Many organizations are attempting to become more environmentally conscientious (Green) in response to customer demands, improved efficiencies, and the threat of government regulation. While the benefits have been highlighted anecdotally, this study attempts to assess whether companies that are more Green do reap the economic benefits as reflected in their financial performance. Using the Green rankings from Newsweek, our study identified 3 categories of firms. The results indicated that firms which were higher ranked in the Newsweek survey (more Green firms) actually had lower sales growth compared to their less Green counterparts. In addition, the Green firms' market valuations were not different from their counterparts. The only identified benefit was a lower growth in expenses for the Green firms, indicating an improvement in operational efficiency. Therefore, this study was unable to find the many benefits touted by anecdotal studies of Green businesses.
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INTRODUCTION
There has been a recent trend in business and information technology (IT) to become more environmentally conscientious (Green). One significant driver of this trend has been regulatory pressures. In 2009, the U.S. House of Representatives passed the American Clean Energy and Security Act, which was designed to restrict the amount of greenhouse gases in an effort to fight global warming and climate change through "cap and trade" (House Bill 2454, 2009). While it was never enacted into law, the bill did raise the profile and threat associated with carbon emissions. In addition, the United States Environmental Protection Agency (U.S. EPA) has continued to expand its authority through the Clean Air Act Amendments of 1990, providing benefits of reduced toxic emissions but at a cost to business (U.S. EPA, 2011).
In addition to regulatory pressures, business and IT have also determined that Green business activities also possess financial incentives. GreenBiz.com (GreenerComputing Staff, 2010) also reports that companies are implementing sustainable strategies, initiatives and events in order to meet the changing needs of their customers. In May 2009, Symantec, a major security software company, released its Green IT Report which found that Green IT budgets are rising, IT is willing to pay a premium for Green equipment, and Green IT initiatives have become more of a priority. In addition, Newsweek (2011) reports that companies ranked highly in their Green surveys are approaching Green projects, even in a poor economic climate and a declining threat of regulation such as "cap and trade." These instances, along with anecdotal evidence from cases studies, would indicate that financial benefits could also be a significant driver of Green initiatives.
While many sites such as GreenBiz.com are trumpeting the benefits of being Green, it is not clear whether a Green strategy is financially beneficial or simply a means of survival. If Green activities are essentially a necessary cost of doing business, then it will be important for regulatory bodies to determine the appropriate level of effort that companies exert to ensure societal well-being. However, if Green activities do possess financial benefits that give successful companies a strategic advantage, then market forces should challenge firms to become more Green without the pressures from regulatory bodies. Anecdotal evidence is mixed in this regard. After examining the sustainability initiatives of 30 large corporations, Nidumolu, Prahalad, and Rangaswami (2009) concluded that sustainability provides organization and technological innovations that will result in additional revenues and profits. Furthermore, organizations are also wasteful in production when many of their resources could be reused. Recycling can be a great method for lowering waste outputs and reducing costs. However, companies like Caterpillar have spent billions of dollars to meet emissions standards set by the EPA, passing along the higher costs in the price of its machines. "We are going to meet our social obligation, but society is going to pay for it," said Jim Parker, Caterpillar vice president of distribution in the Americas (Gordon, 2011).
The purpose of this study is to empirically evaluate whether companies reputed to have a Green focus are benefitting financially from their efforts. Newsweek has created a ranking system that incorporates a company's environmental impact (emissions and water usage), management policies, and management disclosures. These three factors are used in determining a composite figure used to rank the firms by level of Greenness. Furthermore, some industries have more or different challenges in conducting Green activities relative to others (i.e. energy companies vs. technology). However, if a firm is a leader in its industry associated with Green activities, then it should have better financial results relative to its less-Green peers if a Green focus does result in improved financial performance. While there have been many purported benefits with a Green focus, our study was only able to identify a slower growth rate in expenses for Green firms. Somewhat surprisingly, the most Green firms in each industry actually experienced the slowest revenue growth. The one benefit associated with Green firms was that the standard deviation of the different performance measures was consistently smaller than their peers, indicating a more uniform performance among Green firms.
The next section of the paper will establish the hypotheses that will be tested, as well as the methodologies and data. The following section will provide descriptive statistics of the variables in this study, as well as the tests of the hypotheses. The paper will conclude with our findings, limitations, and suggestions for future research.
