Researchers have developed a new calculation method that reveals investors place a higher value on a company’s environmental performance rather than just transparency through information disclosure. In certain developed nations, companies can boost both environmental efficiency and economic success by going beyond simple sustainability efforts.
Incorporating sustainable practices into business operations is not only an ethical obligation but also a sound financial strategy. A study conducted by researchers from Kyushu University, published on December 10, 2024, in Corporate Social Responsibility and Environmental Management, shows that companies demonstrating strong environmental performance and honesty in their disclosures can effectively reduce expenses and increase profits.
Investors are beginning to appreciate the efforts companies are making towards achieving carbon neutrality, which has led to a surge in environmental, social, and governance (ESG) investing. To aid this movement, the Sustainability Accounting Standards Board (SASB) has created a sector-specific framework that enables companies to clearly communicate their sustainability risks and opportunities to investors. Many companies are now using this framework to disclose their environmental information, and in various countries worldwide, such transparency is becoming a requirement.
However, the relationship between corporate environmental strategies, performance, costs, and profits still lacks clarity. To shed light on this issue, Professor Hidemichi Fujii and his team from Kyushu University’s Faculty of Economics examined financial and environmental data from 8,547 companies across 34 countries between 2015 and 2022.
The research team developed two quantitative metrics to evaluate corporate environmental disclosures: materiality-based scores and comprehensive environmental scores.
“Financial materiality is a relatively new idea. Environmental priorities differ by industry since each company faces unique environmental challenges. Financial materiality helps investors determine the relevance of the disclosed information and supports better decision-making,” stated Siyu Shen, a graduate student at Kyushu University’s Graduate School of Economics and the lead author of the study.
The SASB framework categorizes environmental concerns into six categories, including greenhouse gas emissions and water & wastewater management. For example, water management is crucial for industries such as mining but less significant for sectors like finance. Materiality-based scores focus solely on pertinent issues to gauge how effectively a company tackles environmental challenges, while overall environmental scores assess all disclosed information to evaluate a company’s general environmental endeavors.
The researchers applied these scoring methods to analyze companies’ environmental disclosures and performance and found that firms with strong commitments to environmental stewardship tend to achieve improved financial results, encompassing increased short- and long-term profits and cost reductions. Notably, companies excelling in environmental performance—rather than merely those that focus on information disclosure—demonstrate superior financial outcomes and garner more investor interest.
“Investors prioritize what companies do for the environment over what they claim,” says Fujii. “By actively addressing environmental concerns, companies communicate their commitment to sustainability and reliability to consumers and investors, thereby reducing perceived risks and enhancing their attractiveness as stable and ethical investments.”
While overall environmental scores consistently correlate positively with financial performance, materiality-based scores reveal only a limited connection. This finding differed from the team’s expectations, prompting them to investigate how the value placed on environmental efficiency varies across countries.
Investigating global data indicates that environmental efficiency shows a stronger relationship with financial performance in developed nations, particularly the United States and Japan. Conversely, it is less impactful in developing countries such as Chile and Indonesia.
“These differences likely stem from variations in environmental regulations and public consciousness across nations,” explains Shen. “In more economically advanced countries, where companies have been engaged in sustainability efforts for a long time, enhancing environmental efficiency can lead to increased profitability and market value. Meanwhile, in developing areas, with regulatory frameworks still evolving, the emphasis is more on environmental performance and transparency than on efficiency.”
The research team plans to further explore how macroeconomic factors, including regulatory and societal influences, affect corporate sustainability practices and financial outcomes globally. They aim to provide empirical evidence on how corporate environmental information disclosure and conservation initiatives impact economic performance. “We anticipate that our international comparative studies will offer valuable insights for effective policy development to encourage proactive measures addressing environmental challenges,” Fujii adds.
