Does It Pay to Be Green? A Systematic Overview

TLDR

Conventional wisdom holds that environmental protection raises costs and hurts competitiveness, but recent work argues that better environmental performance can actually improve economic outcomes. This paper reviews empirical evidence linking environmental and financial performance improvements. The authors systematically examine seven channels—market access, product differentiation, technology sales, stakeholder relations, material/energy costs, capital costs, and labor costs—to identify conditions that produce simultaneous environmental and financial gains and diagnose firm types most likely to benefit.

Abstract

Executive Overview The conventional wisdom concerning environmental protection is that it comes at an additional cost imposed on firms, which may erode their global competitiveness. However, during the last decade, this paradigm has been challenged by a number of analysts (e.g., Porter & van der Linde, 1995), who have argued basically that improving a company' environmental performance can lead to better economic or financial performance, and not necessarily to an increase in cost. The aim of this paper is to review empirical evidence of improvement in both environmental and economic or financial performance. We systematically analyze the mechanism involved in each of the following channels of potential revenue increase or cost reduction owing to better environmental practices: (a) better access to certain markets; (b) differentiating products; (c) selling pollution-control technology; (d) risk management and relations with external stakeholders; (e) cost of material, energy, and services; (f) cost of capital; and (g) cost of labor. In each case, we try to identify the circumstances most likely to lead to a “win-win” situation, i.e., better environmental and financial performance. We also provide a diagnostic of the type of firms most likely to reap such benefits.