1. research insights
Investors Reward Environmental Results –
Not Targets
Companies that show real results in environmental used or emissions generated. Process-based
performance – such as lower carbon emissions – environmental performance describes the firm’s
receive a premium from investors. internal efforts to anticipate, manage or respond to
environmental concerns, such as setting targets or
For decades, researchers have tried to answer announcing an environmental strategy.
the question “Does it pay for companies to be
green?” and the studies have provided conflicting
results. Some studies show strong environmental
“... lowering carbon
performance leads to strong financial emissions did not directly
performance; other studies, however, suggest
environmental performance has no effect – or affect a company’s value
sometimes even a negative effect – on financial
performance. on paper, but it did affect
Timo Busch and Volker Hoffman of Swiss
how much investors
university ETH Zurich were intrigued by these
conflicting results. The researchers conducted
were willing to pay for the
a nuanced study of the relationship between company’s stock.”
environmental and financial performance,
examining 174 energy-intensive companies with
large market capitalization in the Dow Jones Investors Pay for Environmental Results
Global Index. When the researchers measured return on
equity (shareholder return) and return on assets
Materiality Matters (how efficiently the assets produce income) they
First, the researchers distinguished between found no correlation between a firm’s financial
two kinds of environmental issues that matter to performance and environmental performance.
investors: issues that have a material effect on the They did find, however, that firms with lower
company (such as air pollution in regions where carbon emissions had higher Tobin’s q than their
pollution is taxed) and issues that do not have a more carbon-intensive peers. Tobin’s q is a ratio
material effect (such as assessing eco-efficiency, that captures the difference between a public
without actively managing it). In particular, they company’s market and book values. In other
focused on carbon emissions as a material issue words, lowering carbon emissions did not directly
to study. affect a company’s value on paper, but it did affect
how much investors were willing to pay for the
Results versus Targets company’s stock.
Next, the researchers defined environmental
performance two ways: one way based on The researchers theorize that, as companies
outcomes, or results, and the other based on improve their operational efficiency and satisfy
process. Outcome-based performance refers to concerns about environmental impact, investor
reductions in energy consumed, raw materials satisfaction increases. In the current business

2. research insights
climate, investors are anxious to see companies The Takeaway
reduce the likelihood of environmental risks If you want your environmental efforts to positively
and sanctions and increase their attractiveness affect your company’s financial standing:
to environmentally conscious consumers and
investors. When a firm satisfies these concerns 1. Choose an environmental issue that has a
its perceived value increases and demand for its material effect on your business;
stock goes up. 2. Focus on attaining real improvements in the
chosen area (e.g. reduce carbon emissions).
“... not only did activities When you do these two things, investor
such as setting emissions satisfaction increases. Your company’s “intangible
value” increases as investors award you with an
targets fail to generate environmental premium, and demand increases for
opportunity to invest in your company.
good returns for investors
– they also failed to drive The researchers do not suggest, however, that
companies abandon process-based activities
investor demand.” such as target-setting and environmental planning:
these activities are crucial to achieving the real
results investors value. Their findings just reveal
The study found companies with process- that a splashy public announcement about your
based outcomes such as emissions targets had plans to become carbon neutral, for example,
significantly lower return on equity and Tobin’s won’t send investors flocking to buy your stock.
q. In other words, not only did activities such as The researchers note that, as environmental issues
setting emissions targets fail to generate good become more acute, this may change and, in the
returns for investors – they also failed to drive future, investors may start awarding premiums for
investor demand. This is likely because process- both environmental results and targets.
based activities often add immediate costs
without providing evidence for shareholders that
costs will eventually decrease and environmental
results will improve. This result is in keeping with
standard economic theory that stresses cost
minimization as a key to financial performance.
The researchers conclude that investors evaluate
different forms of environmental performance in
different ways. When firms focus on improving
actual outcomes, investors respond by awarding
the firm with a “premium” in the form of increased
demand. When firms focus on process where
the actual outcomes remain uncertain—the
anticipation and management of environmental
issues—investors do not reward them.
Source: Busch, T. and Hoffmann V. “How Hot is Your Bottom Line? Linking Carbon and Financial Performance.” September 2012
Business & Society 50(2) 233-265.
Summary: Lisa Richmond and the NBS team