Focus on Corporate Sustainability Investors are increasingly using the shareholder proposal process to push companies to integrate corporate sustainability-generally defined as environmental, social, and governance (ESG) considerations-into their business plans. Sustainability proposals typically promote climate change reporting, greenhouse gas emissions and energy efficiency goals, employee and management diversity, human and animal rights, fair labor practices, and worker and consumer health and safety. This article focuses on shareholder proposals asking companies to link executive pay to sustainability metrics, companies that already link pay to ESG goals, the role of the board in ESG issues, and proxy advisors' views. Sustainability Proposals Gain Traction Of all the shareholder proposals filed, 40 percent seek ESG action, according to an Ernst & Young report. A 2013 Investor Responsibility Research Center (IRRQ report looking at proposals from 2005 through 2011 identified the following trends: * Average support for all types of ESG proposals increased from 10 percent to 21 percent, with those seeking disclosure or reporting on ESG matters receiving greater support than those seeking changes in company policies and practices. * The number of proposals voted on that sought ESG measures in pay programs increased 35 percent. * The number of proposals voted on that asked companies to consider ESG expertise in director qualifications increased 73 percent. Proponents and Targets Faith-based organizations, public pension funds, and socially responsible investment (SRI) funds typically take the lead in sponsoring ESG proposals, and these shareholders have generally focused on the same group of high-profile companies, according to the IRRC report: * Of the roughly 350 companies targeted with ESG proposals, 30 large-cap companies received more than 500 proposals (or more than 40% of all proposals) during the 2005 to 2011 period. * Nearly half of the proposals voted on were at large-cap companies and more than one-third at mid-cap companies; smalland micro-cap companies made up 16 percent and 1 percent of the total, respectively. Some Success Although ESG proposals do not typically receive significant shareholder support, a 2013 proposal at CF Industries Holdings Inc. asking the company to provide a sustainability report on ESG issues received majority (67%) support, as did proposals on board diversity and political spending disclosure. An Institutional Shareholder Services (ISS) blog called this a "high-water mark" for environmental and social policy resolutions. The Ernst & Young report shows growing attention from institutional investors, with average support for ESG proposals in 2012 reaching 19 percent, nearly double the 2005 level. Linking Pay to Sustainability Goals Companies that link executive pay to ESG goals often focus on worker health and safety, such as the number of OSHA incidents. But shareholders are pressuring companies to consid.

1. Focus on Corporate Sustainability
Investors are increasingly using the shareholder proposal
process to push companies to integrate corporate sustainability-
generally defined as environmental, social, and governance
(ESG) considerations-into their business plans. Sustainability
proposals typically promote climate change reporting,
greenhouse gas emissions and energy efficiency goals,
employee and management diversity, human and animal rights,
fair labor practices, and worker and consumer health and safety.
This article focuses on shareholder proposals asking companies
to link executive pay to sustainability metrics, companies that
already link pay to ESG goals, the role of the board in ESG
issues, and proxy advisors' views.
Sustainability Proposals Gain Traction
Of all the shareholder proposals filed, 40 percent seek ESG
action, according to an Ernst & Young report. A 2013 Investor
Responsibility Research Center (IRRQ report looking at
proposals from 2005 through 2011 identified the following
trends:
* Average support for all types of ESG proposals increased
from 10 percent to 21 percent, with those seeking disclosure or
reporting on ESG matters receiving greater support than those
seeking changes in company policies and practices.
* The number of proposals voted on that sought ESG measures
in pay programs increased 35 percent.
* The number of proposals voted on that asked companies to
consider ESG expertise in director qualifications increased 73
percent.
Proponents and Targets
Faith-based organizations, public pension funds, and socially
responsible investment (SRI) funds typically take the lead in
sponsoring ESG proposals, and these shareholders have
generally focused on the same group of high-profile companies,

