Does it Really Pay to Be Green? An Empirical Study of Firm Environmental and Financial Performance

(When) does it pay to be green?

Andrew King and Michael Lenox found that lower pollution levels were linked with higher market valuations, but only under the right conditions, in « Does It Really Pay to Be Green? An Empirical Study of Firm Environmental and Financial Performance ».

This landmark analysis of 652 US manufacturing firms over the 1987-1996 period relies on longitudinal data and regressions to control for time-invariant firm traits and isolate the environment-profit relationship.

Its key takeaways include:

• Companies with lower emissions had significantly higher market valuations (measured by Tobin’s Q), even though the direction of causality remains unclear.
• The success of environmental initiatives depends on how they are implemented and the firm’s context (industry, technologies, management).
• Firms in cleaner industries tended to enjoy higher financial valuations, although this is not automatic: companies that shifted to cleaner industries saw no automatic boost in results.
• Much of the variance in performance was explained by firm-specific characteristics and strategies, which hints only companies with certain attributes or capabilities can profitably « go green ».
• Rather than asking « Does it pay to be green? » in general, the authors argue the better question is « When does it pay to be green? » because the payoff is highly contingent on strategy and context.

According to this article, it likely paysto be green under specific conditions only for instance in in firms with the right innovative capabilities or in industries where greener practices confer a competitive edge.

It is important to note this study is correlational and could not definitively pin down cause and effect: well-managed firms might simply excel at both profitability and pollution control.

Also, the data is limited to 1987-1996 manufacturers, which is why the authors themselves call for further research into what firm characteristics enable profitable environmental improvement.