Research shows environmental sustainability improves profits

There is often a perception that many businesses put profit first and the environment a distant second, but new research from the University of South Australia suggests companies prioritising a healthy planet are now the ones reaping the financial rewards.

The study, published in International Review of Financial Analysis, analysed 24,393 diverse firms from 41 countries with varying economies and found businesses that adopted environmentally sustainable practices (ESPs) faced significantly fewer financial restraints, and in turn, became more profitable.

This is the first research to map this emerging global trend across such a wide range of nations and industries, and lead author, Dr Rajabrata Banerjee, says the overall pattern is quite clear – doing the right thing by the planet is good for business.

“Different industries are more environmentally intensive, and different countries have different regulations and markets, so the impact of ESPs varies somewhat from situation to situation, but when we look at the pattern as a whole, it is very consistent,” Dr Banerjee says. “If a business tries to be more environmentally friendly, it will benefit financially.”

Co-author of the study, Associate Professor Kartick Gupta, says over the past decade we have witnessed a social shift whereby investors and consumers increasingly understand an environmentally unsustainable enterprise is also, ultimately, economically unsustainable.

“Previously there was not so much attention on what the firm was doing, only on profitability,” Professor Gupta said. “But now, there is so much focus from all stakeholders – investors, the government, the public – they all want to know that not only are you making profit, but you are also contributing to a positive society.”

The improved performance was measured across a range of factors including mitigating risk, higher profit, return on assets, average sales, growth and lower cost of capital, as influenced by ESPs in three categories: emission reduction, product innovation, and resource reduction.

“We found, in particular, those companies who invest in innovation to improve ESPs, and who reduce their resource consumption, become more efficient, more profitable operations,” Dr Banerjee says.

The study found the greatest benefits of adopting ESPs occurred for companies operating in intensively polluting industries or based in economies with strict regulatory standards, suggesting when environmental scrutiny is high, ESPs help firms stand out and find more favourable operating terms.

Similarly, results indicated the more competitive the industry, the more advantage there was in adopting ESPs, especially where such measures went above and beyond mandated minimums, suggesting such operations face less scrutiny from lenders and stakeholders and enjoy greater customer loyalty.

“This research is a clear indication that by having an ethical approach to the environment, a company is more appealing for investors and customers,” Professor Gupta says. “Hopefully, this can be a real driver for positive change, leading to a cleaner environment because it is better for business.”

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