Environmental and Resource Economics

, Volume 35, Issue 3, pp 195–220 | Cite as

“It Pays to be Green” – A Premature Conclusion?



It has been claimed that good environmental performance can improve firms’ economic performance. However, because of e.g. data limitations, the methods applied in most previous quantitative empirical studies on effects of environmental performance on economic performance of firms suffer from several shortcomings. We discuss these shortcomings and conclude that previously applied methods are unsatisfactory as support for a conclusion that it pays for firms to be green. Then we illustrate the consequences of these shortcomings by performing several regression analyses of the effect of environmental performance on economic performance using a panel data set of Norwegian plants. A pooled regression where observable firm characteristics like e.g. size or industry are controlled for, confirms a positive effect of environmental performance on economic performance. However, the estimated positive effect could be due to omitted unobserved variables like management or technology. When the regression model controls for unobserved plant heterogeneity, the effect is generally no longer statistically significant. Hence, although greener plants tend to perform economically better, the analysis provides little support for the claim that it is because they are greener. These empirical findings further indicate that a conclusion that it pays to be green is premature.

Key words:

economic performance environmental performance environmental regulations pays to be green 

JEL classification

Q25 Q28 K23 


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.



I am indebted to Iulie Aslaksen and Terje Synnestvedt for valuable discussions, comments and suggestions. I am also grateful to an anonymous referee, Knut Einar Rosendahl and Terje Skjerpen for helpful comments and suggestions, and to Bente Halvorsen for valuable discussions and suggestions in the initial part of the project. Financial support from the Norwegian Ministry of the Environment is gratefully acknowledged.


