Many firms have undertaken proactive environmental initiatives
in recent years - consider Wal-Mart’s efforts to increase energy
conservation and, more recently, their sustainable supply chain
initiatives. But, does the market see these activities as good
value relative to other investment options?

Research in the Journal of Operations Management reveals share
price drops when firms commit to voluntary emissions reductions.
However, share price goes up when firms announce ISO 14 001
certification or corporate donations to environmental causes.

Significantly, the markets ignored all other announcements about
new recycling programs, eco-friendly products, or LEED
certification.

While some evidence suggests financial
benefits arise through energy and materials savings or improved
reputation, others worry such initiatives won’t pay off immediately
- or at all.

Researchers Brian Jacobs (Michigan State University), Vinod
Singhal (Georgia Institute of Technology) and Ravi Subramanian
(Georgia Institute of Technology) analyzed how environmental
performance affects shareholder value through stock market
reactions. Their work builds on previous research examining the
market’s reaction to specific types of announcements.

Jacobs and his collaborators looked at two types of
announcements of environmental performance appearing in 14 daily
business publications such as Financial Times and The Wall Street
Journal between 2004 and 2006. These included 417 firm
announcements of initiatives to avoid, mitigate, or offset the
firm’s environmental impacts, and 363 third-party announcements of
awards and certifications.

The researchers hypothesized the market would respond positively
to both types of announcements, but that third-party awards and
certifications would lead to a greater jump in share price than
announcements by the firm because of the credibility offered by
third parties.

The market reaction to self-reported announcements did not
differ from the reaction to third-party announcements. In fact,
researchers found the market reacted only to three types of
announcements: philanthropy, voluntary emissions reductions, and
ISO 14001 certifications.

In the category of self-disclosed firm announcements,
philanthropy for environmental causes (such as cash gifts for
conservation efforts) generated a positive market reaction, and
voluntary emissions reductions (such as pledges or investments to
cut emissions) created a negative market reaction. In the category
of third-party recognition, ISO 14001 certifications resulted in a
significant positive reaction.

Most types of announcements (either from the firm or third
parties) resulted in no significant change in share price. These
include environmental business strategies (such as new standards),
new eco-friendly products, renewably energy (supply or purchase),
recycling programs, announcements of LEED certification, or
third-party awards.

Why the reaction to only three categories?

The authors suggest philanthropy constitutes a small investment
(the median contribution was $2 million) but can generate
substantial reputation and goodwill benefits. Emissions reductions
beyond regulatory requirements may not be seen as in the
shareholders’ best interests, and actually hurt firm
performance.

Support for the positive impact of ISO 14001 certification on a
firm’s market value is justified by the fact that it is a widely
recognized standard and sometimes a prerequisite for trade.

As managers evaluate environmental options and aim to satisfy
stakeholders with competing demands, they should consider which
announcements resonate with the market - and which do not. Managers
should note that, although no positive returns were found for many
categories, most initiatives did not drive share prices down.

Therefore, many initiatives can be pursued without fear of
negative market reactions.

This article originally appeared on the href=”http://www.nbs.net/research-insight-when-does-the-market-reward-environmental-performance-improvements/”>
Network for Business Sustainability and is reprinted with
permission. Read another Research Insight on href=”http://www.nbs.net/research-insight-older-consumers-will-purchase-ethically-but-they-need-the-right-information-good-value-and-reminders/”
target=”_blank”>Marketing to Socially Conscious
Consumers.

Citation: Jacobs, Brian W., Vinod R. Singhal and Ravi
Subramanian (2010) href=”http://mgt.gatech.edu/directory/phd/jacobs/jacobs_et_a_env_events_paper_080920.pdf”
target=”_blank”>An empirical investigation of environmental
performance and the market value of the firm. Journal of
Operations Management, 28: 430-441