The Profitable Correlation
 Between Environmental and
 Financial Performance:
 A Review of the Research

Executive Summary
 

The Profitable Correlation Between Environmental and Financial Performance: A Review of the Research was commissioned by Light Green Advisors (LGA) to demonstrate that recent research has shown that successful environmental management has a tangible effect on business performance. The Profitable Correlation reviews 40 recently published papers on corporate profitability and environmental performance. Key findings from the 20 quantitative studies included in The Profitable Correlation, including the specific  financial measures and specific environmental factors analyzed in these empirical studies, are shown in the table below.

Introduction
       Over the last decade, numerous quantitative studies and qualitative papers have examined the conventional notion that progressive environmental management is inevitably a 'cost' to the corporate 'bottom-line.' This environmental 'cost' assumption has been tested against a wide range of financial measures in an impressive body of research. The findings of this research increasingly indicate that the conventional 'cost' view is, at best, outdated. Rather, recent empirical and analytical research shows that there is a clear correlation between environmental performance and corporate profitability.

Selected Findings
       Recent empirical research that has found that superior environmental performance leads to positive financial results:

• company environmental performance correlates with intangible asset value, and reductions in toxic chemical releases result in increases in firm market value
   
• firms that improve their environmental performance by adopting 'beyond compliance' environmental management systems realize stock price gains
   
• firms whose international environmental standards are more stringent than local law have higher market values than firms whose standards are at or below the local legal mandate
   
• pollution prevention and emissions reduction initiatives lead to improvements in company ROE, ROA and ROS ratios, while ROA improves as environmental performance improves
   
• chemical companies that have pre-existing capacities to innovate and that employ innovative pollution prevention technologies realize significant cost savings
   
• 'industry-balanced' portfolios of "low pollution" S&P 500 companies earn greater stock returns than portfolios of "high pollution" companies.

And, in the alternative, recent empirical studies have found that poor environmental performance leads to negative financial consequences:

• chemical companies likely to be impacted by adverse environmental legislation suffer stock price declines while the legislation is being developed
   
• firms targeted by the EPA for pollution-control enforcement actions suffer stock price declines when their violations are announced
   
• as Superfund liability rose for a group of 'large' chemical companies, the cost of capital for the firms in the set rose as well
   
• firms which experience negative news coverage regarding their Toxic Release Inventory (TRI) emissions levels incur subsequent stock declines

Quantitative Studies
(studies cross-categorized by environmental performance criteria observed and financial performance measure evaluated)

*IRRC: Investor Research Responsibility Center
*TRI: Toxic Release Inventory
*CEP: Council on Economic Priorities
*FRDC: Franklin Research and Development Center

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