Unpacking the Relationship between Environmental and Financial Performance: Value-Added Corporate Environmental Practice in the US Chemical Industry

Abstract

Despite a recent surge of empirical studies examining associations between corporate environmental performance (or, more broadly, corporate social responsibility) and financial performance, researchers have been unable to give an integrated account of the mechanisms linking those environmental performances to financial outcomes. The practical implications of this research stream thus remain limited, offering managers little guidance in their efforts to improve environmental and financial performance. This study therefore examines the specific roles played by firms’ value-creating environmental practices and how these practices may help explain their environmental and financial performance. Drawing on 18,743 plant-level panels of detailed environmental information and their corresponding 455 firm-level panels of financial information, we investigate the relationship between a range of pollution prevention activities and environmental performance in the U.S. chemical industry and their influence on financial performance, particularly on cost competitiveness and market valuation. Our analysis finds that more-intensive pollution prevention activities, particularly those involving process efficiency and raw material management, result not only in superior environmental performance but in improved cost competitiveness, though not necessarily in higher market valuation. Keywords: Pollution prevention activities; environmental management; environmental performance; financial performance; cost competitiveness; market value; chemical industry.