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Environmental Performance and Firm Value: Evidence from Dow Jones

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Environmental Engineering and Management Journal December 2011, Vol.10, No. 12, 1801-1808
http://omicron.ch.tuiasi.ro/EEMJ/

“Gheorghe Asachi” Technical University of Iasi, Romania

ECO-EFFICIENCY: EFFECTS ON ECONOMIC AND FINANCIAL

PERFORMANCE. EVIDENCES FROM DOW JONES
SUSTAINABILITY EUROPE INDEX

Esteban Pérez-Calderón1, Patricia Milanés-Montero1,

María-Leticia Meseguer-Santamaría2, José Mondéjar-Jiménez2
1
University of Extremadura, Department of Financial Economics and Accounting, Faculty of Business Studies and Tourism,
Avda. Universidad, s/n, 10.071 – Cáceres, Spain
2
University of Castilla-La Mancha, Department of Statistic, Faculty of Social Sciences, Avda. Alfares 44, 16071–Cuenca, Spain

Abstract

In recent years, a new line of research, named eco-efficiency theory has become an issue of considerable interest. The most
important works in relation with this topic focus on the fact that enterprises can maximize their economic benefits and minimize
the impact on the environment at the same time. Therefore, the recommendation is to choose the so called strategy win-win,
which allows for getting a double economic environmental benefit by means of a good management of productive resources, the
rationalization of consumption and the right treatment of generated outputs.
In this study it was used a sample of 122 firms from different sectors which belong to Dow Jones Responsibility Index Europe
for the years 2007 through 2009. The objective is to show that the firms with the best environmental performances during this
period also obtained the largest economic and financial benefits. Therefore, the investments done in order to improve the
environmental performance can be a good incentive for these companies.

Key words: eco-efficiency, environmental performance, financial performance, PLS

Received: September, 2011; Revised final: December, 2011; Accepted: December, 2011

1. Introduction continual adaptation to satisfy the interests of their

The increase in wealth and development
achieved in recent decades has brought great
degradation of the planet, the effects of which will be
felt for several decades: destruction of the ozone
layer, deforestation, temperature change throughout
the world, desertification, loss of biodiversity, or
large-scale toxic waste spills (Petraru and Gavrilescu,
2010; Shrivastava, 1995). In recent years, the
environmental deterioration caused largely by poor
management of natural resources has greatly
increased public interest in protection of the
environment. Today's companies, in the process of
stakeholders, are replacing their minimal strategies
based on complying with legislation in force with
other policies of environmentally responsible
behaviour and commitment, voluntarily exceeding
what the law requires of them and making large
investments to adapt their businesses and make their
consumptions and emissions much more efficient.
In this situation, the question company
managers and owners would ask is as follows: are the
costs arising from these expenses and amortization of
the investment made to achieve better environmental
performance really less than the value generated the
company hopes to obtain? There have been many


Author to whom all correspondence should be addressed: e-mail: estperez@unex.es; Phone: +34 927 257 000 (# 57926)