HYPOTHESES, METHODOLOGIES, AND DATA
Some studies have found that adopters of a Green strategy allow them to achieve a competitive advantage. Companies not following the trend of "going Green" will fall behind the pack and struggle to find success (Nidumolu et al., 2009). After examining the sustainability initiatives of 30 large corporations, Nidumolu et al. (2009) concluded that sustainability provides organization and technological innovations that will result in additional revenues. There are also benefits to organizations from a marketing standpoint. Helping the environment is good for marketing as consumers are simply attracted to environmentally friendly products. Surveys have shown that Millennials are more apt to switching to products that are environmentally sound and are willing to pay more for green products (Brown, 2009; GreenerComputing Staff, 2010). With global warming being a concern on the mind of consumers in the supermarket, most consumers are demanding carbon labeling on products-this ultimately impacts many of their purchase decisions (Deame, 2008). Managers are increasingly becoming aware of this trend. In a 2009 EventView survey of corporate marketing managers, 15% of respondents were planning to pursue green tactics as part of their event-marketing program in the next year while 46% said they were already pursuing green marketing tactics (Clarke, 2009). Green products offer opportunities for companies to capture greater market share, thus enhancing their revenues.
In addition, regulatory compliance will also cause companies to incur additional costs of production, which could then be passed on their customers through higher priced products. As noted earlier, companies such as Caterpillar are spending large sums of money to meet EPA requirements while passing on these costs in higher charges to their customers (Brown, 2009). Assuming that these compliance efforts result in a company being more Green, and that these costs can be passed on to their customers through higher prices, then we can posit that revenues should also increase for these companies.
In both situations, as a company becomes more Green, we can expect an increase in revenues relative to its less Green peers. Therefore, the first testable hypothesis is as follows:
HI: The revenues of a more Green company will be growing fester than a less Green company.
In this analysis, a "more Green" company is one that has earned a higher ranking inNewsweek's Green Rankings (Newsweek, 2012). More specifically, companies are included in this study only if they appeared in both the 2011 and 2012 rankings. Newsweek introduced the Green Rankings in 2009, though only the 2011 and 2012 rankings utilize the same methodology, thus are comparable. It is reasonable to expect industry differences within these rankings as well. To control for industry differences, "greenness" is defined as a relative number within an industry as defined by Newsweek, thus the most "green" in a given industry is 100. "Greenness" is calculated as follows:
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In the 2011 rankings the largest 500 companies were selected based on June 30, 2011 revenue (most recent fiscal year), market capitalization and employees (Newsweek, 2011), similarly the 2012 rankings were determined based on these figures as of April 30, 2012 (Newsweek, 2012). Hence 2012 revenue growth is measured by the cumulative change in gross revenues over the preceding four fiscal years (2008-11):
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Therefore, the Revenue Growth for the 2012 year would use Gross Revenues for 2011 divided by Gross Revenues for 2008. The model for evaluating HI is:
Revenue Growthit = Greennessit + eit
A second advantage that has been identified among case studies are the large cost savings associated with Green initiatives. There are three main areas that have been identified as sources of cost savings: decreased energy consumption, reduction of waste, and general reduction of costs. All of these factors should have a positive impact on a firm's Green ranking as they either reduce the environmental impact or positively impact management's policies that are utilized in the Newsweek formula.
Inefficient energy consumption is a major problem that leads to wasteful spending at many organizations. Daoud (2009) notes that energy consumption reduction is the most visible goal for many organizations. By reducing wasteful consumption, an organization can dramatically lower costs (Nidumolu et al., 2009). There are several ways that organizations can prosper financially by going green. The U.S. Postal Service for example saved over $2.25 million by using virtualization to reduce power consumption in its data centers and replacing workstations with power saving monitors (DiRamio, 2009). Microsoft was able to save $250,000 in annual energy costs just by raising the temperature of their server rooms (Miller, 2008). Servers use an astounding amount of energy in the United States-this amounted to about 1.2% of all electrical use with a bill of $2.7 billion in 2005 (Koomey, 2007). A lot of this energy can be conserved by doing things such as buying more efficient servers, moving data centers to cooler locations or near a renewable energy source, and turning off machines that are no longer required. Cost reduction is undoubtedly a benefit that every organization can enjoy.
