performance in ways such as more efficient waste management, pollution prevention, premiums on green products and improved public image (Porter 1991, Schmidheimy and Zorraquin 1995).

The idea that systematic improvements in environmental performance will lead to improvements in the financial bottom line is appealing to industrialists and green activists alike. However, company leaders who were initially positive about the possible revenue accruing from sound environmental practice have begun to question the environmental ‘free lunch’ (Cairncross 1994) as they experience diminishing returns on environmental projects and as ‘first mover’ advantages are eroded due to more and more firms adopting environmental programmes.

Initial enthusiasm about cost savings and competitive advantage has recently given way to a more cautious approach. It has become clear that the slogan adopted by Dow Chemicals, ‘Waste Reduction Always Pays’, simply is not true for many businesses. Such optimism may lead to unrealistic expectations and a breakdown in the dialogue between environmentalists and business leaders. Professor Rob Gray (1994) at the Centre for Social and Environmental Accounting Research in Dundee has commented:

Given that we have no way of knowing whether or not the planetary ecology is truly in crisis, and that it is impossible for us to ascertain whether our present ways of doing business can be made compatible with environmental sensitivity, we as a business community have some hard thinking to do. And the sooner we abandon the virtually empty rhetoric of win – win situations the better for business and the environment.

[Gray 1994]

The reality of the situation probably lies between the extremes. It is unlikely that executives at Dow Chemicals truly believed that all pollution prevention capital expenditure yields a positive return. Catchy slogans can bring public relations benefits and provide impetus for efforts towards efficiency by employees. It is also unlikely that Professor Gray totally refutes the idea of win – win situations. A report in the US which reviewed more than 100 studies into the effect of environmental regulations on economic competitiveness, concluded that there was no conclusive evidence to support either position.

Studies gauging the effects of environmental regulation on net exports, overall trade flows, and plant-location decisions have produced estimates that are small or statistically insignificant.

[Stavins, Jaffe, Peterson and Portney 1994]

The Framework for Change

The approach of industry to environmental quality issues in the 1970s was characterised by reactive and resistant attitudes in the industrial world. There was, on the whole, little awareness of the potential savings that could be made from environmental initiatives and unwillingness to cooperate with even the most enlightened policy-making. The 1980s saw a more positive approach from many companies and a growing realisation that innovative solutions in areas such as waste management, pollution, and environmental management systems could aid resource efficiency and reap large financial rewards for forward thinking companies. At Glaxo’s site in Cumbria, the factory’s solvent recovery plant recycles materials which might otherwise cause air and water pollution and in the process cut the company’s solvent bill by £20 million a year in 1986. On a smaller scale, cider-makers H.P. Bulmer used biotechnology to devise an effluent treatment plant able to clean up hot acidic wastes from their pectin plant. The total capital cost for the plant was £24,000, while the savings in its first year were estimated to have been £30,000 (Elkington and Burke 1987).

Environmental improvement has often been the by-product of the pursuit of other goals. In the late 1970s the objectives were often reduced energy use in reaction to the oil price shocks, in the 1980s many industries pursued better productivity as part of that decade’s drive for leaner companies, but in many cases, and in some unexpectedly, these profitable investments led to greener production. There are many such examples of environmental investments leading to impressive savings from a wide variety of sectors. However, many corporations are questioning how long the momentum of such initiatives can be sustained.

As diminishing returns on environmental investment have set in, the new generation of environmental managers have found it difficult to replicate the impressive successes of the 1980s and are increasingly nervous of stakeholder reaction to expensive environmental investments. Shareholders and the financial community are concerned that environmental spending is spiralling out of control to the detriment of other operational and capital investment considerations. Non-governmental organisation (NGO) concern focuses on the loss of momentum of the greening process and a reduced prominence of environmental issues on the company agenda (Walley and Whitehead 1994).

The road to a coherent and successful environmental strategy is a difficult one for many firms. Companies have been extremely nervous about the increasing transparency forced upon them by environmental legislation, such as Integrated Pollution Control authorisation requirements and statutory environmental impact assessments. They believe, often rightly so, that much of the information they are being asked to share with the world, especially regarding products and processes, confers competitive advantage to the company and that commercial security may be compromised by such ‘blood-letting’.

The financial markets may look on with distrust, and in some cases actually penalise, companies that are setting aside significant funding for environmental projects (Schmidheimy and Zorraquin 1995). Firms may also be increasing their vulnerability to adverse publicity. It is much easier to attack a firm like the Body Shop for a single transgression from its stated environmental policy because the company has a high media profile built on the back of its excellence. The share price of the Body Shop fell significantly after accusations of discrepancies between its animal testing policy and the actual activities of the company. In the wake of the controversy surrounding the disposal of the Brent Spar oil platform the Advisory Committee on Business and Environment commented:

Balanced reporting of environmentally sensitive decisions is to be welcomed since it helps to inform responsible public discussion. On the other hand, sensational reporting is counter-productive since, in the glare of publicity, constructive debate on potentially contentious matters becomes very difficult. Through over-simplifying issues and focusing on drama and conflict, such media stories tend to polarise views. In such an atmosphere it is much easier to appeal to the value systems of ‘interested parties’ than it is to argue detailed points of science, law or economics. In addition, sensational media stories tend to highlight situations as ‘win – lose’. It is close to impossible to create a ‘win – win’ situation in the glare of publicity.

[Seventh Progress Report to, and Response from, the President of the Board of Trade and the Secretary of State for the Environment March 1997]

Assessing the Benefits of Green Strategy

Finance directors and accountants who attempt to quantify a company’s environmental efforts face an ill-defined and complex task. Environmental financial reporting and accounting have evolved slowly due to a lack of understanding and a reluctance by accountants to get involved in issues which they have not traditionally considered of relevance to the profession. These attitudes are rapidly changing. Daniel Blake Rubenstein (a chartered accountant and Principal in the Office of the Auditor General in Canada) comments:

For the first time in accounting’s sleepy history, there is a growing recognition among accountants and non-accountants alike that accounting, that a value-free, balanced system of double entries, may be sending dangerously incomplete signals to business, to consumers, to regulators, and to bankers. The imperative to reconsider 5000 years of accounting conventions is not a passing fad.

[Rubenstein 1994]

Environmental accounting is one way in which positive and negative changes to the profit and loss account are ascribed to changes in the environmental performance of the firm. A change to a less toxic raw material used in a process is likely to incur more or less raw material expenditure. This will affect financial performance and it is vital that management is able to calculate the impact on the bottom line. Within the context of this report it is important to note that the value of environmental accounting lies not only in assigning financial values to the impaas of companies, processes or products, but also as an internal management tool for spotting environmental projects and initiatives with realistic rates of return.

Since 1990, stakeholders have pushed for more companies to accurately report their environmental liabilities and exposure to increasingly tough environment...