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When Does it Pay to be Green?

Chapter
Part of the INSEAD Business Press Series book series (IBP)

Abstract

The possibility that business can profit from environmental investments — the win-win hypothesis1 — has captured the imagination of academics, managers and the general public for quite some time. If investing in environmental protection were profitable,2 normal business practices would be conducive to sustainable societies. Based on this premise, academics have persistently looked for causal relationships between environmental investments and variables such as stock price and market share.3 The business case for sustainability exists indeed. Business schools around the world teach success stories of environment-oriented investments (or eco-investments, for short) that paid off, generated competitive advantage or even new market spaces. But if there are so many advantages for business, why is corporate proactive behavior not a widespread phenomenon? Why hasn’t commerce yet led us to sustainable societies? Although simple, it took a while for people to realize that the profitability of environmental investments is similar to other issues in business: it is conditional on specific circumstances. As Forest Reinhardt4 put it, the question is not whether corporations can offset the costs of eco-investments, but when it is possible to do so. In his view, the possibility for corporations to profit from eco-investments depends on “the economic fundamentals of the business, the structure of the industry in which the business operates, its position within that structure, and its organizational capabilities”.5 Hence, directing a firm’s efforts toward profit generation from cleaner technologies or green products might make business sense in certain circumstances, but not in all.

Keywords

Internal Combustion Engine Recycling Rate Battery Pack Sustainable Society Plasma Plant 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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Notes