Organizations are also wasteful in production when many of their resources could be reused. Recycling can be a great method for lowering waste outputs and reducing costs. Cisco provided a good model for reuse when they created a recycling group in 2005. Reuse of equipment went from 5% in 2004 to 45% in 2008. Recycling costs were reduced by a total of 40%, resulting in an additional $ 100 million in profits (Nidumolu et al., 2009). Trimming waste is quite appealing when it allows organization to save money in a Green way.
Companies can also help save costs in a Green way through activities such as telecommuting and virtual meetings. According to Dennis Pamlin from the World Wildlife Fund, "Increasing virtual meetings and telecommuting today could, without any dramatic measures, help to save more than 3 billion tons of C02 emissions in a few decades; this is equivalent to approximately half of the current U.S. C02 emissions" (Buttazzoni, Rossi, Pamlin, and Pahlman, 2009). Organizations are also learning that telecommuting is a great way to save costs into the millions of dollars. It was reported that AT&T saved an estimated $550 million by telecommuting (Nidumolu et al., 2009). Additionally, AT&T estimated that their telecommuters saved about 5.1 million gallons of gasoline (Buttazzoni et al., 2009). Virtualization and other consolidation techniques with computer hardware helped Citi save $1 million on power and cooling costs by consolidating 15% of its 42,740 servers (Wasserman, 2009).
While all of these cost-saving initiatives should help financial performance, many of these require a significant investment in infrastructure and expertise. Many activities, such as virtualization, require a significant investment in technology. And energy-saving endeavors can require a significant investment in infrastructure. Microsoft built an air-cooled data center in Dublin, Ireland which runs without any chillers: a process accomplished simply by drawing in cooler outside air (Miller, 2009b). It is estimated that this will result in decreased electrical costs and also considerable savings in water usage. Microsoft is also setting a trend by building new data centers near hydroelectric power sources, again reducing the usage of fossil fuels (Wasserman, 2009).
The other problem facing many IT organizations wanting to embark on a sustainable IT development endeavor is that it requires a certain expertise, which current employees may not possess. A few essential competencies are: a) the ability to redesign operations to use less energy and water, produce fewer emissions, and generate less waste; b) the capacity to ensure that suppliers and retailers make their operations eco-friendly; c) the skills to know which products or services are most unfriendly to the environment; and d) the management knowhow to scale both supplies of green materials and the manufacture of products (Nidumolu et al., 2009). Advanced training and outside consulting are essential necessities that will add costs to an organization.
Because many of the cost-savings activities require significant up-front costs, it is unclear whether Green companies will enjoy a net reduction of operating costs relative to their less Green peers. A second confounding factor is related to the timing of the benefits relative to the additional costs incurred. Because the costs of becoming more Green tend to be up-front while the full benefits will not be realized until the initiatives are fully implemented, even effective Green initiatives may not appear successful in the early periods. However, it is expected that Green companies should have different costs relative to their peers due to their initiatives. This leads to the next two testable hypotheses:
H2a: The operating expenses (excluding depreciation and amortization) of a more Green company will be decreasing (or growing more slowly) relative to a less Green company.
It is assumed that Green companies will be receiving benefits from its programs that eliminate waste, reduce energy consumption, or minimize other operating expenses. While many green initiatives require upfront capitalized investments, they tend to provide the benefits from cost savings. While total operating expenses may be increasing for a growing company, it is expected that the savings from Green initiatives will slow the pace of growth relative to the companies who are less Green. Similar to the rationale provided above, the cost efficiency of a company in the 2012 rankings is based upon 2011 fiscal year financial statements:
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The model for evaluating H2a is:
Operating Expense Growthit = Greennessit + eit
H2b: The depreciation and amortization expenses of a more Green company will be increasing relative to a less Green company.
