Tracking the relationship between environmental management and ﬁnancial performance in the service industry
Attention to the relationship between environmental management practices and ﬁnancial performance has e increasingly widespread in both academic theory and corporate practice. Stricter environmental laws and regulations, increased societal awareness of the ecological impacts of business activities, and mounting pressures from investors have led ﬁrms to rethink their approach toward the natural environment and to better understand the impact of environmental management on the ﬁrm’s bottom line.
Until the recent past, proactively investing in efforts to preserve the natural environment was thought to be an act of corporate altruism, something that would provide few ﬁnancial beneﬁts to the corporate bottom line (Crook 2005). Indeed, many observers continue to view environmental management solely pliance with environmental regulations (mostly through pollution control or ‘‘end-of-pipe’’ technologies), and thus, as negatively impacting ﬁnancial performance (Walley and Whitehead 1994). In this cost-avoidance context, externalities—the costs of air, water, and soil pollution-that ‘‘might have been otherwise avoided or borne by others,’’ were incurred by the ﬁrm, diverting resources from other productive investments, raising operating costs, and hurting proﬁtability (Waddock and Graves 1997). But this conventional view of environmental management is changing. For a growing number panies, environmental management now goes beyond ‘‘pliance’’ and can be viewed as all efforts undertaken by the ﬁrm to minimize the negative effects of its activities on the natural environment (Christmann 2000; Klassen and Whybark 1999). For some, it remains a ‘‘moral mandate’’, while for others, it is ‘‘a necessary evil to maintain legitimacy and the right to operate’’(Hart and Milstein 2003, p. 56).
Regardless of the motivation for change, evidence is mounting that the effective integration of environmental practices into operations can, and does, affect the ﬁnancial performance of the ﬁrm ‘‘through both market (revenue) and cost pathways’’(Klassen and McLaughlin 1996). On the cost side, ﬁrms that invest in environmental management can potentially reduce their future costs by promoting waste reductions and process efﬁciencies (Hart and Ahuja 1996), uncovering process improvement opportunities (Hart 1995; Russo and Fouts 1997), pliance costs, and minimizing the risk of future environmental liabilities (Porter and van der Linde 1995). In short, ﬁrms that go pliance are better positioned to meet tighter environmental standards in the future.On the revenue side, consumer preferences are shifting toward more environmentally responsible products anizations (Shrivastava 1995). As demand grows for different or more efﬁcient ways to use