This paper was presented within 4th International Conference on Tourism and Environment, 28th – 30th September, Cáceres, Spain
 Pérez-Calderón et al./Environmental Engineering and Management Journal 10 (2011), 12, 1801-1808
studies on this which have shown a positive
relationship between the introduction of
environmental performance models, mechanisms and
strategies and financial and economic performance
(Draghici et al., 2009; Henri and Journeault, 2010;
Ittner et al., 2003; Sarkis and Cordeiro, 2001;
Schaltegger and Synnestvedt, 2002). On the other
hand, there have been fewer papers which have
studied this relationship using variables related with
consumptions and emissions. In addition, localized
studies have been done partially, focusing on some
very specific kind of consumption or emission (Al-
Tuwaijri et al., 2004; Bostan et al., 2010; Iwata and
Okada, 2010; Pogutz and Russo, 2009).
This study would be designed to provide
evidence to answer this question. For this purpose, the
initial hypothesis would be that companies which
pollute less are also the ones which obtain greater
profitability in financial and economic terms. So by
measuring their performance in terms of their
emissions to air and their consumptions, we will find
out whether companies with a higher level of
environmental commitment are also those which
achieve higher profitability and/or stock market
recognition, so showing the desirability of this kind of
efficient behaviour. To do this, we will analyze the
large business groups which clearly followed a
strategy in 2009 based on the sustainability of their
business, such as those are listed in the Dow Jones
Sustainability Europe Index (DJSEI).
The conceptual framework used is the Eco-
Efficiency Theory (Porter and Van der Linde, 1995).
This theory maintains that it is possible for companies
to maximize their efficiency, i.e., reduce costs and
create value, while minimizing their impact on the
environment (Huppes and Ishikawa, 2005). It is an
emerging line of socio-economic research which
investigates possible relationships between
environmental and economic performance (Birkin and
Woodward, 1997).
Although there have been many recent studies
using the concept of eco-efficiency and its effect on
financial and economic performance, such as those by
Ekins (2005), Henri and Jorneault (2010), Burnett and
Hansell (2008), Derwall et al. (2004), Sikin et al
(2008), in none of them are measurements of
efficiency of consumptions and emissions used as
main variables of that concept.
In the last two decades, a lot of literature has
been written dedicated to research on the relationship
between environmental and economic and financial
performance. There is also sufficient evidence of the
desirability of environmentally committed strategies
and the importance of their transparency to company
stakeholders (Parker, 2005; Peng et al., 2008;
Segarra-Oña et al., 2011; White, 2005), for
continuous improvement of their competitive
advantages and greater value generation (Peng et al.,
2009; Wagner and Schaltegger, 2004).
In spite of this, there have been few studies
which give clear evidence of the consequences this
behaviour has on value creation and company
1802
performance (Adams and Larrinaga-González, 2007;
Kold and Van Tulder, 2010). This is not because of
lack of interest from researchers or companies
themselves, but rather to the fact that the information
they would need is still difficult to get, because the
integrated adoption of reporting standards is still
highly limited and they are incomplete and lacking in
credibility and comparability (Adams, 2004; Faber et
al., 2005).
Reviewing the literature, two schools of
publication can be differentiated. The traditional
school, for which investments in environmental
management means extra costs for companies, must
give up a part of their profit and therefore become
less competitive with their competitors. Underlying
these studies is the idea of companies receiving a
penalty in the form of the high investment they have
made in technology or models to improve their
environmental management, interpreted as costs
undermining companies' profit and competitiveness,
in the short term (Friedman, 1962; Palmer et al.,
1995; Walley and Whitehead, 1994).
While this more traditional theory starts from
the hypothesis that there is a negative linear
relationship between economic performance (EcP)
and environmental performance (EnP), the reformist
school of research assumes the hypothesis that the
behaviour of the relationship is better represented on
an inverted U-shaped curve, predicting a positive
relationship between EcP and EnP until the moment
that EcP reaches its maximum value (Lankoski, 2000;
Wagner, 2005). The opposite hypothesis supposes a
positive relationship between EnP, EcP and financial
performance (FP). This is what is called the
renovating school. In this case, the costs related with
EnP are considered investments which will bring
greater economic and financial returns because of the
associated differentiation and increased
competitiveness, in the medium to long term (Esty
and Porter, 1998; Horhota, 2009; Porter, 1991; Porter
and Van der Linde, 1995).
Two kinds of effects may be expected of good
environmental performance on a company's economic
performance. Firstly, it would be expected that these
patterns of behaviour would lead to better use of
resources, consumptions and emissions, as the
introduction of environment-friendly strategies lead to
skills and abilities in processes which produce
savings, better use of resources or the avoidance of
unexpected costs due to lawsuits and compensation
(Porter and Kramer, 2006; Verdeke, 2009; Ziegler et
al., 2002). One group of publications, based on the
postulates of the more conventional theory, shows a
negative relationship between EnP and EcP (Jaggi
and Friedman, 1992; Sarkis and Cordeiro, 2001;
Thornton et al., 2003).
Rectifying the econometric model of analysis,
which began with the hypothesis of a negative linear
relationship between EcP and EnP, positive
relationships are obtained for the lower EcP levels
and negative relationships for the higher ones,
showing different behaviour (Boons and Wagner,
 Eco-efficiency: effects on economic and financial performance

