Chapter 6: Understanding the Relationship between a Facility’s Environmental and Financial Performance
6. Understanding the relationship between a facility’s environmental and ﬁnancial performance Nicole Darnall, G. Jason Jolley and Bjarne Ytterhus I. INTRODUCTION An understanding of how a company’s environmental performance aﬀects its ﬁnancial prospects, and how the stringency of the environmental policy regime might constrain a company’s ﬁnancial opportunities, are issues of considerable concern to policy makers. Collectively, organizations spend millions of dollars annually when installing mandated pollution-control technology, applying for environmental permits, and monitoring and reporting their environmental impacts (Portney and Stavins 2000). These costs create an incentive for companies to reduce their environmental impacts below minimum reporting thresholds. Doing so also beneﬁts organizations by improving their operational eﬃciencies. At the same time, regulators can achieve greater environmental improvements without additional monitoring and enforcement. However, questions remain about the extent to which the stringency of the environmental regulatory regime diminishes a company’s ﬁnancial performance. Other uncertainties relate to whether or not more eﬃcient companies may be the ones that actively reduce their impacts on the natural environment. As such, a company’s superior ﬁnancial outcomes may be mistakenly attributed to its improved environmental performance, when ﬁnancial performance is related more to the fact that a company is more eﬃcient from the outset. These issues have been ignored by many prior studies (for example, Stanwick and Stanwick 2000; Russo and Fouts 1997; Levy 1995; Hart and Ahuja 1996; Cormier et al. 1993; Arora and Cason 1995). Moreover, previous research has not explored how the stringency of the...
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