2. according to the IRRC report:
* Of the roughly 350 companies targeted with ESG proposals,
30 large-cap companies received more than 500 proposals (or
more than 40% of all proposals) during the 2005 to 2011 period.
* Nearly half of the proposals voted on were at large-cap
companies and more than one-third at mid-cap companies;
smalland micro-cap companies made up 16 percent and 1
percent of the total, respectively.
Some Success
Although ESG proposals do not typically receive significant
shareholder support, a 2013 proposal at CF Industries Holdings
Inc. asking the company to provide a sustainability report on
ESG issues received majority (67%) support, as did proposals
on board diversity and political spending disclosure. An
Institutional Shareholder Services (ISS) blog called this a
"high-water mark" for environmental and social policy
resolutions.
The Ernst & Young report shows growing attention from
institutional investors, with average support for ESG proposals
in 2012 reaching 19 percent, nearly double the 2005 level.
Linking Pay to Sustainability Goals
Companies that link executive pay to ESG goals often focus on
worker health and safety, such as the number of OSHA
incidents. But shareholders are pressuring companies to
consider a broader range of ESG factors, such as board and
management diversity, human rights, and environmental
leadership (e.g, reducing greenhouse gas emissions and energy
efficiency).
The growing interest in linking executive pay to ESG goals is in
part a recognition that ignoring sustainability risks-such as
costs of environmental disasters and cost savings from energy
efficiencies-can have a significant negative effect on a
company's bottom line, and failing to consider sustainability
issues-such as sourcing materials from suppliers that are not
socially or environmentally responsible-can harm a company's
reputation.

3. 2013 Proposals
This year, proposals at two S&P 500 companies, Caterpillar and
Dominion Resources, asked the companies' boards to adopt
policies tying senior executives' incentive pay to nonfinancial
measures, such as reducing environmental damage from
company operations.
The proponent of the Caterpillar proposal, the Nathan
Cummings Foundation, offered the following arguments in
support of its position:
* Compensation incentives should include metrics that promote
sustainable value creation and reduce negative environmental
impacts so they are aligned with business strategies for creating
sustainable, long-term shareholder value and mitigating risks.
* Deliberations on executive compensation should consider
social and environmental factors as well as financial and
strategic goals.
* Many companies have added sustainability criteria to the mix
of metrics used to determine executive compensation.
* Greater emphasis should be placed on sustainability factors in
incentive pay in light of recent environmental incidents that
caused significant losses to shareholders.
* Caterpillar countered with the following arguments:
* Adopting the proposal is unnecessary because Caterpillar has
been committed to responsible business practices for more than
85 years and is continuously looking to improve sustainability
efforts.
* Caterpillar was named to the 2012 Dow Jones Sustainability
Indexes for the 12th straight year as one of the sustainability
leaders in the industrial engineering sector. Such longstanding
recognition has helped build Caterpillar's image as a responsible
corporate citizen.
* The company's executive pay program already motivates
executive officers to operate the business in a sustainable
manner and create long-term value for stockholders.
Similarly, Dominion Resources defended its current executive
compensation program, saying it creates a strong incentive for

4. executives to operate the business in a sustainable manner by
establishing performance goals designed to create long-term
shareholder value. The company also cited its leadership in the
areas of stewardship and sustainability and its commitment to
being a responsible corporate citizen and providing safe, clean,
and reliable energy.
Although the proposals received only about 7 percent of
shareholder support (see Caterpillar and Dominion Resources),
they and others like them are sending a message to companies
that sustainability may be a factor to consider in setting pay
plan goals.
Companies Using Sustainability Goals
A number of companies already include sustainability goals in
their executive pay plans. A 2012 Glass Lewis & Co. report
notes that 42 percent of several hundred companies comprising
11 global market indices provided a link between executive pay
and sustainability, up from 29 percent in 2010.
Among S&P 500 companies, 43 percent link executive pay to
ESG goals, according to an April 2013 IRRC/Sustainable
Investments Institute report. The most common goals-in
descending order-were social criteria (e.g., safety, employee
retention, and diversity), environmental factors (including toxic
spills, greenhouse gas emissions, and energy efficiency), and
ethical factors {e.g, misstatements of financials and ethical
breaches). Utilities and energy and materials companies were
the businesses most likely to consider environmental and social
factors, and utilities and energy companies were most likely to
consider ethics.
A 2012 report by the United Nations-backed PRI Association, a
global network of investors that recommends companies link
executive rewards to ESG metrics, noted the following
companies included sustainability goals in their pay plans:
The Board's Role
Sustainability issues have traditionally been the purview of
management. Shareholders, however, are pushing corporate
boards to oversee policies and decisions that affect corporate

