When Does it Pay to be Green?

When Does it Pay to be Green?
Proactive environmental planning would prevent dumping of untreated pollutants in streams, a small step that has a small positive effect on corporate bottom line. | Photo by: Mick Garratt

Proactive environmental planning would prevent dumping of untreated pollutants in streams, a small step that has a small positive effect on corporate bottom line. | Photo by: Mick Garratt

Protecting the environment is good for reputation and public perception. Who doesn’t want to be known as someone who cares about preserving the planet? But for many corporate executives, the real question is: Does it make money? Does it even save money? These are the people who are scrutinized by and held accountable to governing boards and thousands or even millions of shareholders. They get paid handsomely to get it right on the big decisions.

John Johnson

John Johnson

“I get these questions all the time,” says Jon Johnson, professor of management in the Sam M. Walton College of Business. “A lot of people ask about the relevance of sustainability, especially environmental performance and business performance. Is it a distraction? Does it cost business? Is it neutral? Is it good for business?”

Johnson founded the Walton College’s Applied Sustainability Center and co-founded the Sustainability Consortium, a partnership between the University of Arkansas and Arizona State University that provides science-based information about the impact on a firm’s bottom line of sustainability and innovative environmental strategies.

There are many competing hypotheses, he says, about whether an environmental strategy is good or bad for business. Over the past decade, many academic disciplines – management, finance, economics, accounting and marketing – have attempted to answer this question. Most of these studies found a positive relationship, but others have found a negative relationship or no significant relationship. So the issue remains controversial.

The controversy and persistent questions from executives motivated Johnson and several colleagues to reexamine the relationship. They knew there was an abundance of studies, so they decided to do a meta-analysis. Meta-analysis is a statistical method that focuses on aggregating and synthesizing results from different, even diverse, studies to identify patterns and reduce measurement and other sources of error.

The researchers sought studies that show a correlation between some indicator of financial performance and an indicator of environmental performance. By statistically aggregating many studies, meta-analysis produces a sophisticated averaging of the relationship and increases the statistical robustness of the analysis.

“That’s the theory,” Johnson says. “The reality is that meta-analysis is an inexact method. It is not something that should be over-interpreted, which is to say that it’s a great way to draw general conclusions about well studied relationships.”



Whether reactive or proactive, large or small, public or private – there is a positive, yet modest, relationship between corporate environmental behavior and profit. | Credit: U.S. Coast Guard photo

The researchers found 72 studies from 1970 through 2009 from multiple disciplines. Through further statistical analysis, they settled on 39 usable studies with 202 samples that examined the relationship between corporate environmental performance and corporate financial performance. By crunching data from these studies, their goal was to answer two fundamental questions: Does it pay to be green, and, if so, when?

The answer to the first question came easily enough. The meta-analytic results demonstrated a positive and robust – that is, statistically significant – relationship between corporate environmental and financial performance. But this overall finding simply confirmed results from the bulk of published work. It wasn’t surprising, Johnson says, and there were many caveats.

“So the story is yes, it does pay to be green, but this is a modest relationship no matter how you cut it,” he says. “I can’t over-emphasize this enough. Most companies will experience only minor positive financial performance based on environmental programs. We’re not talking about huge increases in profitability.

“On the other hand, there are very few single predictors of financial performance, so managers should be interested in any positive correlate of performance. You won’t beat the competition based on progressive environmental performance alone, but on average, your company will benefit from it.”

No matter how you cut it. What Johnson alludes to here is the second question: If it indeed pays to be green, if companies benefit from adopting or following some kind of environmental strategy, then when? Exactly how does this work for them? To answer this question, the researchers delved into the literature and identified a list of moderators, various factors that influence the relationship.


First they focused on different types – or perhaps degrees – of environmental strategies. The literature brims with descriptive words for these types, which include – in a more or less progressive order – noncompliance, beginner, reactive, defensive, conformance, accommodating, modern and proactive. For their study, the researchers grouped all strategies into two categories, proactive and reactive.

A proactive environmental approach embraces and integrates environmental issues into the corporate business strategy. It is focused on the front end of processes and operation, on preventing problems by dealing with the source. Proactive strategies view responsible management of the environment as important for business. They encourage employee involvement and receive significant support from top management. (At Wal-Mart, for example, a senior vice president heads up sustainability.) These strategies emphasize efficiency, waste reduction and, perhaps most importantly, continuous innovation.

Reactive strategies focus on compliance. Their objective is to meet legal requirements, and they generally lack significant involvement from top executives. These strategies include the traditional “end-of-the-pipe” methods for trapping, storing or treating carbon emissions. They do not include employee environmental training or involvement. Rather than preventing problems by dealing with the source, reactive strategies solve environmental problems when they arise.

Next, the researchers asked this essential question: Does the additional investment in proactive environmental practices, such as process innovation and redesign, positively influence the financial bottom line to a greater extent than reliance on traditional, reactive, end-of-the-pipe solutions? And what happens when both strategies exist?

The answers to these questions surprised Johnson and his colleagues. They found that the influence of proactive versus reactive strategies produced no significant moderating effect on financial performance. In the other words, no matter which tack firms pursue, they appear to benefit similarly. Contrary to expectations, proactive strategies did not appear to lead to greater financial returns than reactive strategies.

“Firms that go beyond regulatory requirements and focus on prevention by integrating environmental concerns into things like process innovation, stakeholder collaboration and employee involvement may not necessarily expect greater financial returns than firms focusing on mere compliance or end-of-pipe methods,” Johnson said. “In some ways, I’m almost disappointed to report this, because a lot of what I do is press the case for leading-edge sustainability. But research doesn’t work that way, and the results were clear, that both proactive and reactive approaches were equally beneficial.”