It is assumed that Green companies will need to incur significant capital expenditures in order to be Green and obtain the future benefits. These capital expenditures in facilities and intellectual property will result in higher depreciation and amortization expenses in the future periods. Therefore, we expect Green companies will have a higher growth in their depreciation and amortization expenses relative to the less Green companies. Extending the rationale provided above, the depreciation and amortization (D&A) expense growth of a company in the 2012 rankings is based upon 2011 fiscal year financial statements:
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The model for evaluating H2a is:
D&A Expense Growthit = Greennessit + eit
By developing Green technologies, companies are gaining new competencies that will be hard for slower movers to match. The goal of becoming environmentally friendly is quite similar to those of corporate innovation; hence, sustainability is being treated as "innovation's new frontier" (Nidumolu et al., 2009). By participating in Green initiatives, companies can also get ahead of the curve by adhering to the strictest environmental regulations even though it may cost them money in the short term. For instance, if Ford and Chrysler had complied with strict California emissions standards in 2002, they would now be ahead of their competition when the standards are enforced nationwide in 2016 (Nidumolu et al., 2009). By developing new ideas towards the goal of environmental sustainability, organizations are also creating promising ideas for business. These competitive advantages should lead to greater future revenues, even though current revenues may not reflect those benefits.
In addition, Green cost-saving strategies require a significant up-front investment, with the benefits to be realized in future savings. In 2009, IBM announced that it would turn Dubuque, Iowa into a model for environmental sustainability using technology to monitor water and energy in order to calculate the maximum benefits (Hamm, 2009). In 2008, HP made plans to save $8 million annually by building new data centers that used Dynamic Smart Cooling, which uses computational fluid dynamics (CFD), a sensor network, and a centralized server to control cooling (Miller, 2008). While it is expected that these investments will result in cost savings to justify the significant investments, those cost savings may not be fully reflected as yet in their financial reports.
A Green brand is also beneficial from a marketing standpoint. Helping the environment is good for marketing as consumers are simply attracted to environmentally friendly products. As discussed earlier, significant research shows large cross sections of consumers (e.g., Millennials) are partial to Green products, willing to pay more for those more environmentally friendly and even prefer to work for companies reputed to be more environmentally sensitive. Managers keenly aware of these facts continue to increase pursuit of green marketing tactics. However, Greenbiz.com reports that organizations can struggle to translate their Green leadership into a current market advantage (GreenerComputing Staff, 2010). These all suggest that current financial performance may not reflect the full value of a company's Green activities.
While current financial measurements in a company's financial statements may not reflect the ultimate value of its Green activities, the stock market is supposed to be efficient. Therefore, the third testable hypothesis is as follows:
H3: The stock market valuation of current reported accounting numbers for a more Green company will be greater than for a less Green company. As in Dumev and Kim (2005) and Kaplan and Zingales (1997), Tobin's Q is used as a proxy for stock market valuation. Tobin's Q is the market value of assets divided by the book value of assets, thus a larger measurement indicates a higher forward-looking valuation, perhaps indicative the value of Green investments not captured in book values. Similar to Kaplan and Zingales (1997) the market value of assets is equal to the book value of assets plus the market value of common equity less the sum of the book value of common equity and deferred taxes (from the balance sheet). To be most directly comparable to Newsweek's rankings, data from the most recent fiscal year is used in these calculations. Thus, the model for evaluating H3 is:
Tobin's Q^sub it^ = Greenness^sub it^ + e^sub it^
RESULTS
Table 1 shows the descriptive statistics of the variables used in this study. During the two years of evaluation, companies on average had an increase in revenues and expenses, but, on average, experienced a decrease in Tobin's Q. Average revenue and operating expense growth increased in 2011, while growth of depreciation and amortization slowed.
In order to evaluate our hypotheses, we have categorized the sample of firms into the top one-third (TOP), middle one-third (MID), and bottom one-third (BOT) in terms of the relative rank of Greenness within their respective industries. Table 2 shows the descriptive statistics associated with different categories of firms. In Panel A, Revenue Growth is shown for the two sample years for the different categories of firms. One of the more remarkable observations is that Revenue Growth for the TOP firms was smaller for both of the sample years relative to either the MIDDLE or BOTTOM firms. This conflicts with the expectations of Hypothesis 1, in which we expected more Green firms to have higher revenue growth rates, as Green marketing would be expected to drive higher sales prices, greater unit sales, or both. The other interesting finding was that the standard deviation for Revenue Growth was the smallest for the TOP firms in both sample years. While the TOP firms were not growing as rapidly as the other categories, the growth rate was less sporadic or more stable across the sample firms.
In Panel B, the different categories are shown for the Operating Expense Growth variable for both sample years. Consistent with Hypothesis 2A, the growth in operating expenses (excluding depreciation and amortization) is lower for the TOP category of firms and the MIDDLE firms show slower or equal growth relative to the BOTTOM firms. In addition, the standard deviation for the Operating Expense Growth variable was the smallest for the TOP firms in both sample years, similar to the Revenue Growth variable. The other variable related to expenses, D&A Expense Growth, is shown in Panel C.