5. sustainability and to consider ESG experience in evaluating
director qualifications.
Board Oversight
Ceres, a network of investors that addresses environmental
issues, reviewed committee charters and governance documents
and found that 28 percent of 600 large US companies mention
board oversight of sustainability. In The Road to 2020:
Corporate Progress on the Ceres Roadmap for Sustainability,
Ceres recommends boards establish a committee that has clear
accountability for sustainability. The organization also
encourages companies to include sustainability performance
measures as a core component of compensation packages and
incentive plans for executives.
A 2011 Glass Lewis report found that 44 percent of S&P 100
companies had a boardlevel committee with explicit oversight
responsibilities for issues related to sustainability. The proxy
advisor views board-level oversight as a key indicator that
companies place appropriate attention on sustainability and as a
mechanism investors can use to hold boards accountable for
environmental and social performance.
Considering ESG in Director Qualifications
Partly in response to pressure from shareholders, companies are
increasingly including ESG qualifications in their director
recruitment process. The number of shareholder proposals voted
on that asked companies to consider ESG expertise in director
qualifications increased 73 percent from 2005 to 2011,
according to the IRRC report.
Some companies, like Prudential Financial, have shown a
commitment to recruiting directors with skills in sustainability
and environmental responsibility. Others have established ESG
committees. For example, Alcoa's Public Issues Committee
provides guidance on matters relating to social responsibility,
environmental sustainability, and health and safety. At Chevron,
22 percent of shareholders voted in favor of a proposal to
nominate a director with environmental expertise, and at
Freeport-McMoRan Copper and Gold, 30 percent of

6. shareholders supported a similar proposal.
Proxy Advisor Views
The two major proxy advisory firms, ISS and Glass Lewis,
usually support shareholder proposals that address ESG issues
generally. But when considering proposals linking executive
pay to environmental and social criteria, ISS typically makes
voting recommendations on a case-by-case basis under its
policy guidelines, considering the following factors:
* Whether the company has significant or persistent
controversies or regulatory violations regarding social and
environmental issues;
* Whether the company has management systems and oversight
mechanisms in place regarding its social and environmental
performance;
* The degree to which industry peers have incorporated similar
nonfinancial performance criteria in their executive
compensation practices; and
* The company's current level of disclosure regarding its
environmental and social performance.
If a shareholder proposal receives majority support and the
company does not implement the proposal, ISS may recommend
shareholders vote against director nominees.
If at least 25 percent of shareholders vote for a shareholder
proposal, Glass Lewis believes the board should demonstrate
some level of engagement and responsiveness to the concerns.
Interest in Sustainability Likely to Broaden
In most cases, ESG proposals do not receive significant
shareholder support. This may change, however, as more
attention is placed on the way sustainability risks affect the
bottom line and company reputations. According to the IRRC
report, shareholder support for ESG proposals generally tends to
be highest at companies in which investors question board
performance and to rise after adverse events, such as a financial
crisis or environmental disaster. The report concludes that,
although the proposals are not yet garnering significant levels
of support, they raise issues of importance to some shareholders

7. and may be early indicators of matters that may concern all
investors in the future.
Sustainability issues are also increasingly part of the ongoing
dialogue between companies and investors, with support for
incorporating ESG goals into corporate policy development
expanding beyond social welfare and environmental advocacy
organizations. For example, in response to shareholder
concerns, a group of global stock exchanges is considering a
proposal to require listed companies to disclose sustainability
information to shareholders as part of the Sustainable Stock
Exchanges (SSE) initiative. The proposal was drafted by a
coalition of investors led by Ceres this fall.
DOES BEING GREEN RESULT IN IMPROVED FINANCIAL
PERFORMANCE?
Many organizations are attempting to become more
environmentally conscientious (Green) in response to customer
demands, improved efficiencies, and the threat of government
regulation. While the benefits have been highlighted
anecdotally, this study attempts to assess whether companies
that are more Green do reap the economic benefits as reflected
in their financial performance. Using the Green rankings from
Newsweek, our study identified 3 categories of firms. The
results indicated that firms which were higher ranked in the
Newsweek survey (more Green firms) actually had lower sales
growth compared to their less Green counterparts. In addition,
the Green firms' market valuations were not different from their
counterparts. The only identified benefit was a lower growth in
expenses for the Green firms, indicating an improvement in
operational efficiency. Therefore, this study was unable to find
the many benefits touted by anecdotal studies of Green
businesses.
(ProQuest: ... denotes formulae omitted.)
INTRODUCTION

