The Financial Impact of ISO 14001 Certification: Top-Line, Bottom-Line, or Both?

Abstract

It is not easy being green, but it does beg the question: Does being green pay off on the bottom-line? Unfortunately, that question of becoming ISO 14001 to reap financial benefit remains widely unanswered. In particular, corporate practice is interested in how environmental management impacts firms’ finance through top-line impact, bottom-line impact, or both—as this paves the way for an investment of environmental management. As current findings are mixed, our study tracks financial performance of publicly traded US firms between 1996 and 2005 to test whether ISO 14001 leads to improved financial performance. Employing a rigorous event-study approach, we compare certified firms to different control groups based on several matching criteria that include industry, size, and/or ROA. In the short run, ISO 14001 certification makes only a minor impact on the bottom-line, according to our results. However, these same results show a significant financial improvement over the long haul with ISO 14001 certification. Additionally, this long-term improvement also makes a significant improvement in top-line performance. Thus, we conclude that environmental management pays off along both dimensions.

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Notes

  1. 1.

    According to ISO, a total of 5,225 US firms were certified by 2009 (ISO 2010). If we compare our final list to the total number of certifications by 2009, it included approximately 80 % of the ISO 14001 certified firms. Though not complete, we believe that our final list is a good representation of the actual ISO 14001 certified firms. While the number of certifications per year is released by the ISO, unfortunately, given that companies work with different certifying agencies, the details regarding certified firms and their certification dates are not publicly available.

  2. 2.

    This percentage corresponds closely to Corbett et al. (2005) who indicate that 67 % of ISO 9001 and ISO 14001 certified firms within the United States stated that they are either privately held or foreign owned.

  3. 3.

    In case of Corbett et al. (2005), their analyses and results were based on a final sample of 554 firms. These 554 firms were arrived from a list of 21,482 certifications that had 7,238 US firms listed in Compustat, resulting in an effective representation of 7.7 % (i.e., 554/7,238). Though our final sample size of 219 is lower than that of Corbett et al. (2005), it is a better representation of the ISO 14001 certified firms within the USA. Specifically, our final sample size is 16.3 % of the total US public firms listed in Compustat (i.e., 219/1,346).

  4. 4.

    This relative increase in the median ROA value is calculated by taking the corresponding percentage value of 0.0354 % from Table 2 (i.e., the lowest for the period t − 2 to t − 4 across panels (a) through (d) and dividing it by the median starting ROA value of 4.96 %. This ratio (0.0354/4.96 = 0.007) is then converted to relative percentage increase by multiplying it by 100. In effect, we could say that at the minimum, ROA went from 4.96 to 4.995 %. All the relative increase in median values of ROA and other financial indicators were done in a similar fashion.

  5. 5.

    Financial leverage is a measure of the total debt a company takes to acquire assets. Profit margin (ROS) is calculated by dividing net income over sales.

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Correspondence to Constantin Blome.

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de Jong, P., Paulraj, A. & Blome, C. The Financial Impact of ISO 14001 Certification: Top-Line, Bottom-Line, or Both?. J Bus Ethics 119, 131–149 (2014). https://doi.org/10.1007/s10551-012-1604-z

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Keywords

  • ISO 14001
  • Environmental management systems
  • Event study
  • Financial performance
  • Top-line impact
  • Bottom-line impact