Environmental Sustainabilitys Impact On Earnings

Abstract

There is ever increasing social pressure for businesses to adopt sustainable methods of production to minimize environmental impacts. While this may be laudable, businesses have a responsibility to their stakeholders to maximize financial results. These potentially competing objectives are often referred to as part of the triple bottom line. In this paper, we restrict our attention to the original bottom line, Earnings per Share, and the Environmental bottom line of conserving resources. Focusing on the health care sector, we find a clear relationship between EPS and the adoption of sustainable practices. We augment this study with a look at expectations. That is, to what extent are sustainable business practices affecting the financial markets assessment of expected future success v. current financial success? Future expectations could be affected if environmental initiatives signal enlightened leadership or if a business that adopts environmental initiatives is thus well-positioned to face regulatory uncertainty in the future. Either of these management advantages would raise expectations of future success and thus be reflected in higher stock prices today, beyond what is currently captured in earnings ratios.