8. There has been a recent trend in business and information
technology (IT) to become more environmentally conscientious
(Green). One significant driver of this trend has been regulatory
pressures. In 2009, the U.S. House of Representatives passed
the American Clean Energy and Security Act, which was
designed to restrict the amount of greenhouse gases in an effort
to fight global warming and climate change through "cap and
trade" (House Bill 2454, 2009). While it was never enacted into
law, the bill did raise the profile and threat associated with
carbon emissions. In addition, the United States Environmental
Protection Agency (U.S. EPA) has continued to expand its
authority through the Clean Air Act Amendments of 1990,
providing benefits of reduced toxic emissions but at a cost to
business (U.S. EPA, 2011).
In addition to regulatory pressures, business and IT have also
determined that Green business activities also possess financial
incentives. GreenBiz.com (GreenerComputing Staff, 2010) also
reports that companies are implementing sustainable strategies,
initiatives and events in order to meet the changing needs of
their customers. In May 2009, Symantec, a major security
software company, released its Green IT Report which found
that Green IT budgets are rising, IT is willing to pay a premium
for Green equipment, and Green IT initiatives have become
more of a priority. In addition, Newsweek (2011) reports that
companies ranked highly in their Green surveys are approaching
Green projects, even in a poor economic climate and a declining
threat of regulation such as "cap and trade." These instances,
along with anecdotal evidence from cases studies, would
indicate that financial benefits could also be a significant driver
of Green initiatives.
While many sites such as GreenBiz.com are trumpeting the
benefits of being Green, it is not clear whether a Green strategy
is financially beneficial or simply a means of survival. If Green
activities are essentially a necessary cost of doing business,
then it will be important for regulatory bodies to determine the
appropriate level of effort that companies exert to ensure

9. societal well-being. However, if Green activities do possess
financial benefits that give successful companies a strategic
advantage, then market forces should challenge firms to become
more Green without the pressures from regulatory bodies.
Anecdotal evidence is mixed in this regard. After examining the
sustainability initiatives of 30 large corporations, Nidumolu,
Prahalad, and Rangaswami (2009) concluded that sustainability
provides organization and technological innovations that will
result in additional revenues and profits. Furthermore,
organizations are also wasteful in production when many of
their resources could be reused. Recycling can be a great
method for lowering waste outputs and reducing costs.
However, companies like Caterpillar have spent billions of
dollars to meet emissions standards set by the EPA, passing
along the higher costs in the price of its machines. "We are
going to meet our social obligation, but society is going to pay
for it," said Jim Parker, Caterpillar vice president of
distribution in the Americas (Gordon, 2011).
The purpose of this study is to empirically evaluate whether
companies reputed to have a Green focus are benefitting
financially from their efforts. Newsweek has created a ranking
system that incorporates a company's environmental impact
(emissions and water usage), management policies, and
management disclosures. These three factors are used in
determining a composite figure used to rank the firms by level
of Greenness. Furthermore, some industries have more or
different challenges in conducting Green activities relative to
others (i.e. energy companies vs. technology). However, if a
firm is a leader in its industry associated with Green activities,
then it should have better financial results relative to its less-
Green peers if a Green focus does result in improved financial
performance. While there have been many purported benefits
with a Green focus, our study was only able to identify a slower
growth rate in expenses for Green firms. Somewhat
surprisingly, the most Green firms in each industry actually
experienced the slowest revenue growth. The one benefit

10. associated with Green firms was that the standard deviation of
the different performance measures was consistently smaller
than their peers, indicating a more uniform performance among
Green firms.
The next section of the paper will establish the hypotheses that
will be tested, as well as the methodologies and data. The
following section will provide descriptive statistics of the
variables in this study, as well as the tests of the hypotheses.
The paper will conclude with our findings, limitations, and
suggestions for future research.
HYPOTHESES, METHODOLOGIES, AND DATA
Some studies have found that adopters of a Green strategy allow
them to achieve a competitive advantage. Companies not
following the trend of "going Green" will fall behind the pack
and struggle to find success (Nidumolu et al., 2009). After
examining the sustainability initiatives of 30 large corporations,
Nidumolu et al. (2009) concluded that sustainability provides
organization and technological innovations that will result in
additional revenues. There are also benefits to organizations
from a marketing standpoint. Helping the environment is good
for marketing as consumers are simply attracted to
environmentally friendly products. Surveys have shown that
Millennials are more apt to switching to products that are
environmentally sound and are willing to pay more for green
products (Brown, 2009; GreenerComputing Staff, 2010). With
global warming being a concern on the mind of consumers in
the supermarket, most consumers are demanding carbon labeling
on products-this ultimately impacts many of their purchase
decisions (Deame, 2008). Managers are increasingly becoming
aware of this trend. In a 2009 EventView survey of corporate
marketing managers, 15% of respondents were planning to
pursue green tactics as part of their event-marketing program in
the next year while 46% said they were already pursuing green
marketing tactics (Clarke, 2009). Green products offer
opportunities for companies to capture greater market share,
thus enhancing their revenues.