2009; Claver et al., 2007; Schaltgegger and
Synnestvedt, 2002; Wagner, 2005).
In the same context, in their study, Hart and
Ahuja (1996) argue that the investments made by
companies to reduce emissions negatively affects the
net profit for the following two financial years and,
consequently, higher emission levels are associated
with companies with larger profits.
The other reference, in the study of the
relationship between EnP and EcP, is the theory put
forward by Porter and Van der Linde (1995). These
authors argue that pollution by companies represents
a source of inefficiency. Their working hypothesis
springs from the idea that pollution due to emissions
is a sign of technological backwardness, poor
management and inadequate use of production
resources. So, companies which manage to reduce
their pollution will also reduce their environmental
and production costs, so increasing their
differentiation from their competitors or attracting
new customers with raised awareness of
environmental protection.
This is what is known as a “win-win” strategy
(Hart, 1995; Majumdar and Marcus, 2001; Sharna and
Vrendenburg, 1998). According to this, more
demanding regulations in terms of environmental
management would bring greater competitiveness,
innovation, efficiency or profitability in companies
(Aragon-Correa and Sharma, 2003; Ekins, 2005;
Karagozoglu and Lindell, 2000; Shrivastava, 1995).
A look at the relationships between EnP and
FP, reviewing the older literature shows that there is
no clear consensus on the effects of companies'
responsible environmental behaviour on their
financials profits (Konar and Cohen, 2001; Wagner,
2005) although there is an increasing number of
studies showing a positive relationship (Feldman et
al., 1997; Gupta and Goldar, 2005; King and Lenox,
2002; Konar and Cohen, 2001; Russo and Fouts,
1997). On the other hand, there are other studies, such
as those published by Jaggi and Freedman (1992),
Cordeiro and Sarkis (1997), Hassell et al. (2005),
which fit in with the traditional thesis of the negative
relationship between EnP and PF.
In these studies it is argued that shareholders
see investments in environmental management as cost
generators, so reducing expected future profits in the
medium to long term. Finally, evidence has also been
found of the significantly null effect of the companies
which have chosen this kind of strategy (Yamashita et
al., 1999; Murray et al., 2006) or inconclusive results
(Wagner, 2005; Earnhart and Lizal, 2007).
More specifically, in the study by Ziegler et al.
(2002), the effect of sustainable performance on
generation of value for the shareholder measured by
the monthly revaluation of shares between 1996 and
2001 was analyzed. The study's main result was the
demonstration of a significant positive relationship
between the indicators of good environmental
performance in the sectors analyzed and share value.
Other similar studies that have used emissions
as a proxy for EP are listed below (Table 1).
The variety of results in the studies which have
tried to identify in which direction environmental
management affects financial gain or loss is because
the proxy or data used have often not taken into
account variables related with eco-efficient behaviour
by companies, except for very specific cases,
environmental management in (Sinkin et al., 2008) or
publicizing environmental behaviour. In our study,
we look at environmental performance measured
using variables reflecting the organization's eco-
efficient behaviour and thereby achieve a more direct
relationship between the effects on financial
performance and this kind of eco-efficient
environmental strategy.

Table 1. Studies that have been used as environmental proxy data on emissions

Studies Years and sample Environmental proxy Results

King and Lenox 652 U.S. manufacturing Toxic chemical emissions They find evidence of an association between
(2002) firms. Period: 1987- lower pollution and higher financial
1996 valuation (Tobin’s q)
Wagner and 301 valid responses. Environmental impact reduction The relationship between environmental
Schaltegger UK and German index (energy, water, emissions, performance and economic performance is
(2004) companies. Industrial waste…) more positive than for firms without
sector. 1998-2000 shareholder value-oriented strategies.
Wagner 63 firms. European pulp Emission based index (COD, Environmental performance improves ROCE
(2005) and paper SO2, NOX) and consumptions but has no significant effect on ROS and
manufacturing. 1995- (energy, water) ROE
1997
Pogutz and Russo 117 worldwide publicly Greenhouse gas emissions In the short-run, firms revealed positive
(2009) trade firms from the (GHG) effects of the environmental performance on
Global Fortune 500 operating performance in terms of ROA,
Index. Data from 2002- ROE, ROS and Tobin’s q.
2005
Iwata and Okada Japanese manufacturing GHG Reductions in emissions lead to an increase
(2010) sector, 268 firms from in ROE. It causes a decrease in the natural
2004 to 2008 logarithm of Tobin’s q in clean firms and
decrease ROA, ROIC, ROI, ROS in dirty
industries.

