More Proof in Favor of Sustainability Investing

A study published in the August issue of Management Science reports a statistically significant and positive correlation between company adherence to the most rigorous global environmental standards and higher corporate market value. Selecting 89 mining and manufacturing firms from the S&P 500 during the period of 1994-97, authors Dowell, Hart and Yeung compared companies that demonstrated consistently strong environmental practice to those that met different standards at each location, as established by the varying regulations of local governments. The prevailing wisdom argues that operations in less demanding countries enables companies to:1) save costs by avoiding expensive pollution controls and by continuing to use old equipment that would otherwise have been upgraded; and 2) generate revenue by continuing to manufacture products that are no longer acceptable in the more developed world. The authors instead found, using Tobins “q” as a measure (market value/replacement cost of tangible assets), that the companies that applied the same stringent standard throughout their operations had higher market values. Possible explanations include:1) state-of-the-art technology, with the best environmental practices embedded in it, is also the most productive; 2) global standardization provides consistent processes and products worldwide; 3) companies do not have to make incremental investments every time […]

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