Sustaining Competitive Advantage Through Corporate Environmental Performance

Abstract

This research investigates the relationship between a firm's environmental efforts and the sustainability of its competitive advantage by analyzing the effects of change in firm environmental performance on the persistence of profitability growth. We find that environmental resources allow a firm with superior financial performance to sustain its competitive advantage, and also complement the efforts of a poorly performing firm to hasten recovery from inferior financial performance. Our findings further indicate that firms attain such positive effects through enhanced profit margins resulting from improved environmental performance. Additionally, we observe that a corporate strategy of improving environmental performance demonstrates management's responsibility to maximize the shareholder wealth of a well‐performing firm. The results provide valuable insights to align environmental activities towards developing unique resources for sustaining the competitive advantage. The study provides an empirical support for creating economic value by benefiting the environment. Copyright © 2016 John Wiley & Sons, Ltd and ERP Environment

Manager’s Dilemma: Stockholders’ and Consumers’ Responses to Corporate Environmental Efforts

“…By examining corporate environmental efforts of large US-based firms, we find consumers and stockholders appreciating firms' endeavors to mitigate environmental damage through environmentally-friendly operations, such as the reduction of greenhouse gas emissions, energy usage, water usage, and waste disposal. The results are consistent with the hypothesis of creating competitive advantage through environmental innovations that have a positive influence on environmental protection [17][18][19][20]. However, we find a conflicting response from consumers, who are underwhelmed by firms' environmental management efforts.…”

“…Ferreri-Ferrero et al [8] highlight the generation of consistent competitive advantage in the ESG dimensions providing an intangible value that enhances firms' corporate financial performance. Several other research studies have recommended firms to develop core competencies and inimitable resources through environmental strategy so that they can sustain their competitiveness [20,25,[27][28][29]. However, as pointed out by Bergmann [30], a firm's obligation to meet short-term profitability is a hindrance to achieving the goal of sustainable development.…”

“…Therefore, any change in immediate sales could reflect consumers' perceptions of the firm's recent activities. In particular, when estimating consumers' perceptions of a firm's environmental actions, the argument places reasonably high importance on the fact that sales growth captures a fair amount of publicly-available information [20]. This study estimates consumers' responses through sales growth in 2013 with respect to the firm's environmental scores announced in the Newsweek Green Rankings 2012.…”

“…Following prior studies, the analysis includes firm and industry-specific characteristics in the investigation model as major control variables that may influence the sales or stock performance [20,53]. Firm size is measured by the natural logarithm of total assets, and the debt ratio is calculated by the ratio of the sum of total debt in current liabilities and long-term debt to the total assets.…”

“…Accordingly, firms are classified into five industry categories under the broad global industry classification standard (GICS) and the industry classification benchmark (ICB): Consumer Goods, Consumer Services, Industrials, Technology and IT Services, and Energy. These categories are used as dummy variables to condition the empirical model with industry-specific effects [20]. The industry dummy takes a value of 1 if the firm is in a related industry and 0, otherwise.…”