Similar to Operating Expense Growth, and contrary to Hypothesis 2B, the D&A Expense Growth variable was the smallest for the TOP firms for both sample years and, again, MIDDLE firms experienced slower growth relative to BOTTOM firms. Another interesting observation was that D&A Expense Growth was greater than the Operating Expense Growth and Revenue Growth for every category in both sample years. And finally, the standard deviation for the TOP firms was smaller for the two sample years except for one instance. While the BOTTOM (2011) had the second smallest standard deviation, the BOTTOM (2010) had the highest standard deviation among the different category years. The general conclusion was that the most Green companies had the smallest rates of growth in the both expense categories, and the rate of growth was the most stable across those firms. Panel D reports the Tobin's Q score for each of the categories in the two sample years. There are two predominant findings associated with this variable. For both sample years, the TOP category had the lowest Tobin's Q score and the BOTTOM category had the highest Tobin's Q score. This is the opposite of what was expected from Hypothesis 3. The other interesting finding was that the standard deviation of the Tobin's Q scores was the smallest for the TOP firms and the largest for the BOTTOM firms. Similar to the other variables in this study, firm's that are more Green had the most stable scores while the firms that are the least Green had the greatest variability.
In performing the hypothesis testing, z-statistics were computed on the differences between the different categories on the variables of interest. In each case, the category hypothesized to be smaller is subtracted from the larger, thus producing an expected positive z-statistic. The results in Panel A of Table 3 are used in evaluating Hypothesis 1. As can be seen, the most Green firms (TOP) had smaller revenue growth rates relative to both the MIDDLE and BOTTOM categories, and four of six are signficant at the 5% level opposite the expected direction. These findings do not support Hypothesis 1.
The results in Panel B are used in evaluating Hypothesis 2A. The TOP firms for both sample years had smaller growth in operating expenses (excluding depreciation and amortization) than both the MIDDLE and BOTTOM categories. Combined with the earlier observation of lower operating expense variation for the TOP firms, this does support Hypothesis 2A in that Green firms are able to better eliminate waste and be more efficient, leading to lower operating expenses relative to their less Green peers. However, the results in Panel C do not support Hypothesis 2B. The Green firms did not have higher depreciation and amortization charges relative to their less Green peers. In fact, the results were significant opposite the hypothesized direction for four of the six instances. One of the confounding results was that TOP firms had lower growth rates for both revenues and expenses. In addition, their rate of growth of expenses was lower for both operating expenses (excluding depreciation and amortization) and for charges on long-term infrastructure (depreciation and amortization expenses).
The results in Panel D are used to test Hypothesis 3. In all situations, the TOP firms did not have significantly higher Tobin's Q scores relative to their less Green peers. In fact, the most Green firms actually had lower scores, although none of the differences were statistically significant. These results do not support Hypothesis 3.
CONCLUSION
The purpose of this study was to empirically examine some of the purported benefits associated with Green businesses. By utilizing the green rankings of the largest 500 companies in the U.S. from Newsweek's annual survey, which evaluates companies based on the environmental friendliness of their business practices, this study evaluated companies based on reported financial results. While many case studies and anecdotal evidence have identified advantages associated with Green business practices, this study is unable to provide empirical support based on two recent three year periods. In fact, Green companies exhibited lower growth rates of revenues. Consistent with popular expectations, however, this study finds that the growth rate in operating expenses is slower for more Green companies. Moreover, our sample of Green companies show less variation in both revenue and expense growth. Our results might suggest that the benefits of Green are more quickly experienced in a reduction of operating expenses and perhaps exceptional revenue growth is a longer term prospect. It could also indicate that by adopting Green business practices, TOP companies have more advanced and uniform business practices and processes which result in more consistent and predictable financial performance.
While this study attempts to evaluate the relationship between Green business practices and financial performance, there are some other important aspects to consider in future research. The Green rankings consider three different factors in determining the composite score, of which the environmental impact is only one component. In addition, Newsweek's rankings have a very short history. Will companies with a Green emphasis consistently be highly ranked by Newsweek, and will a consistently high Green ranking have a higher association with improved financial performance relative to companies who are consistently not Green?