  1. Aldrich J. (1989) Autonomy. Oxford Economic Papers 41: 15–34Google Scholar
  2. Al-Tuwaijri S. A., Christensen T. E., Hughes K. E. (2004) The Relations Among Environmental Disclosure, Environmental Performance, and Economic Performance: A Simultaneous Equations Approach. Accounting, Organizations and Society 29: 447–471CrossRefGoogle Scholar
  3. Baltagi B. (2001) Econometric Analysis of Panel Data, Second edition. John Wiley & Sons, New YorkGoogle Scholar
  4. Bonifant, B. C., M. B. Arnold and F.J. Long (1995), ‘Gaining Competitive Advantage through Environmental Investments’. Business Horizons July–August: 37–47.Google Scholar
  5. Bragdon, J. and J. Marlin (1972), ‘Is Pollution Profitable? Environmental Virtue and Reward: Must Stiffer Pollution Controls Hurt Profits?”. Risk Management (April 1972): 9–18.Google Scholar
  6. Brekke, K. A. and K. Nyborg (2004), ‘Moral Hazard and Moral Motivation: Corporate Social Responsibility as Labor Market Screening’. Paper presented at the 13th annual EAERE conference in Budapest, June 25–28, 2004.Google Scholar
  7. Callens I., Tyteca D. (1999) Towards Indicators of Sustainable Development for Firms. A Productive Efficiency Perspective. Ecological Economics 28: 41–53CrossRefGoogle Scholar
  8. Cooley T., LeRoy S. (1985) Atheoretical Macroeconometrics. A Critique. Journal of Monetary Economics 16: 283–308CrossRefGoogle Scholar
  9. Dechant K., Altman B. (1994) Environmental Leadership: From Compliance to Competitive Advantage. Academy of Management Executive 8(3): 7–20Google Scholar
  10. Ebert U., Welsch H. (2004) Meaningful Environmental Indices: A Social Choice Approach. Journal of Environmental Economics and Management 47: 270–283CrossRefGoogle Scholar
  11. Edwards D. (1998) The Link between Company Environmental and Financial Performance. Earthscan Publications, LondonGoogle Scholar
  12. Elkington, J. (1994), ‘Towards the Sustainable Corporation: Win–Win–Win Business Strategies for Sustainable Development’. California Management Review Winter: 90–100.Google Scholar
  13. Filbeck G., Gorman R. F. (2004) The Relationship between the Environmental and Financial Performance of Public Utilities. Environmental and Resource Economics 29(2): 137–157CrossRefGoogle Scholar
  14. Flugsrud, K., E. Gjerald, G. Haakonsen, S. Holtskog, H. Høie, K. Rypdal, B. Tornsjø and F. Weidemann (2000), ‘The Norwegian Emission Inventory. Documentation of methodology and data for estimating emissions of greenhouse gases and long-range transboundary air pollutants’. Reports 1/2000, Statistics Norway.Google Scholar
  15. Gallarotti G. M. (1995) It Pays to Be Green: The Managerial Incentive Structure and Environmentally Sound Strategies. Columbia Journal of World Business 30(4): 38–57CrossRefGoogle Scholar
  16. Golombek R., Raknerud A. (1997) Do Environmental Standards Harm Manufacturing Employment? Scandinavian Journal of Economics 99(1): 29–44CrossRefGoogle Scholar
  17. Greene, W. (2000), Econometric Analysis. 4th edition, Prentice Hall International.Google Scholar
  18. Griffin J., Mahon J. (1997) The Corporate Social Performance and Corporate Financial Performance Debate. Business and Society 36(1): 5–31Google Scholar
  19. Hamilton J. (1995) Pollution as News – Media and Stock-Market Reactions to the Toxics Release Inventory Data. Journal of Environmental Economics and Management 28(1): 98–113CrossRefGoogle Scholar
  20. Harrington W. (1988) Enforcement Leverage when Penalties are Restricted. Journal of Public Economics 37: 29–53CrossRefGoogle Scholar
  21. Hart S. (1997) Beyond Greening: Strategies for a Sustainable World. Harvard Business Review 75(1): 66–76Google Scholar
  22. Hart S., Ahuja G. (1996) Does it Pay to be Green? An Empirical Examination of the Relationship between Emission Reduction and Firm Performance. Business Strategy and the Environment 5: 30–37CrossRefGoogle Scholar
  23. Hendry D. (1996) On the Constancy of Time-Series Econometric Equations. The Economic and Social Review 27(5): 401–422Google Scholar
  24. Jaffe A. B., Peterson S. R., Portney P. R., Stavins R. N. (1995) Environmental Regulations and the Competitiveness of U.S. Manufacturing: What Does the Evidence Tell Us? Journal of Economic Literature 33: 132–163Google Scholar
  25. Jaggi B., Freedman M. (1992) An Examination of the Impact of Pollution Performance on Economic and Market Performance: Pulp and Paper Firms. Journal of Business Finance and Accounting 19(5): 697–713Google Scholar
  26. King A., Lenox M. (2001) Does it Really Pay to be Green? An Empirical Study of Firm Environmental and Financial Performance. Journal of Industrial Ecology 5(1): 105–116CrossRefGoogle Scholar