11. In addition, regulatory compliance will also cause companies to
incur additional costs of production, which could then be passed
on their customers through higher priced products. As noted
earlier, companies such as Caterpillar are spending large sums
of money to meet EPA requirements while passing on these
costs in higher charges to their customers (Brown, 2009).
Assuming that these compliance efforts result in a company
being more Green, and that these costs can be passed on to their
customers through higher prices, then we can posit that
revenues should also increase for these companies.
In both situations, as a company becomes more Green, we can
expect an increase in revenues relative to its less Green peers.
Therefore, the first testable hypothesis is as follows:
HI: The revenues of a more Green company will be growing
fester than a less Green company.
In this analysis, a "more Green" company is one that has earned
a higher ranking inNewsweek's Green Rankings (Newsweek,
2012). More specifically, companies are included in this study
only if they appeared in both the 2011 and 2012 rankings.
Newsweek introduced the Green Rankings in 2009, though only
the 2011 and 2012 rankings utilize the same methodology, thus
are comparable. It is reasonable to expect industry differences
within these rankings as well. To control for industry
differences, "greenness" is defined as a relative number within
an industry as defined by Newsweek, thus the most "green" in a
given industry is 100. "Greenness" is calculated as follows:
...
In the 2011 rankings the largest 500 companies were selected
based on June 30, 2011 revenue (most recent fiscal year),
market capitalization and employees (Newsweek, 2011),
similarly the 2012 rankings were determined based on these
figures as of April 30, 2012 (Newsweek, 2012). Hence 2012
revenue growth is measured by the cumulative change in gross
revenues over the preceding four fiscal years (2008-11):
...
Therefore, the Revenue Growth for the 2012 year would use

12. Gross Revenues for 2011 divided by Gross Revenues for 2008.
The model for evaluating HI is:
Revenue Growthit = Greennessit + eit
A second advantage that has been identified among case studies
are the large cost savings associated with Green initiatives.
There are three main areas that have been identified as sources
of cost savings: decreased energy consumption, reduction of
waste, and general reduction of costs. All of these factors
should have a positive impact on a firm's Green ranking as they
either reduce the environmental impact or positively impact
management's policies that are utilized in the Newsweek
formula.
Inefficient energy consumption is a major problem that leads to
wasteful spending at many organizations. Daoud (2009) notes
that energy consumption reduction is the most visible goal for
many organizations. By reducing wasteful consumption, an
organization can dramatically lower costs (Nidumolu et al.,
2009). There are several ways that organizations can prosper
financially by going green. The U.S. Postal Service for example
saved over $2.25 million by using virtualization to reduce
power consumption in its data centers and replacing
workstations with power saving monitors (DiRamio, 2009).
Microsoft was able to save $250,000 in annual energy costs just
by raising the temperature of their server rooms (Miller, 2008).
Servers use an astounding amount of energy in the United
States-this amounted to about 1.2% of all electrical use with a
bill of $2.7 billion in 2005 (Koomey, 2007). A lot of this energy
can be conserved by doing things such as buying more efficient
servers, moving data centers to cooler locations or near a
renewable energy source, and turning off machines that are no
longer required. Cost reduction is undoubtedly a benefit that
every organization can enjoy.
Organizations are also wasteful in production when many of
their resources could be reused. Recycling can be a great
method for lowering waste outputs and reducing costs. Cisco
provided a good model for reuse when they created a recycling

