8/7/2019 When does the market reward environmental performance
improvements?
1/1
When does the market reward environmental
perormance improvements?
research insigh
Many rms have undertaken proactive environmentalinitiatives in
recent years consider Wal-Martsefforts to increase energy
conservation and, morerecently, their sustainable supply chain
initiatives.But, does the market see these activities as goodvalue
relative to other investment options? Whilesome suggest financial
benefits arise throughenergy and materials savings or
improvedreputation, others worry such initiatives wontpayoff
immediately or at all.
Researchers Brian Jacobs (Michigan State Universi-ty), Vinod
Singhal (Georgia Institute of Technology)and Ravi Subramanian
(Georgia Institute of Tech-nology) analyzed how environmental
performanceaffects shareholder value through stock marketreactions.
Their work builds on previous researchexamining the markets
reaction to specic types ofannouncements.
Jacobs and his collaborators looked at two typesof announcements
of environmental performanceappearing in 14 daily business
publications such asFinancial Times and The Wall Street Journal
between2004 and 2006. These included 417 rmannouncements of
initiatives to avoid, mitigate, oroffset the rms environmental
impacts, and 363third-party announcements of awards
andcertications. The researchers hypothesized themarket would
respond positively to both types ofannouncements, but that
third-party awards andcertications would lead to a greater jump in
shareprice than announcements by the rm because of thecredibility
offered by third parties.
The market reaction to self-reported announcementsdid not differ
from the reaction to third-partyannouncements. In fact, researchers
found themarket reacted only to three types of
announcements:philanthropy, voluntary emissions reductions, andISO
14001 certications. In the category of self-disclosed rm
announcements, philanthropy forenvironmental causes (such as cash
gifts for conser-vation efforts) generated a positive market
reaction,and voluntary emissions reductions (such as pledgesor
investments to cut emissions) created a nega-tive market reaction.
In the category of third-partyrecognition, ISO 14001 certications
resulted in asignicant positive reaction.
Most types of announcements (either from the rmor third parties)
resulted in no signicant change inshare price. These include
environmental businessstrategies (such as new standards), new
eco-friendlyproducts, renewably energy (supply or
purchase),recycling programs, announcements of LEEDcertication, or
third-party awards.
Why the reaction to only three categories? Theauthors suggest
philanthropy constitutes a smallinvestment (the median contribution
was $2 million)
but can generate substantial reputation and goodwillbenefits.
Emissions reductions beyond regulatoryrequirements may not be seen
as in the shareholdersbest interests, and actually hurt rm
performance.Support for the positive impact of ISO 14001certication
on a rms market value is justied bythe fact that it is a widely
recognized standard andsometimes a prerequisite for trade.
As managers evaluate environmental options and aimto satisfy
stakeholders with competing demands, theyshould consider which
announcements resonate withthe market and which do not. This
research sup-ports recent work examining a wide variety of
activi-ties, each with differing potential to add nancial val-ue to
the rm. Managers should note that although nopositive returns were
found for many categories, mostinitiatives did not drive share
prices down. Therefore,many initiatives can be pursued without fear
ofnegative market reactions.
The market reactedonly to three types
oannouncements:philanthropy, voluntaryemissions reductions,and ISO
14001certifcations.
January Source: Jacobs, Brian W., Vinod R. Singhal and Ravi
Subramanian (2010) An empirical investigation o
environmental perormance and the market value o the frm. Journal
o Operations Management, 28: 430-441Summary: Pamela Laughland and
The Network Team
