Why disclosing green practices can be a profitable business practice

This article is based on research by Annachiara Longoni

Annachiara Longoni, Director of Esade's BuNeD research group, has published empirical research that shows how disclosing environmental practices can benefit a firm's performance.

"Companies that are transparent and make their environmental practices public are likely to improve their financial outcome," says Longoni. "Our findings demonstrate that the broader the environmental disclosure practices, the greater and more positive the impact on financial performance."

To test their hypothesis, Longoni and her co-author Raffaella Cagliano from Politecnico di Milano looked into the green supply-chain practices of more than one hundred top Italian food firms: "The food industry is a useful context for analysing the impact of environmental disclosure initiatives, since the public has started to pay more attention to the responsible behaviours of food companies."

The researchers measured the level of environmental disclosure practices and compared the average return on investment of these firms to that of their industry peers.

Sharing environmental practices with stakeholders increases a firm's financial performance

Broad disclosure practices

The findings confirm that sharing environmental practices with a variety of stakeholders increases a firm's financial performance. But not all stakeholders are equal: improvement levels vary according to the type of stakeholders chosen.

When environmental disclosure practices are limited and restricted to primary stakeholders – such as suppliers, distributors, customers and final consumers, shareholders, employees and unions, and the local community – financial performance is not improved on average.

However, when environmental disclosure practices are more comprehensive and include a wider range of stakeholders – such as industrial associations and NGOs, mass media, regulatory institutions, banks, the scientific community and research institutions – financial performance is significantly improved.

Examples of sustainable practices

The type of information companies in the study disclosed included internal green supply-chain management practices in production processes – for example, efforts to reduce consumption of raw materials, water and energy, as well as pollution emissions.

Regarding external green supply-chain management practices, the information disclosed was related to supplier selection on the basis of sustainability competencies, sustainability performance and reputation, certifications, and overall capacity to develop sustainable products.

Disclosing environmental practices is not so good for improving environmental performance

The weak link: environmental performance

Disclosing environmental practices is good for business, but not so good for improving environmental performance.

Companies that make their environmental practices public are not necessarily more committed to addressing sustainability issues. In fact, disclosing this information through channels such as CSR reports could sometimes be a marketing tool to enhance brand image among stakeholders.

"Concerns among academics and practitioners are emerging about how statements in disclosure practices compare with the firm's real commitment to addressing sustainability issues," state the authors.

The study suggests that companies that disclose their environmental practices do not necessarily improve their environmental performance. 

In fact, the researchers warn that an imbalance between the level of information disclosed and the firm's real commitment to addressing sustainability issues could have negative consequences: "Discrepancies between environmental information disclosed and a firm's actual green practices may preclude both the possibility of creating a positive firm image and improving financial performance, and establishing a dialogue with stakeholders to improve environmental performance."

This article is based on research published in the International Journal of Operations & Production Management.