January 11, 2001
Greener Multinationals Have Higher Market Value
A study tying high corporate environmental standards with greater market value adds to the growing
body of evidence that poor environmental performance does not pay.
To some multinationals, deciding corporate environmental standards for operations in developing
countries is a no brainer. Use the lowest standards possible to reduce costs and increase profits.
A study published in Management Science refutes that strategy, stating that companies employing
such practices decrease their own market value in the long run.
In the study,
entitled "Do Corporate Global Environmental Standards Create or Destroy Market Value?," the authors
write "The evidence from our analysis indicates that positive market valuation is associated with
the adoption of a single stringent environmental standard around the world."
Glen Dowell, Stuart Hart and Bernard Yeung arrived at this conclusion after answering the question:
Is the application of stricter global environmental standards associated with greater market
Paring down the list of firms in Standard and Poor's 500 Index, 89 mining and
manufacturing companies with production operations in developing countries were chosen for
analysis. Market value and environmental practice data from 1994 to 1997 served as the basis for
The environmental practices employed by the companies were broken down into
three categories: strict internal environmental standards, less stringent U.S. standards, and lax
local environmental standards. Surprisingly, in over half of the cases where environmental
practices were measurable, the corporations applied strict internal standards. Host-country
standards were chosen in less than 30 percent of the cases.
After accounting for factors
such as advertising and research and development, the researchers found that the market valuation
of companies employing strict internal environmental standards for their operations was
significantly higher than companies using local standards. And just as noteworthy, the valuation
of companies employing less stringent U.S. standards was determined to be nearly as low as the
companies adopting host-country environmental standards.
The reason for this higher
valuation, the authors suggested, is that investors may be taking into consideration the risks and
liabilities associated with environmental performance in assessing a company's value. Using lax
local standards may be perceived as leading to future cleanup costs and bad publicity, both of
which can lower profitability. Those companies also may be viewed as not being competitively
positioned if local standards change as the economy grows.
The conclusions of this study
should serve as a wake-up call to corporations with lagging environmental practices. In the global
economy, even U.S. environmental standards negatively affect market value. Social investors should
feel reaffirmed that their instincts are right on the money.