Tracing the Influence of Corporate Environmental Practices on Environmental and Financial Returns

Abstract

Despite a recent surge of empirical studies examining associations between corporate environmental performance and financial performance, researchers have been unable to give an integrated account of the mechanisms that link the two. The practical implications of this research stream thus remain limited, offering managers little guidance in their efforts to improve environmental and financial performance. This study of the U.S. chemical industry addresses that gap by analyzing how firms’ environmental management practices and resulting environmental performance may be related to their financial performance, illuminating the type and scope of relevant environmental practices conducted at the plant level of firms. Drawing on detailed environmental information about 18,743 chemical plants and financial information about their 455 parent firms, we investigate the plants’ pollution prevention activities (PPAs) and their broader impacts on environmental performance and financial outcomes in terms of cost competitiveness and market valuation. The results reveal that more-intensive PPAs are associated with both superior environmental performance and improved cost competitiveness, but do not necessarily lead to higher market valuation. The study also establishes that proactive PPAs implemented to improve environmental performance at the plant level are associated with cost competitiveness when those practices directly improve existing production processes and the selected financial measurement is well suited to capture such improvements.