"It pays to be green" - a premature conclusion?

Abstract

It has been claimed that good environmental performance can improve firms’ economic performance.\nHowever, because of e.g. data limitations, the methods applied in most previous quantitative\nempirical studies of the relationship between environmental and economic performance of firms\nsuffer from several shortcomings. We discuss these shortcomings and conclude that previously\napplied methods are unsatisfactory as support for a conclusion that it pays for firms to be green.\nThen we illustrate the effects of these shortcomings by performing several regression analyses of the\nrelationship between environmental and economic performance using a panel data set of Norwegian\nplants. A simple correlation analysis confirms the positive association between our measures of\nenvironmental and economic performance. The result prevails when we control for firm\ncharacteristics like e.g. size or sub-industry in a pooled regression. However, the result could still be\nbiased by omitted unobserved variables like management or technology. When we control for\nunobserved plant specific characteristics in a panel regression, the effect is no longer statistically\nsignificant. Hence, greener plants perform economically better, but the analysis provides no support\nfor the claim that it is because they are greener. These empirical findings further indicate that a\nconclusion that it pays to be green is premature.\nKeywords: Economic performance; environmental performance; environmental regulations, pays to\nbe green