  1. 1.
    This was also known as the Porter Hypothesis in academic circles. The debate was triggered by the publication of the article: Michael Porter, “America’s Green Strategy,” Scientific American, 264 (1991): 96.CrossRefGoogle Scholar
  2. The early stages of the debate can be found in: Richard A. Clarke et al., “The Challenge of Going Green,” Harvard Business Review, 72/4 (1994): 37–49; Noah Walley and Bradley Whitewead, “It’s not Easy to Be Green,” Harvard Business Review, 72/3: 46–52.Google Scholar
  3. See also Michael Porter & Clas Van der Linde, “Green and Competitive: Ending the Stalemate,” Harvard Business Review, 73/5 (1995): 120–134;Google Scholar
  4. and the subsequent criticism by Karen Palmer, Wallace Oates, and Paul Portney, “Tightening Environmental Standards: The Benefits-Cost or the No-Cost Paradigm?” Journal of Economic Perspectives, 9/4 (1995): 119–132.CrossRefGoogle Scholar
  5. 3.
    See, for instance: Andrew King and Michael Lenox, “Does It Really Pay to Be Green?” Journal of Industrial Ecology, 5/1 (2001): 105–116;CrossRefGoogle Scholar
  6. Gerard J. Lewis and Neil Stewart, “The Measurement of Environmental Performance: An Application of Ashby’s Law,” Systems Research and Behavioural Science, 20 (2003): 31–52.CrossRefGoogle Scholar
  7. Magnus Wagner, Stefan Schaltegger, and Walter Wehrmeyer, “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 (2002): 95–108.Google Scholar
  8. 4.
    Forest Reinhardt, “Environmental Product Differentiation: Implications for Corporate Strategy,” California Management Review, 40/4 (1998): 43–73.CrossRefGoogle Scholar
  9. 5.
    Forest Reinhardt, “Market Failure and the Environmental Policies of Firms: Economic Rationales for ‘Beyond Compliance’ Behavior,” Journal of Industrial Ecology, 3/1 (1999): 9–21.CrossRefGoogle Scholar
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    Benjamin Bonifant, Matthew Arnold, and Frederick Long, “Gaining Competitive Advantage Through Environmental Investments,” Business Horizons, 38/4 (1995): 37–48.CrossRefGoogle Scholar
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    Michael Porter and Mark Kramer, “Challenging Assumptions,” European Business Forum, Winter (2003): 3–4.Google Scholar
  12. 18.
    Detailed information can be found in: Fernando von Zuben, “The Thermal Plasma Technology Separates Aluminum from Plastic in Packages,” in Proceedings of the International Conference on Energy, Environment and Disasters (INCEED) (North Carolina, USA, 2005)Google Scholar
  13. 19.
    Megacities: São Paulo, National Geographic, 2005.Google Scholar
  14. 24.
    The drawing of this figure was influenced by similar ones addressing corporate philanthropy, developed by Michael E. Porter and Mark R. Kramer, “The Competitive Advantage of Corporate Philanthropy,” Harvard Business Review, 80/12 (2002): 56–69.Google Scholar
  15. 25.
    A good example of such approach is The Natural Step (TNS), developed by Karl-Henrik Robert, a Swedish physician. See, for instance: Brian Nattrass, Dancing with the Tiger: Learning Sustainability Step by Natural Step (Gabriola Islands, Canada: New Society Publishers, 2002);Google Scholar
  16. Brian Nattrass, The Natural Step for Business: Wealth, Ecology and the Evolutionary Corporation (Philadelphia, Pa: New Society, 1999).Google Scholar
  17. See also; Peter M. Senge et al., The Necessary Revolution: How Individuals and Organizations Are Working Together to Create a Sustainable World (US Green Building Council, 2008);Google Scholar
  18. Maximilien Rouer and Anne Gouyon, Réparer la planète: La révolution de l’économie Positive (Jean-Claude Lattès, 2007)Google Scholar
  19. 26.
    Stewart Hart, “Beyond Greening: Strategies for a Sustainable World,” Harvard Business Review, 75/1 (1997): 66–76.Google Scholar
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    Tom J. Brown and Peter Dacin, “The Company and the Product: Corporate Associations and Consumer Product Responses,” Journal of Marketing, 61/1 (1997): 68–84.CrossRefGoogle Scholar
  21. 28.
    For an overview of EPR, see: Thomas Lindhqvist, “Extended Producer Responsibility in Cleaner Production: Policy Principle to Promote Improvements of Product Systems” (PhD diss., IIIEE, Lund University, Sweden, 2000).Google Scholar
  22. 29.
    The term base of the pyramid has been coined by C. K. Prahalad and S. Hart, “The Fortune at the Bottom of the Pyramid,” Strategy + Business 26, 2002 to refer to Tiers 4 and 5 of the population, with a buy power parity of $1500/year or below, which together account for 4 billion people.Google Scholar
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    Renato J. Orsato, “Future Imperfect? The Enduring Struggle for Electric Vehicles,” in The Business of Sustainable Mobility, ed. Paul Niewenhuis, Philip Vergragt and Peter Wells (London: Edward Elgar, 2006), 35–44.Google Scholar
  24. 32.
    An extensive review of the various approaches used in the business and environment literature can be found in: Luca Berchicci and Andrew King, “Chapter 11: Postcards from the Edge: A Review of the Business and Environment Literature,” The Academy of Management Annals, 1/1 (2007): 513–547.CrossRefGoogle Scholar
  25. 34.
    Andrew King and Michael Lenox, “Industry Self-Regulation without Sanctions: The Chemical Industry’s Responsible Care Program,” The Academy of Management Journal, 43/4 (2000): 698–716.CrossRefGoogle Scholar
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    Torbjörn Brorson, Environmental Management: How to Implement an Environmental Management System Within a Company or Other Organisation, 3rd ed. (Stockholm: EMS, 1999).Google Scholar
  27. 36.
    Kathleen M. Eisenhardt, “Building Theories from Case Study Research,” Academy of Management Review, 14/4 (1989): 532–550.Google Scholar
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    Robert Stake “Case Studies,” in Strategies of Inquiry, ed. Norman K. Denzin and Yvonna S. Lincoln (Thousand Oaks, CA: Sage, 1994).Google Scholar
  29. 38.
    C. Eden and C. Huxham, “Action Research for the Study of Organizations,” in Handbook of Organizational Studies, ed. S. Clegg, C. Hardy, and W. Nord (London: Sage, 1996), 565–580.Google Scholar
  30. 39.
    Data was drawn from empirical research developed during 2004–2007, as part of the project called “Strategic Environmental Management in European and Australasian Firms,” awarded by the European Commission, Marie Curie Actions (MOIF-CT-2004-509911). Selected cases have also been chosen from data collected during the period 1999–2004, as part of the action research program with 35 Swedish companies at the International Institute for Industrial Environmental Economics (IIIEE), as well as the research about the global automobile industry presented in: Renato J. Orsato, “The Ecological Modernization of Industry: Developing Multi-disciplinary Research on Organization & Environment” (PhD diss., University of Technology, Sydney, Australia: 2001).Google Scholar
  31. 40.
    W. Chan Kim and Renée Mauborgne, Blue Ocean Strategy: How to Create Uncontested Market Space and Make Competition Irrelevant (Boston, MA, USA: Harvard Business School Press, 2005).Google Scholar

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© Renato J. Orsato 2009

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