Does it pay to be green?

Evidence can be marshalled to support either the view that pollution abatement is a cost burden on firms and is detrimental to competitiveness, or that reducing emissions increases efficiency and saves money, giving firms cost advantage. There has been a great deal of research literature regarding whether or not the pollution abatement practices in the form of environment management practices (EMPs) can improve firm performance (Montabon et al ,2007). Since 1960 the US federal government first began regulating major sources of air pollution the conventional approach to meeting air quality standards involved establishing maximum emissions rates or technology based standards for regulated stationary sources by introducing Cap and Trade (CAP) program as an environment regulator to abate the pollution emitted by major industries. This definitely incurred further costs for major manufacturing and petroleum industries as a cost to pollute the environment and the research on business and environmental protection focused on identifying a positive link between corporate environmental performance and profitability arguing that it can pay to be green (Starik and Marcus 2000; Porter and van der Linde 1995). This research stream positioned itself in opposition to the traditional view that improvements in environmental performance are associated with increased costs (Walley and Whitehead 1994;Palmer et al. 1995). It has been proposed that firms are trying understand the benefit of being environmental proactive in anticipation by efficient utilisation of resource, improved corporate image and cost saving advantage .While in contrast some firms are being reluctant and uncertain about the cost recovery in environmental policies investment as the market conditions are highly uncertain and environment protection is considered as cost burden. Uncertainty in future supply and demand conditions (market volatility) coupled with a fixed number of pollution credits creates an uncertainty in the future price of pollution credits, and the industry must accordingly bear the cost of adapting to these volatile market conditions. However considering the recent incidents of major leaks in the Mexican Gulf by BHP it is established that pollution abatement provides the competitive advantage to the firms, increase efficiency and saves money. Recent research suggest increased environmental protection leads to enhanced firm performance (Clarkson et al ,2011),however this is in particular the firms pursuing a proactive environmental strategy with greater financial resources and superior management capabilities (Christmann ,2000) and (Sharma & Vredenburg ,1998).This framework forecasts that proactive corporate environmental policies and financial success are interrelated. Due to

this responsible environment

management has become an important focus in modern

accounting texts (Hansen and Mowen,2007) and literature in this regard suggest that firms can gain sustainable competitive advantage by reducing an adverse impact of their operations on natural environment and attracting environmentally aware customers. This phenomenon was supported by one leader in environmental management, the Dow Chemical Company, which publicly announced its specific environmental performance goals to be achieved by 2015, ranging from cutting the number of chemical spills to improving energy efficiency and reducing green house gas emissions. Dow Chemical even invites the public to monitor its progress over time at its web site. Similarly, Nucor Corporation, a successful US steel maker, has disclosed that it has achieved its greenhouse gas emission reduction target 6 years ahead of the schedule under the Kyoto Protocol, even though the US government rejected the Protocol (Clarkson et al 2011). Moreover, literature research has proposed that firms involve in environment management practices by responding to institutional pressures and create external legitimization; as a consequence firm facilities may obtain greater access to resources that contribute to their long term viability. This argument was supported by some companies which saved hundreds of millions of dollars by responding to market pressures for improved and greater production efficiency .This was obtained by reducing excessive wastes ,material and energy use, thus making market conditions favourable. Similarly, firms that adopt proactive environmental strategies benefit form premium pricing and enhanced sales performance (Rivera, 2000). Increased market legitimacy and greater social approval allow environmental aware facilities to market the management procedures they follow as selling points for the products they produce, thus consciously differentiate their products from their competitors (Bansal and Hunter, 2003).Nestle the worlds largest food and beverage company and an important member of United Nation Global compact uses the varied practices throughout their supply chain targeting the environment protection. Using a greener supply chain Nestle has not only lessened the amount of potential environmental contaminants but also saved transportation costs, which reduced adverse environmental effects of transportation and invariably energy use and pollution. Similarly, Montaben et el (2007) identifies the five factors of environment regulation to combat pollution and which enhances the firm performance as follows:-

Recycling:-Recycling helps cost savings via more efficient and effectively use of material which were once thought to be disposed and pollute the environment. Most of the firms concentrate on recycling for cost saving only. Proactive waste reduction:-This focuses on the minimising the waste in processing of products or elimination of waste before it is produced. Thus ultimately organisations develop regulations which also improve their performance. Remanufacturing:- It lowers the cost structure by replacing a part or component of the product Environmental design:-It concerns with the use of environmentally conscious design processes which results in greater product innovation, as a result firm performance. Surveillance of the market for environmental issues: This measure identified those firms that look for opportunities in the future related to environmentally friendly practices. This practice is most likely allied with the idea of a demand-based mechanism. In the case of this measure, the firm is actively seeking out opportunities to fulfil future demand that is based on environmentally friendly products or processes. Thus attracting the customers and environmental regulation committees who are supporter of these kinds of environmental favourable products.

