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➽ What Is Your Company’s Environmental Strategy? - Does it pay to be green or You pay to be green?
In looking at the relationship between corporate governance and the environment, I will leverage the work of Hart and Ahuja (1996) - “Does it pay to be green? An empirical examination of the relationship between emissions reduction and firm performance.”
In discussing firm performance and the governance mechanisms over environmental management, one of the key drivers is whether it pays to be green? Or do you pay to be green? Our starting assumption is that it pays to be environmentally green.
Being green by investing in good environmental policies, the firm reduces compliance and liability costs, improves the bottom-line and market share, while enhancing both the tangible and intangible assets.
The environmental management activities include pollution reduction and control; reduction of toxic emissions, control of waste, and biodiversity. It is important to evaluate the effectiveness of environmental management from the perspectives of firm profitability, and societal/governmental regulations.
Pollution reduction will cost the firm although the costs can be transferred to the public through better reputation and image which attracts customers and employees. This method reduces litigations or fines and eventually leads to cost reduction.
Pollution reduction methods have the highest positive effect on financial performance, yet managers tend to be unaware of this effect. If all firms act like the best green performers, the market would see them without any differentiator such as higher return as they will all seem to be reaching an equilibrium point.
However, in order to break such inertia, they need to innovate and find new strategies to obtain rent or higher returns.
Firms involved in environmental management could be split into two major blocks: (i) green compliant firms – focusing on full compliance with relevant regulations and policies and (ii) environmentally pro-active firms – seeking to achieve abnormal returns through green investments.
Markets create incentives for pollution control. Internal and external factors may influence environmental pollution control activities and the behaviour of managers in charge of these activities.
Different environment regulations and market reactivity across different regions may lead to different pay off to green initiatives.
The example of the car emissions regulation in the EU tends to be the most efficient measure to push the automobile industry towards greenness. The carmakers are expected to balance the portfolio of their cars to ensure that the minimum greenness of these portfolios is maintained.
These different national policies imply strong external corporate governance elements that 'lead' or 'steer' behaviour by 'aligning' incentives. This is done by ensuring that the attainment of financial goals is dependent on the achievement of environmental goals.
The national or regional strategies can be treated within a continuum between 'command and control' and ‘market-based approaches such as emissions trading. Yet there needs to be a clear political commitment to the green agenda for efficient pollution control to be achieved.
Taking a resource-based perspective on corporate environmental performance, it can be argued that the level of industry´s growth moderates the expected probability of returns.
The expected payoff of any environmental investment risk tends to be higher in high-growth industries as they generate the type of innovative culture that facilitates pollution prevention as the structure allows for slack resources to be invested in environmental improvements.
However, in low growth industries, the adoption of new policies (related to environmental conditions) would be difficult, as they require a loosening of organizational structures and norms.
Please share your thoughts in the comments section…
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Published origninally on 30th Jan 2020 08:38:14
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