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Environmental Management, Financial Performance Go Hand in Hand

Newsweek’s Green Rankings in November compared the environmental footprints, management and reporting of the 500 largest US companies, and our analysis shows that the “greenest” companies are on the gravy train.

Findings suggest that financial performance and environmental management go hand in hand most in the four sectors shown in the table below. (To find out whether “green” companies are in the money, we split each sector in half based on the green scores used to rank the companies and create equally weighted portfolios of the top and bottom halves, then compared their economic total returns over a given period of time.)

Table 1: Financial performance of companies grouped by green scores

FOTW gravy

The scores take account of impacts from suppliers, and reliability of the supply chain is a key aspect in the Consumer Staples sector; environmental incidents and effects on local communities represent a clear risk in Energy and Materials; and efficiency is an important driver of performance in the Utilities sector. These are just some of the possible drivers of the outperformance of greener companies in these sectors.

Our findings fit perfectly with the conclusions in a recent Harvard Business School study which found that more sustainable companies “might outperform traditional firms because they are able to attract better human capital, establish more reliable supply chains, avoid conflicts and costly controversies with nearby communities, and engage in more product and process innovations in order to be competitive under the constraints that the corporate culture places on the organization.”

After six years of meetings in the city trying to convince fund managers and large mainstream investors of the importance of including environmental data in their strategies, more research that environmental performance is linked to better returns should help get them on board with the sustainability agenda. As one of them used to tell me, “It’s all about the gravy.”

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