Environmental Standards Yield Profits for Multinationals, Study Says

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Who says it doesn’t pay to think green?p. Contrary to the belief that multinational companies suffer from environmental regulation, big businesses that adopt strict global environmental standards in developing countries are rewarded with higher stock market performance, according to a study published in Management Study, a journal of the Institute for Operations Research and the Management Sciences.p. The study found “a significant and positive relationship between the market value of a company and the level of environmental standard it uses.”p. Of the companies examined in the study, firms choosing to employ their own strict global environmental standard abroad have an individual value of approximately $10.4 billion higher than those using less stringent U.S. standards, after setting controls for the influence of physical assets, capital structure and multinationality.p. “This paper refutes the idea that adoption of global environmental standards by multinational enterprises constitutes a liability that depresses market value,” the authors write. “On the contrary, the evidence from our analysis indicates that positive market valuation is associated with the adoption of a single stringent environmental standard around the world.”p. The study also warns developing countries that using lax environmental regulations to attract foreign direct investment may bring them poorer quality and less competitive firms.p. The study, “Do Corporate Global Environmental Standards Create or Destroy Market Value?” was written by Glen Dowell, University of Notre Dame’s College of Business; Stuart Hart, Kenan-Flagler Business School, University of North Carolina at Chapel Hill; and Bernard Yeung, NYU Stern School of Business. It appears in the current issue of Management Science .p. The researchers investigated two questions: Are multinational enterprises more profitable when they surpass lax environmental standards in developing countries, and do improvements in environmental standards actually lead to increased market value?p. Addressing the second question, the researchers were unable to determine if environmental measures undertaken in one year result in higher market value in a subsequent year.p. The researchers examined a sample of 89 manufacturing and mining companies headquartered in the United States that are included in the Standard and Poor’s 500 Index. Only multinational enterprises that had production operations in countries with GDP per capita below $8,000 were sampled.p. Companies’ compliance with environmental standards was derived from the Investor Responsibility Research Center’s Corporate Environmental Profile for the year’s 1994-1997. The profile indicates if a multination firm adheres only to local standards, applies American standards abroad, or uses a stringent internal environmental standard that exceeds any national standard.p. Surprisingly, the researchers found that defaulting to lax local environmental standards is by no means the most common practice. Nearly 60 percent of the companies observed in this sample adhere to a stringent internal standard, compared to less than 30 percent that only enforce developing countries’ standards.p. The authors concede that the increased productivity observed in the study may be a result of using new technologies and equipment. Nevertheless, they suggest, firms that adopt high environmental standards are those that strive for eco-efficient production systems. The conscious policy to pursue technologies and processes that increase resource productivity of their operations has a positive result for the bottom line.

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