The researchers drilled deeper and looked at various firm characteristics – large versus small, public against private, U.S. firms compared international firms and so-called “worst offenders” versus a broad set of companies in less environmentally impactful industries – or at least do not have a reputation for harming – the environment. Would these moderators influence the relationship between environmental and financial performance?


Simply put, large firms were those found on the list of Fortune 500 companies. Firms not on the list were considered small. Previous research in this area has not squelched varying opinions about the influence of small versus large when it comes to the adoption an environmental strategy designed to cut expenses or generate additional profits. Some researchers have argued that small firms are not burdened by the endemic bureaucracy and inertia of large corporations and are therefore more flexible and better able to respond to environmental challenges and organizational change. But at least as many, if not more, studies have argued that large firms have an advantage here because they have the resources to invest in innovative programs that will yield long-term savings. In this milieu, the researchers asked this basic question: Are the benefits of environmental performance the same or different for large versus small firms?

Their results revealed that there was a significant statistical difference between samples of large firms only and samples of large firms versus small ones. While both groups benefitted, small firms appeared to benefit more.

“Again, it’s modest,” Johnson says, “but this is actually good news because one of the arguments out there right now is that large firms are the only ones that benefit from environmental performance because they are the only ones who can afford it. So now you can’t really say that, that it works only for Wal-Mart and other Fortune 500 companies.”


What about organizational form? Does public or private influence the relationship between environmental and financial performance? Here too, opinions have varied. Because public firms, those whose shares are traded on a stock exchange, receive greater media attention, they may reap some reputational benefits by being perceived by the public as concerned about the environment. On the other hand, private firms have more freedom and discretion to implement innovative and progressive environmental initiatives.

The findings revealed no real difference between public and private firms in terms of each type of firm’s relationship between environmental and financial performance. In other words, the correlation between private firms’ environmental/financial performance did not significantly differ from that of public firms. Both types of firms benefit similarly.


There was, however, a statistically significant difference between U.S. and international firms. The question here was: Does corporate environmental performance matter more or less for firms that are based in the United States than for international-based counterparts? The answer was more. U.S. firms appear to benefit more than international firms, the researchers found. Johnson says this could be a function of a more stringent regulatory environment in the United States than in many parts of the world, that international firms may be held to lower standards. On the other hand, the finding may explain a sort of trickle-down effect, suggesting other firms want to do business with compliant producers.



Whether reactive or proactive, large or small, public or private – there is a positive, yet modest, relationship between corporate environmental behavior and profit. | Credit: U.S. Coast Guard photo

And then there are the bad boys. Completing their exploration of firm characteristics, the researchers wanted to know if the so-called “worst offenders” – firms that have been hard on the environment or at least perceived by the public as high polluters – benefit more or less than a broader set of industries by adopting some kind of environmental strategy. They do not. Again, contrary to expectations, the meta-analysis showed that studies examining a broad set of firms found no significant differences in the relationship between environmental and financial performance, when compared to studies that investigated the same relationship in industries that are considered worst offenders.

As a final analysis, the researchers lumped all sample studies into one category and studied the effect of environment performance on profitability, market-based firm growth, cost efficiency and other outcomes. These measures indicated that corporate environmental performance influences market-based financial performance greater than other indicators.

“The financial performance measures are interesting,” Johnson says, “because they give you at least a clue as to the kind of effect this has. The market measure of performance – we’re talking about stock performance here – was positive and significant, and I think this is encouraging. It shows that the market recognizes and rewards environmental performance.”

Johnson and his colleagues were not surprised by the overall message, that a modest, yet statistically significant and positive relationship exists between corporate environmental performance and corporate financial performance. Their meta-analysis supported the argument that it does pay to be green. But
they were at least mildly surprised by what they found beneath the surface, by the answers that explained when and how this process works.

“When we drilled down into the moderators,” Johnson says, “we found some contextual factors that affect the relationship. But, by and large, there were actually fewer contextual variables than we would have expected to see. And so the overall story is it doesn’t matter whether is reactive or proactive, large or small, public or private. Whatever the sub-sample, there is a positive, yet modest relationship.”

The lead author for this study is Heather Dixon-Fowler, assistant professor at Appalachian State University and a former Walton College doctoral student. In addition to Johnson, other authors are Alan Ellstrand, Walton College management professor; Dan Slater, assistant professor of management at Union University; and Andrea Romi, assistant professor at Texas Tech University and also a former Walton College doctoral student. Johnson is holder of the Walton College Professorship in Sustainability. He serves as academic director and chairman of the board of The Sustainability Consortium. Alan Ellstrand is holder of the Charles C. Fichtner Chair.

Proactive environmental approach

  • Encourage employee involvement
  • Receive significant support from top management

 These strategies emphasize efficiency, waste reduction and, perhaps most importantly, continuous innovation.

Reactive strategies focus on compliance

  • Meet legal requirements
  • Lack significant involvement from top executives

These strategies include the traditional “end-of-the-pipe” methods for trapping, storing or treating carbon emissions.

About The Author

Matt McGowan writes about research in the College of Engineering, Sam M. Walton College of Business, School of Law and other areas. He is the editor of Short Talks From the Hill, a podcast of the University of Arkansas. Reach him at 479-575-4246 or dmcgowa@uark.edu.

University Relations Science and Research Team

University Relations Science and Research Team

Matt McGowan
science and research writer
479-575-4246, dmcgowa@uark.edu

Robert Whitby
science and research writer
479-387-0720, whitby@uark.edu

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