13. group in 2005. Reuse of equipment went from 5% in 2004 to
45% in 2008. Recycling costs were reduced by a total of 40%,
resulting in an additional $ 100 million in profits (Nidumolu et
al., 2009). Trimming waste is quite appealing when it allows
organization to save money in a Green way.
Companies can also help save costs in a Green way through
activities such as telecommuting and virtual meetings.
According to Dennis Pamlin from the World Wildlife Fund,
"Increasing virtual meetings and telecommuting today could,
without any dramatic measures, help to save more than 3 billion
tons of C02 emissions in a few decades; this is equivalent to
approximately half of the current U.S. C02 emissions"
(Buttazzoni, Rossi, Pamlin, and Pahlman, 2009). Organizations
are also learning that telecommuting is a great way to save costs
into the millions of dollars. It was reported that AT&T saved an
estimated $550 million by telecommuting (Nidumolu et al.,
2009). Additionally, AT&T estimated that their telecommuters
saved about 5.1 million gallons of gasoline (Buttazzoni et al.,
2009). Virtualization and other consolidation techniques with
computer hardware helped Citi save $1 million on power and
cooling costs by consolidating 15% of its 42,740 servers
(Wasserman, 2009).
While all of these cost-saving initiatives should help financial
performance, many of these require a significant investment in
infrastructure and expertise. Many activities, such as
virtualization, require a significant investment in technology.
And energy-saving endeavors can require a significant
investment in infrastructure. Microsoft built an air-cooled data
center in Dublin, Ireland which runs without any chillers: a
process accomplished simply by drawing in cooler outside air
(Miller, 2009b). It is estimated that this will result in decreased
electrical costs and also considerable savings in water usage.
Microsoft is also setting a trend by building new data centers
near hydroelectric power sources, again reducing the usage of
fossil fuels (Wasserman, 2009).
The other problem facing many IT organizations wanting to

14. embark on a sustainable IT development endeavor is that it
requires a certain expertise, which current employees may not
possess. A few essential competencies are: a) the ability to
redesign operations to use less energy and water, produce fewer
emissions, and generate less waste; b) the capacity to ensure
that suppliers and retailers make their operations eco-friendly;
c) the skills to know which products or services are most
unfriendly to the environment; and d) the management knowhow
to scale both supplies of green materials and the manufacture of
products (Nidumolu et al., 2009). Advanced training and outside
consulting are essential necessities that will add costs to an
organization.
Because many of the cost-savings activities require significant
up-front costs, it is unclear whether Green companies will enjoy
a net reduction of operating costs relative to their less Green
peers. A second confounding factor is related to the timing of
the benefits relative to the additional costs incurred. Because
the costs of becoming more Green tend to be up-front while the
full benefits will not be realized until the initiatives are fully
implemented, even effective Green initiatives may not appear
successful in the early periods. However, it is expected that
Green companies should have different costs relative to their
peers due to their initiatives. This leads to the next two testable
hypotheses:
H2a: The operating expenses (excluding depreciation and
amortization) of a more Green company will be decreasing (or
growing more slowly) relative to a less Green company.
It is assumed that Green companies will be receiving benefits
from its programs that eliminate waste, reduce energy
consumption, or minimize other operating expenses. While
many green initiatives require upfront capitalized investments,
they tend to provide the benefits from cost savings. While total
operating expenses may be increasing for a growing company, it
is expected that the savings from Green initiatives will slow the
pace of growth relative to the companies who are less Green.
Similar to the rationale provided above, the cost efficiency of a

15. company in the 2012 rankings is based upon 2011 fiscal year
financial statements:
...
The model for evaluating H2a is:
Operating Expense Growthit = Greennessit + eit
H2b: The depreciation and amortization expenses of a more
Green company will be increasing relative to a less Green
company.
It is assumed that Green companies will need to incur
significant capital expenditures in order to be Green and obtain
the future benefits. These capital expenditures in facilities and
intellectual property will result in higher depreciation and
amortization expenses in the future periods. Therefore, we
expect Green companies will have a higher growth in their
depreciation and amortization expenses relative to the less
Green companies. Extending the rationale provided above, the
depreciation and amortization (D&A) expense growth of a
company in the 2012 rankings is based upon 2011 fiscal year
financial statements:
...
The model for evaluating H2a is:
D&A Expense Growthit = Greennessit + eit
By developing Green technologies, companies are gaining new
competencies that will be hard for slower movers to match. The
goal of becoming environmentally friendly is quite similar to
those of corporate innovation; hence, sustainability is being
treated as "innovation's new frontier" (Nidumolu et al., 2009).
By participating in Green initiatives, companies can also get
ahead of the curve by adhering to the strictest environmental
regulations even though it may cost them money in the short
term. For instance, if Ford and Chrysler had complied with
strict California emissions standards in 2002, they would now
be ahead of their competition when the standards are enforced
nationwide in 2016 (Nidumolu et al., 2009). By developing new
ideas towards the goal of environmental sustainability,
organizations are also creating promising ideas for business.

