Studies Prove Business $en$e From Proactive Environmental Management Initiatives & Certifications

31 Mar

I always find it rewarding when a study comes out that underscores the business value of sustainability, especially when backed up with statistics and hard dollars.  Such is the case with a 2008 study by researchers from the Georgia Institute of Technology (GIT).  The research study, entitled An Empirical Investigation of Environmental Performance and the Market Value of the Firm, was authored by Brian W. Jacobs, Vinod R. Singhal, and Ravi Subramanian.  The study analyzed the shareholder value effects of environmental performance by measuring the stock market reaction associated with announcements of environmental performance.

The study focused on how markets react to Corporate Environmental Initiatives (CEI) and Environmental Awards and Certifications (EAC).  The results of the study provided compelling data that suggested that “announcements of philanthropic gifts to environmental causes are associated with significant positive market reaction, voluntary emission reductions are associated with significant negative market reaction, and ISO 14001 certifications are associated with significant positive market reaction”.  For me this report validates my devotion over the past 15 years working with small to large manufacturers and public agencies in designing, implementing and maintaining ISO 14001 certifications and in making the argument that “proactive environmental management makes business sense”.  I’m not some crazed environmentalist after all (although my passion occasionally borders on the “evangelical” side)!

The research study focused on reviewing the “market value impacts of specific events (such as use environmental announcements) as a “proxy for the difficult-to-measure construct of environmental performance”.   The study found a statistically significant market reaction to the hundreds of environmental performance announcements evaluated, suggesting a causal link between environmental performance and financial performance.   Specific to ISO 14001 announcements, the market was seen as reacting positively (on a statistical basis) to announcements of ISO 14001 certifications. Years of literature and case studies have offered volumes of data that support the positive impact of environmental management systems in general as well as direct evidence that ISO 14001 certification improves company performance over long periods of time. The authors of the GIT believe that they are the “first to provide empirical evidence of the impact of ISO 14001 certification on market value”.

Body of Evidence

Forays into proactive environmental management and attainment of internationally recognized certifications like ISO 14001, RC 14001 or LEED are not always “window dressing’ to demonstrate commitment to sustainability, as some may believe.  These efforts are more often than not the real deal when it comes to demonstrating value-added savings and long-term return on investment and access to new market.  While the skeptics continue to throw cold water on CEI’s and EAC’s the evidence continues to stack up in favor of long-term benefits.

The results were based on analysis of 811 announcements (430 CEI announcements and 381 EAC announcements) that appeared in the daily business press during the period 2004-2006.  Now, you may pause and say “well that was a long time ago…what about post recession?” A recent article by Phil Covington in Triple Pundit asked that same question. Covington cites a recent Fast Company’s recent article concerning Bloomberg’s business of measuring companies “Environmental, Social and Governance” (ESG) performance, which found that “the number of investors accessing ESG data is up by 29% comparing the first half of 2010 with the second. Investors use it to identify smart practices – for example, companies who operate in a socially responsible manner may be viewed as forward thinking and well-managed.” While this report suggests that there is increased attention being paid to companies that “do good” or that implement proactive ESG practices, the results are still not statistically treated like the GIT study.  But either way, as Covington concludes “This surely portends that markets will inevitably respond favorably to sustainability efforts, especially when the data shows improved governance and profits result directly, and in the long run, from sustainability”.

Since the 2006 study period cited in the GIT study, there have been more studies that provide compelling proof of the market value of environmental initiatives or certification.  Here are a couple of stand-out examples.  First, a study entitled Which Competitive Advantages can Firms Really Obtain from ISO 14001 Certification? demonstrate statistically that there is a significant difference between firms with ISO 14001 certification and firms without ISO14001 certification.  Internal efficiency benefits are considered significantly higher for firms with ISO 14001 certification.  Therefore managers’ expectations of improving internal efficiency might be the real reason that encourages firms to make the voluntary decision of investing in ISO 14001 certification.

