research insights
When does the market reward environmental
performance improvements?
Many firms have undertaken proactive environmental
initiatives in recent years – consider Wal-Mart’s
efforts to increase energy conservation and, more
recently, their sustainable supply chain initiatives.
But, does the market see these activities as good
value relative to other investment options? While
some suggest financial benefits arise through
energy and materials savings or improved
reputation, others worry such initiatives won’t
payoff 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 performance
affects shareholder value through stock market
reactions. Their work builds on previous research
examining the market’s reaction to specific types of
announcements.
Jacobs and his collaborators looked at two types
of announcements of environmental performance
appearing in 14 daily business publications such as
Financial Times and The Wall Street Journal between
2004 and 2006. These included 417 firm
announcements of initiatives to avoid, mitigate, or
offset the firm’s environmental impacts, and 363
third-party announcements of awards and
certifications. The researchers hypothesized the
market would respond positively to both types of
announcements, but that third-party awards and
certifications would lead to a greater jump in share
price than announcements by the firm because of the
credibility offered by third parties.
The market reaction to self-reported announcements
did not differ from the reaction to third-party
announcements. In fact, researchers found the
market reacted only to three types of announcements:
philanthropy, voluntary emissions reductions, and
ISO 14001 certifications. In the category of self-
disclosed firm announcements, philanthropy for
environmental causes (such as cash gifts for conser-
vation efforts) generated a positive market reaction,
and voluntary emissions reductions (such as pledges
or investments to cut emissions) created a nega-
tive market reaction. In the category of third-party
recognition, ISO 14001 certifications resulted in a
significant positive reaction.
Source: Jacobs, Brian W., Vinod R. Singhal and Ravi Subramanian (2010) An empirical investigation of
environmental performance and the market value of the firm. Journal of Operations Management, 28: 430-441
Summary: Pamela Laughland and The Network Team
Most types of announcements (either from the firm
or third parties) resulted in no significant change in
share price. These include environmental business
strategies (such as new standards), new eco-friendly
products, renewably energy (supply or purchase),
recycling programs, announcements of LEED
certification, or third-party awards.
Why the reaction to only three categories? The
authors suggest philanthropy constitutes a small
investment (the median contribution was $2 million)
but can generate substantial reputation and goodwill
benefits. Emissions reductions beyond regulatory
requirements may not be seen as in the shareholders’
best interests, and actually hurt firm performance.
Support for the positive impact of ISO 14001
certification on a firm’s market value is justified by
the fact that it is a widely recognized standard and
sometimes a prerequisite for trade.
“The market reacted
only to three types of
announcements:
philanthropy, voluntary
emissions reductions,
and ISO 14001
certifications.”
As managers evaluate environmental options and aim
to satisfy stakeholders with competing demands, they
should consider which announcements resonate with
the market – and which do not. This research sup-
ports recent work examining a wide variety of activi-
ties, each with differing potential to add financial val-
ue to the firm. Managers should note that although no
positive returns were found for many categories, most
initiatives did not drive share prices down. Therefore,
many initiatives can be pursued without fear of
negative market reactions.
January 2011