Better environmental performance boosts profits and cuts costs

Investors are increasingly recognizing companies’ contribution to carbon neutrality, driving the growth of environmental, social and governance (ESG) investing. To support this trend, the Sustainability Accounting Standards Board (SASB) provides an industry-specific framework to help companies effectively communicate their sustainability risks and opportunities to investors. Many companies now use this framework to disclose their environmental messaging, and this transparency is becoming mandatory in many countries around the world.

Despite these advances, the impact of corporate environmental strategy and performance on costs and profits remains unclear. To address this problem, Professor Hidemichi Fujii of Kyushu University School of Economics and his team analyzed financial and environmental data from 2015 to 2022 on 8,547 companies in 34 countries.

The team developed two quantitative metrics to evaluate corporate environmental information: a materiality-based score and an overall environmental score.

“Financial materiality is a relatively new concept. Environmental priorities vary across industries because different companies face different key environmental challenges. Financial materiality helps investors assess whether disclosed information is relevant and Support informed decision-making.

According to the SASB framework, environmental issues can be divided into six areas, including greenhouse gas emissions, water and wastewater management. For example, water management is highly relevant to industries such as mining, but less relevant to industries such as finance. Materiality-based scores only quantify relevant issues to understand a company’s effectiveness in addressing environmental challenges, while overall environmental scores evaluate all disclosed information to assess a company’s overall environmental efforts.

The researchers applied these two scores to assess a company’s environmental disclosure and performance. They found that companies with higher levels of environmental involvement achieve better financial outcomes, including improved short- and long-term profits and lower costs. Notably, companies with superior environmental performance (as opposed to those that focus solely on disclosure) exhibit better financial performance and attract greater interest from investors.

“Investors value what companies do for the environment more than what they say,” Fujii said. “By taking concrete action on environmental issues, companies signal sustainability and reliability to consumers and investors, reducing perceived risk and enhancing their appeal as stable and ethical investments.”

While the overall environment score has a clear positive relationship with financial performance, the materiality-based score shows only a limited correlation. This contradicted the team’s hypothesis, leading them to explore differences in how countries assess environmental efficiency.

A closer look at global data shows that environmental efficiency is more closely related to financial performance in developed countries such as the United States and Japan. By comparison, this phenomenon remains less important in developing countries such as Chile and Indonesia.

“This difference may reflect differences in environmental regulations and public awareness across countries,” Shen explained. “In more economically developed countries, companies have long-term commitment to sustainable development, and improving environmental efficiency can improve profitability and market valuation. At the same time, in developing regions, as the overall regulatory framework is still being formulated, environmental performance and transparency are prioritized. Not efficiency.

The team is further studying how macroeconomic factors such as regulatory and social environments influence corporate sustainability practices and financial results in various countries. Through a series of studies, they aim to provide scientific evidence on the impact of corporate environmental information disclosure and protection efforts on economic performance. Fujii added: “We hope that our international comparative study will provide useful information to promote effective policy planning and thereby promote proactive responses to environmental issues.”