Companies Benefit from Sustainable Practices

New research shows that corporate performance has improved as their environmental practices have become better, while energy consumption and carbon emissions have decreased.

Climate change and pollution reduction are among the most important challenges confronting businesses. As the major cause of global warming is greenhouse-gas emissions, they pose serious environmental challenges. To address the issue, corporations are engaging in sustainable investment – spending on environmental and green initiatives for emissions reduction such as energy efficiency, clean power, pollution reduction and recycling. Sustainable investments can not only reduce carbon emissions and promote recycling and reuse but can also increase productivity through reduced energy usage.

Muhammad Atif, Md. Samsul Alam and Md. Shahidul Islam, authors of the December 2021 study “Firm Energy and Carbon Performance: Does Sustainable Investment Matter?,” examined how sustainable investment influences firm energy and carbon performance as well as firm profitability. Their data sample included 23,501 firm-year observations over the 17-year period 2002-2018 in Canada, France, Germany, Japan, the U.K. and the U.S. Controlling for industry and country effects, they found:

  • Sustainable investment had a statistically significant negative relationship with both the intensities of energy consumption and carbon emissions, suggesting that sustainable investment improves energy efficiency and clean energy use, thereby decreasing carbon emissions.
  • Measuring firm performance by Tobin’s Q (market value of equity scaled by book value) and return on sales (net income scaled by sales), there was a positive relationship between a firm’s environmental and financial performance – firms investing in sustainability enjoyed better financial performance.

Their study contributes to the research on sustainability and a low carbon economy, demonstrating that a firm can achieve both financial and environmental advantages by employing its internal assets and resources to clean technologies. In other words, through their sustainable investments, companies not only benefit by signaling to investors their commitment to more ecologically friendly policies (attracting investors and lowering their relative cost of capital) but also benefit through productivity gains, improving profitability.

These findings are consistent with those of Joshua Kazdin, Katharina Schwaiger, Viktoria-Sophie Wendt and Andrew Ang, authors of the study, “Climate Alpha with Predictors Also Improving Company Efficiency,” published in the winter 2021 issue of The Journal of Impact and ESG Investing. They found that companies with low carbon emissions tend to have high measures of company performance in terms of implied cost of capital, gross profitability and Tobin’s Q – the outperformance of companies with low carbon emission intensities is consistent with those companies being more efficient. Specifically, the relationship between carbon emission intensity and gross profitability was negative and statistically significant, indicating that an increase in emission intensity by one metric ton per million dollars in sales increases gross profitability by 0.3% and implying that lower carbon intensities may reflect greater company efficiencies. Thus, such companies tend to have exposure to the quality (and profitability) factor. They also found that the highest emissions were correlated with relatively poor productivity and that after accounting for sector exposures and other characteristics, companies with low carbon emissions exhibit excess returns.