1803
 Pérez-Calderón et al./Environmental Engineering and Management Journal 10 (2011), 12, 1801-1808
2. Material and methods
Review of earlier literature leads us to pose
this question: does good environmental performance
drive good financial performance and the generation
of external value for the company?
To answer this question, and bearing in mind
the postulates of the Theory of Eco-Efficiency, we
determine the relationship established between good
environmental performance and economic and
financial performance. So these are our initial
hypotheses:
 H1: “Organizations with high eco-efficiency
levels are also those with better financial
performance”
Due to the increase in competitiveness brought by this
kind of policy, the effect the savings made have on
the balance sheet or the possibility of avoiding the
negative effect unwanted expenses from poor
environmental behaviour might have on operating
profit or loss.
 H2: “Organizations with high eco-efficiency
levels are also those which show better financial
performance”
In our study, financial performance is mainly
represented by, among other variables, financial
profitability and market share value relative to
accounting value (market-to-book ratio). In principle,
it is to be expected that we will find a positive
relationship between higher eco-efficiency level and
greater financial profitability, because eco-efficient
companies will get better profits for their shareholders
by avoiding additional expenses caused by lawsuits or
penalties, as well as lower debt financing costs. In
addition, it is expected that the differences between
the stock market share value and the book value
should be partly due to the investors' recognition of
better eco-efficiency performance. In principle, the
market and other stakeholders will value
environmentally responsible behaviour positively.
The work methods used were structural
equation models (SEMs). These methods were
applied recently in the study Al-Tuwaijiri et al.
(2004). In this case, the variables used were return on
assets (ROA), trade margin (TM), return on
investment (ROI) and market-to-book ratio (MBR).
The same variables were used in the studies by
Pogutz and Russo (2009) or Iwata and Okada (2010).
To represent eco-efficiency, the variables used were
consumptions data (energy and water) and emissions
to air (CO2, NOx y SOx), relativized in relation to the
Ebitda. These variables have been used in studies
such as those by Wagner and Schaltegger (2004) and
Wagner (2005). Our study population consists of the
companies on the DJSIE. Specifically, in September,
2010, the DJSIE consisted of 157 companies with a
total capital of 4,375 billion euros. The companies
with most long-term sustainability commitment
according to filter criteria are established by financial,
social and environmental stakeholders.
1804
Out of these indexes, companies whose
business is classified in the financial sector have been
excluded, because the peculiarity of their accounting
standards makes their financial and economic ratios
vary considerably, so they are not comparable with
other sectors. The financial details were taken from
the AMADEUS database. The information on
corporate social responsibility was taken from the
sustainability reports published by the companies on
their corporate websites.
3. Results and discussion
The structural model was estimated by the
partial least squares method using the software
SmartPLS 2.0., and is shown in Fig. 1. The simple
reliability index, determined by Cronbach's alpha
coefficient (Table 2), reaches a more than acceptable
value for the variables GVC and FP being over 0.7
(Nunnaly and Bernstein, 1994); only the reliability for
the environmental performance construct for
consumptions (EP-C) is low.
The goodness-of-fit of the estimated models is
good for the variable GVC, with an R2 greater than
0.4, but not for PE, PMA-E, PMA-C where it is less
than 0.1 (Falk and Miller, 1992). In the average
variance extracted test (AVE), only the FP reaches a
value which allows its effect on generation of
company value to be accepted, being greater than 0.5
(Fornell and Larcker, 1981). For the other variables
involved, we can also consider their values valid as
there are cases in the literature of scales below 0.5
being validated. The validity of the measurement
instrument and reliability of the variables selected for
each latent factor are ensured, because the t-statistic
obtained is significantly related with its factors for all
cases except for the variable GRW (Table 3).
In analysis of correlations of the latent factors,
the effects of the influence established between them
can be sensed (Table 4). So the generation of value in
the companies examined (GVE) is being heavily
influenced by the PE. A negative relationship
between the GVE and the environmental performance
of companies with regard to emissions (PMA-E) and
in efficient use of water and energy resources (PMA-
C) is also observed. We also found a negative
relationship between PE, PMA-E and PMA-C. The
parameters estimated almost completely confirm the
foregoing correlations analysis. First, as expected,
good financial management of the business group
(PE) has a positive influence on generation of value
for the company (GVE). With regard to the effect of
good eco-efficient management, it is seen that the
financial management of business groups with higher
(less efficient) consumption and emission ratios is
penalized, because they generate higher costs. A
negative relationship between generation of value for
the company and the factors representing its eco-
efficiency is also obtained, in this case only in
relation with emissions (Table 5).
 Eco-efficiency: effects on economic and financial performance

