Corporate environmental standards create market value

January 30, 2008 | 1 min read

Glen Dowell (Cornell University), Stuart Hart (Cornell University ) and Bernard Yeung (National University of Singapore ) studied the market valuations and environmental policies of Standard & Poor's 500 manufacturing or mining companies with U.S. headquarters from 1994 to 1997. The list was narrowed down to 89 by including only companies with operations in countries with per capita GDP below $8,000 (1985 dollars), on the grounds that “evidence suggests that concern for and activity in environmental regulation decreases dramatically for countries with per capita income below $8,000.”

By operating in potential “pollution havens”, these multinational enterprises (MNEs) can either adhere to a single worldwide standard or adapt their standards to weaker, local environmental laws and regulations. In the latter case, as an earlier study (Vernon 1992) shows, companies can avoid expensive pollution controls, cut costs by recapitalizing old equipment and continue to make products that are no longer considered environmentally acceptable in the markets of the more developed world.

However, the findings of the study “Do Corporate Environmental Standards Create or Destroy Market Value?” (2000) contest the supposition that the pursuit of lower environmental standards would be profitable. On the contrary, the authors show a "significant and positive relationship between the market value of a company and the level of environmental standards it uses.” Firms that adopt a single stringent global environmental standard have much higher market values, as measured by Tobin’s q, than firms that merely comply with the less stringent or poorly enforced host country standards. These first firms were found to have an individual higher value of approximately $10.4 billion.

The authors also describe prior research concerning the social and environmental performance of multinational enterprises. “The (common) notion that MNEs, as a group, pursue the lowest environmental standards and create a “race to the bottom” among developing countries desperate for foreign investments is not substantiated by the data.” The authors believe that in some cases it may make business sense to adopt higher standards than locally required “especially when environmental laws and regulations become more stringent as an economy grows. By investing in state-of-the-art technology and processes in developing countries, MNE facilities may be able to achieve simultaneously world-class cost, quality, and environmental performance. In addition, they may reap standardization benefits and positive reputation effects.”

This study was awarded the 2001 Moskowitz Prize (awarded by the Center for Responsible Business at the Haas School of Business, in cooperation with the Social Investment Forum, the Moskowitz Prize promotes the concept, practice, and growth of socially responsible investing).

References

This article is based on a previously published article on sristudies.org, January 30, 2008.

This article may be reproduced according to our terms of use with attribution (and link, if online) to www.tias.edu. To be cited as: “Corporate environmental standards create market value”, Lloyd Kurtz, and Ingrid Ramaan, www.tias.edu, January 30, 2008.

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