16. These competitive advantages should lead to greater future
revenues, even though current revenues may not reflect those
benefits.
In addition, Green cost-saving strategies require a significant
up-front investment, with the benefits to be realized in future
savings. In 2009, IBM announced that it would turn Dubuque,
Iowa into a model for environmental sustainability using
technology to monitor water and energy in order to calculate the
maximum benefits (Hamm, 2009). In 2008, HP made plans to
save $8 million annually by building new data centers that used
Dynamic Smart Cooling, which uses computational fluid
dynamics (CFD), a sensor network, and a centralized server to
control cooling (Miller, 2008). While it is expected that these
investments will result in cost savings to justify the significant
investments, those cost savings may not be fully reflected as yet
in their financial reports.
A Green brand is also beneficial from a marketing standpoint.
Helping the environment is good for marketing as consumers
are simply attracted to environmentally friendly products. As
discussed earlier, significant research shows large cross
sections of consumers (e.g., Millennials) are partial to Green
products, willing to pay more for those more environmentally
friendly and even prefer to work for companies reputed to be
more environmentally sensitive. Managers keenly aware of
these facts continue to increase pursuit of green marketing
tactics. However, Greenbiz.com reports that organizations can
struggle to translate their Green leadership into a current market
advantage (GreenerComputing Staff, 2010). These all suggest
that current financial performance may not reflect the full value
of a company's Green activities.
While current financial measurements in a company's financial
statements may not reflect the ultimate value of its Green
activities, the stock market is supposed to be efficient.
Therefore, the third testable hypothesis is as follows:
H3: The stock market valuation of current reported accounting
numbers for a more Green company will be greater than for a

17. less Green company. As in Dumev and Kim (2005) and Kaplan
and Zingales (1997), Tobin's Q is used as a proxy for stock
market valuation. Tobin's Q is the market value of assets
divided by the book value of assets, thus a larger measurement
indicates a higher forward-looking valuation, perhaps indicative
the value of Green investments not captured in book values.
Similar to Kaplan and Zingales (1997) the market value of
assets is equal to the book value of assets plus the market value
of common equity less the sum of the book value of common
equity and deferred taxes (from the balance sheet). To be most
directly comparable to Newsweek's rankings, data from the most
recent fiscal year is used in these calculations. Thus, the model
for evaluating H3 is:
Tobin's Q^sub it^ = Greenness^sub it^ + e^sub it^
RESULTS
Table 1 shows the descriptive statistics of the variables used in
this study. During the two years of evaluation, companies on
average had an increase in revenues and expenses, but, on
average, experienced a decrease in Tobin's Q. Average revenue
and operating expense growth increased in 2011, while growth
of depreciation and amortization slowed.
In order to evaluate our hypotheses, we have categorized the
sample of firms into the top one-third (TOP), middle one-third
(MID), and bottom one-third (BOT) in terms of the relative rank
of Greenness within their respective industries. Table 2 shows
the descriptive statistics associated with different categories of
firms. In Panel A, Revenue Growth is shown for the two sample
years for the different categories of firms. One of the more
remarkable observations is that Revenue Growth for the TOP
firms was smaller for both of the sample years relative to either
the MIDDLE or BOTTOM firms. This conflicts with the
expectations of Hypothesis 1, in which we expected more Green
firms to have higher revenue growth rates, as Green marketing
would be expected to drive higher sales prices, greater unit
sales, or both. The other interesting finding was that the
standard deviation for Revenue Growth was the smallest for the

18. TOP firms in both sample years. While the TOP firms were not
growing as rapidly as the other categories, the growth rate was
less sporadic or more stable across the sample firms.
In Panel B, the different categories are shown for the Operating
Expense Growth variable for both sample years. Consistent with
Hypothesis 2A, the growth in operating expenses (excluding
depreciation and amortization) is lower for the TOP category of
firms and the MIDDLE firms show slower or equal growth
relative to the BOTTOM firms. In addition, the standard
deviation for the Operating Expense Growth variable was the
smallest for the TOP firms in both sample years, similar to the
Revenue Growth variable. The other variable related to
expenses, D&A Expense Growth, is shown in Panel C.
Similar to Operating Expense Growth, and contrary to
Hypothesis 2B, the D&A Expense Growth variable was the
smallest for the TOP firms for both sample years and, again,
MIDDLE firms experienced slower growth relative to BOTTOM
firms. Another interesting observation was that D&A Expense
Growth was greater than the Operating Expense Growth and
Revenue Growth for every category in both sample years. And
finally, the standard deviation for the TOP firms was smaller for
the two sample years except for one instance. While the
BOTTOM (2011) had the second smallest standard deviation,
the BOTTOM (2010) had the highest standard deviation among
the different category years. The general conclusion was that
the most Green companies had the smallest rates of growth in
the both expense categories, and the rate of growth was the
most stable across those firms. Panel D reports the Tobin's Q
score for each of the categories in the two sample years. There
are two predominant findings associated with this variable. For
both sample years, the TOP category had the lowest Tobin's Q
score and the BOTTOM category had the highest Tobin's Q
score. This is the opposite of what was expected from
Hypothesis 3. The other interesting finding was that the
standard deviation of the Tobin's Q scores was the smallest for
the TOP firms and the largest for the BOTTOM firms. Similar

