Is going green better for business?

Ahmed Khabbush
Nov 5, 2019 · 5 min read

China has enjoyed many years of consistent, persistent and high rates of economic growth over the last 50 years and is forecasted to continue this growth for the foreseeable future. Incredible rates of growth have seen GDP per capita, or living standards, to seemingly grow exponentially of which the people of China have reaped the rewards.

Source: https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?locations=CN

However, with great economic growth comes a heavy price to pay. GDP output and growth in China has been increasing but along with this comes a negative impact on our environment. Climate change is a topical issue in which awareness is being raised as scientific evidence points towards dire outcomes; a subject that is continuously being discussed as we continue to carry out our unsustainable means of living.

China is currently tackling severe smog in the populous cities. It is well known that air pollution and poor air quality are causes of many health issues such as lung cancer, respiratory infections and pulmonary disease (BBC, 2018).[1] A study by The Lancet (2017) had found that roughly 6.5 million deaths are caused annually due to poor air quality. It is also suggested that air pollution, PM2.5 particles found in smog, can lower productivity in workers.[2] Chang et al. (2014) discovered that for every 10 micrograms of PM2.5 particles detected in the air; the productivity of pear pickers dropped by $0.41 per hour.[3]

Although the Chinese government has taken steps to become more environmentally friendly Beijing is suffering terrible smog conditions. In a 2015 report by real estate firm JLL and environmental consultancy Pure Living, it was concluded that 90% of office buildings were not reaching substantive levels of reduction of pollutants on days with bad air quality.

Output growth seems to be increasing at a higher rate than the efforts to reduce air pollution. The “pollution-haven hypothesis” is a theory that suggests that foreign firms shift their production to countries that have more lenient environmental standards to make the production process cheaper (Hufbauer and Schott, 1992).[4] This could be the case in China, where foreign firms with stricter rules or more “red-tape” move their production to the country to benefit from the more lax regulations. However, Porter and van der Linde (1995a, 1995b) suggest that more red tape in a country can provide a comparative competitive advantage for firms in that country as it deters foreign firms from entering the market.[5] Thus, the Chinese government could consider adding more regulations to lessen the environmental damage of businesses, but they should expect economic implications as a result.

Another way to improve the environmental impact of businesses, that is not legislative, is to encourage ethical and green practices through educational/informative schemes of the competitive benefits of eco-friendly actions. Environmental reporting can be described as a firm’s disclosure of its environmental performance information to its stakeholders.

In the journal article: “Does it really pay to be green?”, King & Lenox (2001) assessed the relationship between lower pollution and higher financial valuation.[6] Their study had found a correlation that suggests that lower pollution does raise the financial valuation of the firm, although the strength of the correlation may be questioned. Literature has supported this hypothesis that better environmental performance consequently results in an improvement in financial performance. Porter & van der Linde (1995), as well as Reinhardt (1999), show a causal link that argues pollution reduction provides cost savings in the long term by increasing efficiency and avoiding future liabilities and compliance costs.[7],[8]

Environmental reporting is generally voluntary therefore not all businesses choose to participate. Milanes (2014) has found that European companies are more like to undertake environmental reporting compared to their Asiatic counterparts.[9] This could be due to cultural or legislative differences, even though the current accounting is aware of the potential cost benefits of environmental reporting.

Going green has many benefits for the owners of businesses. Using green practices in the workplace creates an environment that is safe and healthy for the employees and also helps to minimise wastage (Lorette, 2019).[10] Less waste then, in turn, helps the business to lower the costs of operations in the short term and long term. In some areas of the world, governments and local councils often impose new regulations on businesses to reduce their negative impact on the environment. For example, a state could enforce a standard of pollution which has to be met or otherwise a substantial fine could be given to the firm. On the other side of the spectrum, environmental practices could be incentivised with policies that offer tax reliefs or even subsidies for green products such as solar panels or hybrid vehicles.

In my opinion, firms should consider making green changes in the present to benefit from immediate cost effects as well as to avoid future compliance costs. There are also other intangible advantages that should be considered when going green. Green initiatives help to stimulate a positive public response which strengthens the reputation for the firm and, additionally, provides a further marketing point. Initial costs may be high to make a transition to greener practices, but evidence suggests that it will be economically advantageous in the long run and, more importantly, it is sustainable. Using sustainable methods means that natural and finite resources are not wasted, preventing depletion as well as pollution. Renewable and clean sources are reliable and aid in the preservation of the environment.

References:

· [3] Chang, T., Graff Zivin, J., Gross, T. and Neidell, M. (2014). Particulate Pollution and the Productivity of Pear Packers. American Economic Journal: Economic Policy, 8(3), pp.141–169.

· [4] Hufbauer, G.C. and Schott, J.J. (1992), North American free trade: Issues and recommendations, Peterson Institute Press, Peterson Institute for International Economics.

· [6] King, A. and Lenox, M. (2001). Does it really pay to be green? Massachusetts Institute of Technology and Yale University.

· [2] Lancet, T. (2019). The Lancet Commission on pollution and health. [online] Thelancet.com. Available at: https://www.thelancet.com/commissions/pollution-and-health

· [10] Lorette, K. (2019). Why Businesses Should Go Green. [online] Smallbusiness.chron.com. Available at: https://smallbusiness.chron.com/businesses-should-green-766.html

· [9] Milanes-Montero, Patricia & Stone, Chris & Perez-Calderon, Esteban. (2014). Environmental Reporting in the Hospitality Industry: An International Analysis. Environmental Engineering and Management Journal. 13. 2531–2540. 10.30638/eemj.2014.283.

· [5] [7] Porter, M. and C. van der Linde. 1995. Green and competitive. Harvard Business Review September/October: 121 –134.

· [8] Reinhardt, F. 1999. Market failure and the environmental policies of Firms. Journal of Industrial Ecology 3(1): 9–21.

· [1] Stokel-Walker, C. (2019). The hidden air pollution inside your workplace. [online] Bbc.com. Available at: https://www.bbc.com/worklife/article/20181016-the-hidden-air-pollution-inside-your-workplace

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