The Economic Value of Corporate Eco-Efficiency

TLDR

This study adds new insights to the long‑running corporate environmental‑financial performance debate by focusing on the concept of eco‑efficiency. Using a new database of eco‑efficiency scores, we analyse the relation between eco‑efficiency and financial performance from 1997 to 2004. Eco‑efficiency is positively linked to operating performance and market value, with the market’s valuation of environmental performance evolving over time—initially lacking a premium but later showing a growing differential—suggesting managers need not face a trade‑off and investors can leverage environmental information.

Abstract

This study adds new insights to the long-running corporate environmental-financial performance debate by focusing on the concept of eco-efficiency. Using a new database of eco-efficiency scores, we analyse the relation between eco-efficiency and financial performance from 1997 to 2004. We report that eco-efficiency relates positively to operating performance and market value. Moreover, our results suggest that the market's valuation of environmental performance has been time variant, which may indicate that the market incorporates environmental information with a drift. Although environmental leaders initially did not sell at a premium relative to laggards, the valuation differential increased significantly over time. Our results have implications for company managers, who evidently do not have to overcome a tradeoff between eco-efficiency and financial performance, and for investors, who can exploit environmental information for investment decisions.