19. to the other variables in this study, firm's that are more Green
had the most stable scores while the firms that are the least
Green had the greatest variability.
In performing the hypothesis testing, z-statistics were computed
on the differences between the different categories on the
variables of interest. In each case, the category hypothesized to
be smaller is subtracted from the larger, thus producing an
expected positive z-statistic. The results in Panel A of Table 3
are used in evaluating Hypothesis 1. As can be seen, the most
Green firms (TOP) had smaller revenue growth rates relative to
both the MIDDLE and BOTTOM categories, and four of six are
signficant at the 5% level opposite the expected direction.
These findings do not support Hypothesis 1.
The results in Panel B are used in evaluating Hypothesis 2A.
The TOP firms for both sample years had smaller growth in
operating expenses (excluding depreciation and amortization)
than both the MIDDLE and BOTTOM categories. Combined
with the earlier observation of lower operating expense
variation for the TOP firms, this does support Hypothesis 2A in
that Green firms are able to better eliminate waste and be more
efficient, leading to lower operating expenses relative to their
less Green peers. However, the results in Panel C do not support
Hypothesis 2B. The Green firms did not have higher
depreciation and amortization charges relative to their less
Green peers. In fact, the results were significant opposite the
hypothesized direction for four of the six instances. One of the
confounding results was that TOP firms had lower growth rates
for both revenues and expenses. In addition, their rate of growth
of expenses was lower for both operating expenses (excluding
depreciation and amortization) and for charges on long-term
infrastructure (depreciation and amortization expenses).
The results in Panel D are used to test Hypothesis 3. In all
situations, the TOP firms did not have significantly higher
Tobin's Q scores relative to their less Green peers. In fact, the
most Green firms actually had lower scores, although none of
the differences were statistically significant. These results do

20. not support Hypothesis 3.
CONCLUSION
The purpose of this study was to empirically examine some of
the purported benefits associated with Green businesses. By
utilizing the green rankings of the largest 500 companies in the
U.S. from Newsweek's annual survey, which evaluates
companies based on the environmental friendliness of their
business practices, this study evaluated companies based on
reported financial results. While many case studies and
anecdotal evidence have identified advantages associated with
Green business practices, this study is unable to provide
empirical support based on two recent three year periods. In
fact, Green companies exhibited lower growth rates of revenues.
Consistent with popular expectations, however, this study finds
that the growth rate in operating expenses is slower for more
Green companies. Moreover, our sample of Green companies
show less variation in both revenue and expense growth. Our
results might suggest that the benefits of Green are more
quickly experienced in a reduction of operating expenses and
perhaps exceptional revenue growth is a longer term prospect. It
could also indicate that by adopting Green business practices,
TOP companies have more advanced and uniform business
practices and processes which result in more consistent and
predictable financial performance.
While this study attempts to evaluate the relationship between
Green business practices and financial performance, there are
some other important aspects to consider in future research. The
Green rankings consider three different factors in determining
the composite score, of which the environmental impact is only
one component. In addition, Newsweek's rankings have a very
short history. Will companies with a Green emphasis
consistently be highly ranked by Newsweek, and will a
consistently high Green ranking have a higher association with
improved financial performance relative to companies who are
consistently not Green?

21. Corporate Sustainability
Review the articles "Does Being Green Result in Improved
Financial Performance?" and "Focus on Corporate
Sustainability" from this unit's studies. These two articles
present contrasting views on the value added when an
organization invests in environmental sustainability, which is
one important aspect of overall corporate sustainability.
Environmental sustainability has become a topic on corporate
agendas only within recent history. Today, some consumers
choose their providers based on a company's carbon footprint.
For your initial post in this discussion, decide which view you
wish to adopt on corporate concerns about environmental
sustainability:
1. Being green is profitable, and positively impacts corporate
and environmental sustainability. Identify several examples.
2. Being green has a negative impact on profit, and is a trend
that cannot that corporations and businesses cannot financially
sustain. Identify several examples.