  27. Konar S., Cohen M. (2001) Does the Market Value Environmental Performance? The Review of Economics and Statistics 83(2): 281–289CrossRefGoogle Scholar
  28. Olsthoorn X., Tyteca D., Wehrmeyer W., Wagner M. (2001) Environmental Indicators for Business: A Review of the Literature and Standardisation Methods. Journal of Cleaner Production 9: 453–463CrossRefGoogle Scholar
  29. Orlitzky M. (2001) Does Firm Size Confound the Relationship between Corporate Social Performance and Firm Financial Performance? Journal of Business Ethics 33: 167–180CrossRefGoogle Scholar
  30. Orlitzky M., Schmidt F., Rynes S. (2003) Corporate Social and Financial Performance: A Meta-Analysis. Organization Studies 24(3): 403–441CrossRefGoogle Scholar
  31. Palmer K., Oates W. E., Portney P. R. (1995) Tightening Environmental Standards: The Benefit-Cost or the No-Cost Paradigm? Journal of Economic Perspectives 9(4): 119–132Google Scholar
  32. Porter M., van der Linde C. (1995) Towards a New Conception of Environment-Competitiveness Relationship. Journal of Economic Perspectives 4(4): 97–119Google Scholar
  33. Porter M. E. (1991) America’s Green Strategy. Scientific American 264(4): 96CrossRefGoogle Scholar
  34. Raknerud, A., D. Rønningen and T. Skjerpen (2003), ‘A method for improved capital measurement by combining accounts and firm investment data’. Discussion Papers 365, Statistics Norway.Google Scholar
  35. Reinhardt F. (1999) Market Failure and the Environmental Policies of Firms’ Economic Rationales for Beyond Compliance Behavior. Journal of Industrial Ecology 1(3): 9–21CrossRefGoogle Scholar
  36. Russo M. V., Fouts P. A. (1997) A Resource-Based Perspective on Corporate Environmental Performance and Profitability. Academy of Management Journal 40(3): 534–559CrossRefGoogle Scholar
  37. Schmidtheiny S., Zorraquin F. J. L. (1996) Financing Change: The Financial Community, Eco-Efficiency, and Sustainable Development. MIT, Cambridge MassachusettsGoogle Scholar
  38. Statistics Norway (2003a) Statistisk årbok 2003 (Statistical Yearbook 2003). Statistics Norway, OsloGoogle Scholar
  39. Statistics Norway (2003b), Naturressurser og miljø 2003 (Natural resources and the environment 2003). Statistics Norway, OsloGoogle Scholar
  40. Sæther B. (1998) Environmental Improvements in the Norwegian Pulp and Paper Industry – from Place and Government to Space and Market. Norwegian Journal of Geography 52: 181–194Google Scholar
  41. Sæther, B. (2004), ‘From Local to Global Agenda, Norske Skog 1962–2004’, in B. Sæther, A. Lehtinen and J. Donner Amnell eds., Politics of Forests. Northern Forest-industrial Regimes in the Age of Globalization. Ashgate publishing.Google Scholar
  42. Todsen, S. (1997), “Nasjonalregnskap: Beregning av realkapitalbeholdninger og kapitalslit (National accounts: Estimation of the stock of physical capital and depreciation)”. Notater 97/61, Statistics Norway, Oslo.Google Scholar
  43. Tyteca D. (1995) On the Measurement of the Environmental Performance of Firms - A Literature Review and a Productive Efficiency Perspective. Journal of Environmental Management 46: 281–308CrossRefGoogle Scholar
  44. Wagner M., Nguyen P., Azomahou T., Wehrmeyer W. (2002) The Relationship between the Environmental and Economic Performance of Firms. An Empirical Analysis of the European Paper Industry. Corporate Social Responsibility and Environmental Management 9: 133–146CrossRefGoogle Scholar
  45. Wagner, M. (2001), ‘A Review of Empirical Studies Concerning the Relationship between Environmental and Economic Performance’. Working paper, Center for Sustainability Management, Lüneburg University.Google Scholar
  46. Wagner M., Schaltegger S., Wehrmeyer W. (2001) The Relationship between the Environmental and Economic Performance of Firms. What does Theory Propose and What does Empirical Evidence Tell Us? Greener Management International 34: 95–108Google Scholar
  47. WBCSD (World Business Council for Sustainable Developement) (1997), “Environmental Performance and Shareholder Value”, Geneve.Google Scholar
  48. Wooldridge J. M. (2002) Econometric Analysis of Cross Section and Panel Data. Cambridge, MIT PressGoogle Scholar
  49. Ziegler A., Rennings K., Schroder M. (2002) The Effect of Environmental and Social Performance on the Shareholder Value of European Stock Corporations. Memo, Centre for European Economic Research (ZEW), MannheimGoogle Scholar

Copyright information

© Springer Science+Business Media, Inc. 2006

Authors and Affiliations

  1. 1.Research DepartmentStatistics NorwayOsloNorway

Personalised recommendations