Another study, by the Arava Institute for Environmental Studies entitled Comparative Advantage: The Impact of ISO 14001 Environmental Certification on Exports, suggested that EMS certification appears to imply a supplier who is managing its business well and is showing ethical responsibility. The fact that a supplier was awarded the ISO 14001 or EMAS certification by an independent entity enhances perceived reliability. Importers evaluated felt more confident engaging a new supplier, saving time and effort associated with clarification and research prior to placing a purchase order.  The survey results, as well as other available literature, corroborate the view that ISO 14001 accreditation confers economic benefits and greater “market value”. These include a standard of worldwide recognition, organizational efficiency, better waste management resulting in costs reduction, marketing advantages, and competitiveness by reducing risk and exposure to costly litigation.

What Are You Waiting For?

As of 2008, when the GIT study was published, more than 188,000 organizations worldwide had become ISO 14001 certified in 155 countries and economies. Worldwide, ISO 14001 certifications grew by more than 77,000 from 2004 to 2008 – a 70% increase.  These companies must be onto something. As I had written about previously, throughout a variety of industries, there are leaders and there are laggards.  Innovators who lead and can establish “first mover” status have the most market share to gain from proactive environmental management and attaining certifications like ISO 14001.

The GIT studies and the many others that have been produced over the past five years or so are healthy indicators of how proactive approaches to sustainability can positively influence behavior up and down the supply chain, and can add total market value in a recovering economy.

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5 Responses to “Studies Prove Business $en$e From Proactive Environmental Management Initiatives & Certifications”

  1. Christopher Campbell April 1, 2011 at 6:12 pm #

    Hello. Excellent article full of great reference and jump off points for further research.
    I have one point to make though and it comes from this comment: “I’m not some crazed environmentalist after all (although my passion occasionally borders on the “evangelical” side)!”
    Now, your comments were very far from even being mistaken as being “crazed”.
    Why is it when people start talking about environmental sustainability, or responsibility, they feel the need to justify their sanity? By appearing as an observer, or the level headed outsider (occasionally??) on this important issue you become just that. Maybe true, core environmentalists are going crazy because most people are standing on shore observing rather than jumping into the pool to take action for timely change.
    I’m not trying to dis you at all. I respect your work and what you are trying to do. I would just leave out the labels and the language that keeps you at a safe distance from your core issue.

    • Dave Meyer April 1, 2011 at 7:21 pm #

      Chris- I thank you for your appreciation and in reminding me that labels (as you described) do tend to undermine the conversation. I could easily edit my original statement out, but I won’t because I value your opinion. As a 30 plus year veteran of this business, my early work was viewed as an “externality” to a company’s bottom line. Thus, many company’s viewed environmental initiatives as a extreme or at least not a mainstream undertaking. You and I know differently, and the more that company’s take climate change, energy and resource use, waste management etc. as core business data elements, and “internalizes” those costs, the better able they will be to understand the true benefit of sustainability- not only on the balance sheets, but within the organizations culture too. More company’s “get it” now, and thus my POV is validated more often than not. Thanks again for taking the time to share your opinion and I am taking your words constructively. Thank you.

  2. Conrad Vernon, President & CEO April 4, 2011 at 6:57 pm #

    ISO 14001 is a terrific framework to leverage corporate Environmental, Sustainability and Governance (ESG) programs by OEMs and their supply chain. Key Performance Indicators (KPI) targeting the communication of energy, carbon, water and wastewater tracking in the supply chain is now part of stakeholder, community, customer and investor criteria for evaluating risk and the likelyhood of Fortune 500 companies ability to drive higher profit margins.

    Greenbridge International LLC provides turnkey ISO 14001 training under its patent pending and unique Green Emergent Training Method to manufacturers: http://www.greenbridgeinternational.net/getmethod.html. Our program positions manufacturers for rapid certification within 3-months. Greenbridge not only offers strict training under the GET Method, but also provides KPI programs for its clients in an effort to provide industry widely accepted and used tools to assist with communication.

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