An Examination of Financial Performance and Risk of Environmentally Friendly 'Green' Companies
Blazovich, Janell L., Smith, Katherine Taken, Smith, L. Murphy, Journal of Legal, Ethical and Regulatory Issues
Corporate social responsibility includes a myriad of factors, which could be categorized into two broad categories of responsibility: responsibility to people and to places. People include the traditional stakeholders such as stockholders, employees, lenders, creditors, customers, suppliers, government agencies, and people living in communities where the company operates. Places include the physical locations where the company operates. A company has a responsibility to care for the physical environment. Being identified as "green" or "environmentally friendly" is important to all types of business, whether they are retail firms, manufacturers, or service firms.
There was time, not so long ago, in which people knew little and had small concern for environmental issues. In recent decades, the concept of environmental friendliness has become a notable concern to consumers and businesses. If a corporation attains an environmentally friendly 'green' image, an important question is whether the efforts to be recognized as environmentally friendly have a positive or negative affect on financial performance?
Prior research suggests that some consumers will seek to do business with 'green' companies (Laroche et al., 2001; Smith, 2010; Wolverton & Dimitri, 2010; Oliver, 2007), but whether this additional business offsets the costs of extra efforts to go green is not clear. In addition, by going green, a company might reduce risks (e.g. regulatory fines and litigation) associated with less-than-environmentally friendly activities. Considering the above, the purpose of this study is to answer two research questions: (1) how do green companies perform financially, and (2) what is the risk level of green companies?
The paper proceeds as follows. The next section summarizes prior literature and develops our hypotheses. Next, we describe our sample selection, present our empirical methods, and discuss our results. The final section concludes.
PRIOR RESEARCH AND DEVELOPMENT OF HYPOTHESES
Research on environmental matters crosses disciplines, including business, history, sociology, and science. Within business, there have been studies within all business subfields, such as accounting, economics, finance, and marketing. Taking care of the environment has been a concern since ancient times. Recommendations for preservation of the natural environment can be found in ancient writings, such as the Bible and Koran. Approximately 1400 B.C., the Prophet Moses specified how the ancient Israelites were to manage land and care for animals. About 650 A.D., the Prophet Mohammed gave directions regarding water conservation (Smith, 2010).
In more recent times, the term 'ecology' was coined by German biologist Ernst Haeckel in 1866. The definition of ecology is 'the study of the relationship between organisms and their environment.' Starting in the second half of the 20th century, the U.S. established a number of environmental laws, such as the Air Pollution Control Act of 1955, the U.S. National Environmental Policy Act of 1969, the Clean Air Act of 1970, and the U.S. Water Pollution Control Act of 1972. In 1998 the Federal Trade Commission established the "Green Guidelines" that define terms used in environmental marketing. In 2005, the Kyoto Protocol was established. Countries joining the Protocol pledge to reduce emission of gasses linked to global warming. Some of the key events regarding the environment are shown in Table 1.
Research shows that people in virtually every country of the world are interested in environmental issues. The only question is to what extent are people willing to give up their personal comfort and money to care for the environment. An important issue to many businesses is how to market environmentally friendly products to consumers. Wolverton and Dimitri (2010) examined whether environmental and social objectives are compatible with profit maximization. …