When Does the Market Reward Environmental Performance Improvements?

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Research Insight


Many firms have undertaken proactive environmental initiatives in recent years – consider Wal-Mart’s efforts to increase energy conservation and more recently, their sustainable supply chain initiatives. But does the market see these activities as good value relative to other investment options? While some suggest financial benefits arise through energy and materials savings or improved reputation, others worry such initiatives won’t payoff immediately – or at all.

Researchers Brian Jacobs (Michigan State University), Vinod Singhal (Georgia Institute of Technology) and Ravi Subramanian (Georgia Institute of Technology) analyzed how environmental performance affects shareholder value through stock market reactions. Their work builds on previous research examining the market’s reaction to specific types of announcements.

Jacobs and his collaborators looked at two types of announcements of environmental performance appearing in 14 daily business publications such as Financial Times and The Wall Street Journal between 2004 and 2006. These included 417 firm announcements of initiatives to avoid, mitigate, or offset the firm’s environmental impacts, and 363 third-party announcements of awards and certifications. The researchers hypothesized the market would respond positively to both types of announcements, but that third-party awards and certifications would lead to a greater jump in share price than announcements by the firm because of the credibility offered by third parties.

The market reaction to self-reported announcements did not differ from the reaction to third-party announcements. In fact, researchers found the market reacted only to three types of announcements: philanthropy, voluntary emissions reductions, and ISO 14001 certifications. In the category of self-disclosed firm announcements, philanthropy for environmental causes (such as cash gifts for conservation efforts) generated a positive market reaction, and voluntary emissions reductions (such as pledges or investments to cut emissions) created a negative market reaction. In the category of third-party recognition, ISO 14001 certifications resulted in a significant positive reaction.

“The market reacted
only to three types of announcements:
philanthropy, voluntary emissions reductions, and ISO 14001 certifications.”

Most types of announcements (either from the firm or third parties) resulted in no significant change in share price. These include environmental business strategies (such as new standards), new eco-friendly products, renewably energy (supply or purchase), recycling programs, announcements of LEED certification, or third-party awards.

Why the reaction to only three categories? The authors suggest philanthropy constitutes a small investment (the median contribution was $2 million) but can generate substantial reputation and goodwill benefits. Emissions reductions beyond regulatory requirements may not be seen as in the shareholders’ best interests, and actually hurt firm performance. Support for the positive impact of ISO 14001 certification on a firm’s market value is justified by the fact that it is a widely recognized standard and sometimes a prerequisite for trade.

As managers evaluate environmental options and aim to satisfy stakeholders with competing demands, they should consider which announcements resonate with the market – and which do not. This research supports recent work examining a wide variety of activities, each with differing potential to add financial value to the firm. Managers should note that although no positive returns were found for many categories, most initiatives did not drive share prices down. Therefore, many initiatives can be pursued without fear of negative market reactions.


Jacobs, Brian W., Vinod R. Singhal and Ravi Subramanian (2010) An empirical investigation of environmental performance and the market value of the firm. Journal of Operations Management, 28: 430-441

Summarized by

Pamela Laughland and the NBS Team