Companies are turning their environmental liabilities into cash

A fine mess.
A fine mess.
Image: EPA/Peter Steffen
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Conventional wisdom holds that cleaning up a company’s environmental record is more expensive than paying fines, settling with plaintiffs, or dodging the liability altogether. That understanding guided decades of corporate behavior, from dumping carcinogens into California’s drinking water supply to faking emission tests on diesel cars.

But a growing body of research challenges that notion. Since 2015, studies have suggested that the cost of improving a company’s environmental record is no cost at all, but rather an investment that boosts profits, efficiency, and competitiveness.

Fanny Hermundsdottir and Arild Aspelund, researchers at the Norwegian University of Science and Technology, reviewed more than 100 scientific papers published between 2005 and 2020 measuring the correlation between firms’ investments in sustainability and their competitiveness. Their results, published in the Journal of Cleaner Production, showed that 64 companies exhibited a positive relationship between sustainability innovations and competitiveness; 29 showed mixed or neutral results; five were inconclusive, and two studies showed negative effects.

“Our main contribution is to show that the alternative hypothesis—that sustainability is simply a cost driver—is debunked,” Aspelund wrote by email. “There is no scientific evidence to support such a claim.”

Most researchers, Aspelund argues, are moving toward a consensus that business opportunities from investing in sustainable operations generally eclipse costs. Examples such as Walmart’s money-making decision to green (and simplify) its supply chain in 2005 are becoming more common. But he concedes that few would unconditionally agree that “sustainability is profitable.”

The case isn’t clear-cut for two reasons. First, the scientific literature doesn’t employ standard metrics, and researchers have only studied a subset of the corporate strategies adopted. They also don’t always publish studies that fail to find significant correlations between sustainability and profitability, creating a potential bias toward better outcomes.

The second reason is proving causality: Do investments in sustainability increase a firm’s competitiveness, or are highly competitive firms more likely to invest in sustainability? The data is inconclusive.

“The idea that sustainability is simply a cost driver seems to be more of an assumption than an empirical reality,” says Wesley Longhofer, an associate professor at Emory University’s Goizueta Business School. But because many  sustainability innovations serve the core business and improve performance, “it raises lots of questions about reverse causality.”

Wall Street isn’t waiting for clarity. BlackRock, the world’s largest asset manager, says it will now formally assess climate and sustainability risks as part of its investment decisions. It’s joined by other investors in ClimateAction 100+, a global consortium pushing companies to begin eliminating emissions. And many firms already are: At least 1,100 companies have voluntarily adopted emission targets, according to the Science Based Targets initiative, and 385 of them have pledged to meet the 1.5°C target set under the Paris Agreement.

Companies can still “save” money by cutting corners on their environmental obligations, at least at first. But the strategy risks catastrophic losses. Volkswagen’s diesel emissions cheating scandal has cost the German carmaker €30 billion ($36 billion) so far, while exacting an enormous reputational price at a time when it needs to pivot to electric vehicles.

Moving forward, suggest Aspelund, we may want to stop asking whether green investments make financial sense, but “how, and under which conditions does sustainability create value for firms.” So far, academics have a lot more work to do to answer this question.