Fig. 1. Estimated structural equation model

Table 2. Reliability measurements

Composite Cronbach's
AVE R Square Communality Redundancy
Reliability Alpha
GVE 0.416103 0.779370 0.405955 0.731943 0.416100 0.107826
PE 0.743507 0.935107 0.085639 0.911967 0.743507 0.028154
PMA-C 0.347175 0.225999 -0.058225 0.347175
PMA-E 0.317969 0.631552 0.503187 0.317969

Table 3. Loadings significance

Standard Error T Statistics

Loadings
(STERR) (|B/STERR|)
ECO <- PMA-E 0.382603* 0.103661 3.690913
EGHG <- PMA-E 0.391904* 0.117394 3.33837
ESN <- PMA-E 0.759901* 0.06618 11.482328
EV <- PMA-E 0.628055* 0.082701 7.594263
GRW <- PMA-C -0.485514 0.308123 1.575712
UE <- PMA-C 0.752893* 0.200653 3.752212
UW <- PMA-C 0.488829* 0.164923 2.963975
CM <- PE 0.835012* 0.02699 30.937534
RCF <- PE 0.898808* 0.012799 70.225018
RMEA <- PE 0.905231* 0.012154 74.478045
RMO <- PE 0.917927* 0.010286 89.242561
ROA <- PE 0.741888* 0.028267 26.246131
EVE <- GVE 0.610647* 0.047308 12.907935
EVT <-GVE 0.642167* 0.055335 11.604988
MB <- GVE 0.575046* 0.051097 11.253962
ROE <- GVE 0.752951* 0.033624 22.393174
ROI <- GVE 0.630581* 0.064614 9.759163
 p < 0.01

1805
 Pérez-Calderón et al./Environmental Engineering and Management Journal 10 (2011), 12, 1801-1808
Table 4. Latent variable correlations
GVE
GVE 1.000000
PE 0.632362
PMA-C -0.185643
PMA-E -0.185775
Table 5. Significance of estimated parameters
Standarised
Hypothesis
Beta coefficient
PMA-E -> PE -0.2138 *
PMA-C -> PE -0.1938 *
PE -> GVE 0.6088 *
PMA-E -> GVE -0.0505 *
PMA-C -> GVE -0.0625
 p < 0.01
4. Conclusions
This study measured the effect of good EnP
(environmental performance, in terms of emissions to
air, PMA-E, and energy and water consumption,
PMA-C) on EcP and FP (economic and financial
performance).
To compare the study's two basic hypotheses
(3 subhypotheses), a reflexive latent structural model
was estimated using PLS.
The results show for 2009 that for the most
important companies in terms of sustainability
throughout Europe (DJSIE) with the highest eco-
efficiency levels in terms of consumptions and
emissions to air (PMA-C and PMA-E), this
performance has a significant positive effect on their
EcP. So our study provides empirical evidence to
support the postulates of the renovating school of eco-
efficiency in that companies with higher emission
levels are more inefficient in their production
processes, leading to higher costs, making them be
less competitive and obtain lower profitability and
less profit.
In the same way, good environmental
performance in terms of emissions (PMA-E) has a
positive effect on FP. So, financial profitability ratios
and share market value are increased by the positive
effect of PMA-E. Good emission management
prevents unforeseen expenses due to environmental
accidents or penalties so shareholders consider
environmental costs long-term investments and ignore
their short-term effect on profits. This result fits those
obtained in previous studies. We only need to point
out the lack of significance for the effect PMA-C has
on GVE. We think it might be due to the stock
market's lack of awareness of the effect of energy
savings on companies' profits, or that this recognition
will happen in the medium to long term.
According to the above, we can recommend
that companies should invest to adapt their production
processes and incur the necessary expenses to raise
their efficiency levels for consumptions and
emissions, as this will largely be compensated for by
cost savings and the consequent increase in operating
1806
PE PMA-C PMA-E
1.000000
-0.199955 1.000000
-0.219322 0.028679 1.000000
Standard Error T Statistics
(STERR) (|B/STERR|)
0.031 6.8924
0.0689 2.8124
0.0354 17.2052
0.0229 2.2055
0.0484 1.2915
profit (EcP), although, in the case of emission
efficiency, the effect on net profit or recognition by
the stock market is not clear.
Later analysis will allow more in-depth studies
of the structure of the sector. So, company
segmentation according to their respect for the
environment will lead to sector clusterization to
maximize the advantages and synergies of
collaboration between companies on environmental
management.
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