A study by Ambec & Lanoi (2008) recognised the channels of potential revenue increase or cost reduction owing to better environmental practices: better access to certain markets differentiating products selling pollution-control technology risk management and relations with external stakeholders cost of material, energy, and services cost of capital Cost of labour. It was established that these factors will lead to a win-win situation, i.e., better environmental and financial performance which was proposed various analysts. Furthermore better access to certain markets is related with the prestige of the company attracting loyal customers who are loyal for regulation of environment and thus show loyalty to the firms regulating environment management. Better

access to markets, differentiating products and selling pollution control technology can act as the opportunity to increase revenue while risk management, costs of capital and labour can be an incentive to reduce the costs associated with each channel. Thus overall managing all the channels concentrating on innovation to reduce costs and increasing revenue a firm can enhance firm financial performance and environmental performance However looking at the structure of firms and capacity to innovate, it can be seen that pollution abatement and firm financial performance is not universally same for all the firms. It particularly depends upon a number of factors: The size of firm Capability of firms to innovate new technology and operations to combat pollution Long term or short term goals of firms to adapt to the environmental management practices

Despite the various studies which claim that there is a positive relation between firm performance and pollution abatement ,there also exist studies which have drawn the opposite conclusion ( Mathur & Mathur,2000 and Judge and Elenkoy,2005).It suggest the reason that investment in pollution control activities results in lower overall profitability ,because it diverts the firm resources to a fundamentally non-productive use which has no correlation with the productive uses of resources by firms. One explanation for different results in the research can be contributed due to the different kinds of pollution abatement .Russo and Fouts (1997) suggested that pollution can be abated by two processes: Capturing contaminants produced during the production process:-It is more recent phenomenon and it includes reducing waste and pollutants by modifying production system, equipment or operations End of pipe pollution abatement i.e. by capturing contaminants for disposal at the end of production:-As discussed before five factors of environment management practices, end of pipe involves recycling or recovery of waste after the production of goods or material. Chein and Peng (2011) established the relation between investments in pollution control and long or short term financial performance of the firms. They studied five highly polluting

firms that include cement, plastics, chemicals, paper and pulp, and iron and steel. The results indicate that: firms tend to invest in pollution control facilities in prosperous years the investment in pollution control facilities is negatively associated with short- but not long-run financial performance the investment in end-of-pipe pollution control measures is negatively associated with short-run performance; and, most importantly a significant difference in both short- and long-run performance between firms investing in pollution prevention and end-of-pipe pollution control measure

Thus this can be said that end of pipe pollution abatement eventually become a drag on financial performance of the firms ,but most of the multinational companies believe that pollution prevention technologies may not be less inexpensive that end of pipe solutions ,but in some cases may enhance financial performance .The innovation induced by regulations may present an opportunity costs for firms in short term in terms of enhanced product differentiation and effective internal operation control, but in long term it generates a benefit for firms .Thus pollution control investments, taken as a whole, decrease short-run financial performance. However this poor short-run financial performance is largely caused by the end-of-pipe pollution control investments and this suggests that managers should avoid adopting only such solutions.

