Sustainable business practices are more than just an ethical imperative; they are a prudent financial strategy. A study conducted by researchers from Kyushu University and published on December 10, 2024, in the journal Corporate Social Responsibility and Environmental Management, has highlighted that organisations demonstrating superior environmental performance and transparent reporting can achieve lower operational costs and heightened profitability.
The investment community increasingly values companies’ role in achieving carbon neutrality, fuelling environmental, social, and governance (ESG) investing expansion. In response to this growing trend, the Sustainability Accounting Standards Board (SASB) has developed an industry-specific framework aimed at assisting businesses in effectively conveying their sustainability risks and opportunities to investors. Numerous companies across various countries have started adopting this framework for disclosing their environmental data, with many jurisdictions moving towards making such transparency compulsory.
Despite these progresses, the precise impact of corporate environmental strategies on cost and profit metrics remains ambiguous. To clarify this, Professor Hidemichi Fujii and his team from the Faculty of Economics at Kyushu University comprehensively analysed financial and environmental data collected from 8,547 companies in 34 countries from 2015 to 2022.
To facilitate their analysis, the researchers devised two quantitative metrics: materiality-based scores, which focus on the relevance of disclosed environmental information, and overall ecological scores, which evaluate the extent of a company’s environmental initiatives. Siyu Shen, a graduate student at Kyushu University’s Graduate School of Economics and the study’s lead author, elaborates on the concept of financial materiality, which recognises that environmental priorities differ by industry. Thus, the idea of financial materiality aids investors in making informed decisions based on the relevance of the disclosed data.
According to the SASB’s categorisation, environmental concerns are divided into six sectors: greenhouse gas emissions and water and wastewater management. The relevance of each area varies by industry; for example, water management is crucial for the mining sector but of lesser importance to the financial services industry. Materiality-based scores assess how effectively a company addresses relevant environmental challenges, whereas overall environmental scores provide a broad measure of a company’s environmental efforts.
The application of these metrics revealed that companies with robust environmental engagement are likely to experience superior financial results, including improved profitability over both short and long terms, alongside reduced operational costs. Notably, firms focusing on disclosure and actual environmental performance tend to achieve better financial outcomes and attract more investor interest.
Professor Fujii stresses the importance of action over mere disclosure: “Investors are more concerned with what companies actually do for the environment rather than what they claim to do.” By actively addressing environmental issues, companies reduce perceived risks and enhance their market appeal as stable and ethical investment opportunities.
However, the researchers discovered that while overall environmental scores positively correlate with financial performance, materiality-based scores exhibit only a limited connection. This unexpected finding prompted further investigation into how ecological efficiency is valued differently across various countries.
An in-depth examination of the global data indicated that environmental efficiency holds more significance in financially robust nations like the USA and Japan than in developing countries such as Chile and Indonesia. Shen suggests that this disparity mirrors differences in environmental regulations and public awareness, explaining that in more developed economies, companies with established sustainability practices can leverage improvements in ecological efficiency to boost profitability and market valuation. Conversely, in less developed regions, where regulatory frameworks are still evolving, more emphasis is placed on environmental performance and transparency than efficiency.
The research team continues exploring how macroeconomic factors, including regulatory and social environments, influence corporate sustainability practices and financial outcomes globally. Through ongoing studies, they aim to provide empirical evidence of how environmental information disclosure and conservation efforts impact economic performance. Professor Fujii hopes that the insights gained from these international comparative studies will be instrumental in shaping effective policy planning and promoting proactive environmental responses worldwide.
More information: Siyu Shen et al, Does environmental materiality matter to corporate financial performance: Evidence from 34 countries, Corporate Social Responsibility and Environmental Management. DOI: 10.1002/csr.3062
Journal information: Corporate Social Responsibility and Environmental Management Provided by Kyushu University