Eco‐efficiency Based on Social Performance and its Relationship with Financial Performance

Abstract

SummaryAs corporate responsibility for environmental management has gained attention, eco‐efficiency has become recognized as an important concept for improving the social performance of the business sector as well as that of the public sector. Improving eco‐efficiency is widely accepted not only as a means of increasing economic value, but also as a means of reducing environmental effects. However, managing for eco‐efficiency should take into consideration the differences among industries, because the impact of eco‐efficiency on financial and social performance varies among industries. To explore this variation, we conducted a cross‐industry analysis of eco‐efficiency based on social performance using data envelopment analysis (DEA). DEA measures relative efficiency and is a useful tool for taking into account the relative importance of industry‐specific characteristics. Using DEA, eco‐efficiency scores were derived based on the ratio of two factors of social performance: (1) value‐added inducing and production‐inducing economic spillover effects and (2) the amount of greenhouse gases emitted and energy used. Then, we identified the relationships between our eco‐efficiency score and financial performance, which is a measure of the firm's stability. The case study is based on 272 firms in 16 industries in South Korea. Results show that firms in product manufacturing and service‐intensive industries tend to have higher eco‐efficiency scores than those in raw material or chemical‐intensive industries. In addition, most of the industries reveal no relationship between traditional financial performance metrics and eco‐efficiency scores. A handful of industries had significant relationships with one or more financial performance metrics; in some cases, these relationships were negative, whereas in others they were positive. Surprisingly, almost all industries have no significant relationships between eco‐efficiency and financial performance. This result implies that government support for policies that reward firms that attempt to be eco‐efficient are needed, or that other nonfinancial metrics that influence eco‐efficiency, such as employment and brand reputation, should be considered. This article is expected to support policy makers as they formulate industry‐specific environmental strategies.