It must be considered that firms differ in size as well as in their capability to innovate processes. So some economists argue that firms should invest in environmental activities only to the extent that marginal benefit equals marginal costs because investments beyond the set requirements of pollution abatement may be detrimental to economic performance of the firm (Conrad & Morrison ,1989).In a recent study ,Christmann (2000) discovered whether an organisations capabilities for process innovation and implementation affects its ability to benefit from implementing environmental policies and survey of 88 chemical companies it was concluded that innovation of product and process is a rare, valuable, non-substitutable, and imperfectly imitable asset .So not all the firms have same capabilities to innovate the

products and process and due to heterogeneity of capabilities not all firms can secure their competitive cost advantage (Heslin &Ochoa ,2008)

It must be considered that environmental regulation can place firms at competitive disadvantage as the pollution abatement involves costs which must be charged from the polluter ,thus the end user i.e. the customers had had to pay for using the products .This will raise the prices and customer will be lost ,as a result firms will not perform financially good. Considering all the facts and firms structure it can be said that firms which can easily involved in innovation of technology and to cut costs it is easy for them to improve the environment performance as well as financial performance. The firms that choose to improve their environmental performance significantly over time tend to experience improvements in their financial resources and/or management capabilities immediately prior to the material improvement in their relative environmental performance. To recapitulate, it can be said that financial performance and environmental performance are positively related, if the environmental performance is improved, firms will definitely gain a competitive advantage and saves the money through innovation and risk management. However the relation between environmental performance and economic performance is consistent with the resource-based view of the firm. It indicates that although a proactive environmental strategy may be associated with improved future economic performance (i.e., it pays to be green), not all the firms can imitate this strategy. It appears that only firms with sufficient financial resources and management capabilities can pursue a proactive environmental strategy.

REFERENCE LIST

Chin-Chen Chien & Chih-Wei Peng (2011): Does going green pay off in the long run? Journal of Business Research, in press Frank Montaben, Robert Sroufe & Ram Narasimhan (2006): An examination of corporate reporting, environmental management practices and firm performance, Journal of Operations Management, Volume 25, Issue 5, pp 998-1014 Hansen,D., Mowen, M.,(2007). Management Accounting. Thomson, South-Western L.K. Mathur and I. Mathur (2000): An analysis of the wealth effects of green marketing strategies. J Bus Res, Vol 50 ,pp. 193200. M.E. Porter and C. van der Linde (1995): Toward a new conception of the environment competitiveness relation. The Journal of Economic Perspectives, Vol 9, issue 4 (1995), pp. 97118. M.V. Russo and P.A. Fouts(1997): A resource-based perspective on corporate environmental performance and profitability. Academy of Management Journal, Vol.40, issue 3, pp. 534559. N. Walley and B. Whitehead (1994): It is not easy being green. Harvard Business Review, Vol 72, Issue 3, pp. 4652 Palmer, K., E. Wallace and P. Portney (1995): Tightening Environmental Standards: The Benefit-Cost or the No-Cost Paradigm. Journal of Economic Perspectives, Vol 9, Issue 4, pp119-132. P. Bansal and T.Hunter (2003): Strategic explanations for the early adoption of ISO 14001. Journal of Business Ethics, 46 (2003), pp. 289299. P. Christmann (2000): Effects of best practices of environmental management on cost advantage: the role of complementary assets. Academy of Management Journal, 43 4 (2000), pp. 663680. Peter A. Heslin & Jenna D. Ochoa (2008): Understanding and developing strategic corporate social responsibility, Organizational Dynamics, Vol 37, Issue 2,pp 125-144

Peter M. Clarkson , Yue Li ,Gordon D. Richardson & Florin P. Vasvari (2011): Does it really pay to be green? Determinants and consequences of proactive environmental strategies, Journal of Accounting and Public Policy,Vol. 30,Issue 2,pp 122-144 S. Ambec and P. Lanoie (2008): Does it pay to be green? A systematic overview. Academy of Management Perspectives, Vol 22 ,pp. 4562. S.L.Hart (1995): A natural-resource-based view of the firm. Academy of Management Review, Volume 20. pp. 874907 S. Sharma and H. Vredenburg (1998): Proactive corporate environmental strategy and the development of competitively valuable organizational capabilities. Strategic Management Journal, Vol 19, Issue 8, pp. 729753. Starik, M. and A. Marcus(2000) : Introduction to the special research forum on the management of organizations in the natural environment: A field emerging from multiple paths, with many challenges ahead. Academy of Management Journal 43, 539-546 W.Q. Judge and D. Elenkov (2005): Organizational capacity for change and environmental performance: an empirical assessment of Bulgarian firms. Journal of Business Research, vol 58, issue 7 (2005), pp. 893901

For any comments or queries, please contact kanton.44@gmail.com This is one piece of my work; I pursue assignment making as my hobby business.