Does environmental proactivity pay?

Bertrand Quélin, Professor of Strategy and Business Policy - January 20th, 2018
Bertrand Quelin, HEC Paris ©bozzeny-AdobeStock

For a firm to be profitable, does it need to listen to all its stakeholders? And what happens if a firm is sensitive to stakeholder demands and proactive about environmental issues? Bertrand Quelin’s latest research reveals a surprising correlation between these seemingly disparate business issues.

Bertrand Queling ©HEC Paris

Bertrand Quélin has been professor of strategic management and industrial economics at HEC Paris since 1989. He also directs the strategic management master’s degree program. (...)

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Companies face increasing pressures to reduce the negative impacts of their activities on the environment. As always, they are also under pressure to increase profits. Is it difficult to combine these two achievements, or can they come hand-in-hand? Professor Bertrand Quélin asks, “If a company improves its environmental sustainability – does it pay?”

Balancing act: weighing up stakeholder interests

Every company has a variety of stakeholders (employees, customers, suppliers, shareholders, organizations and associations of professionals and consumers) – and they all have different interests and priorities. Invariably some stakeholders will favor environmental sustainability policies. Whatever their interests are, they need to be strategically managed by companies to ensure maximum profitability. To gain insight into what is often a tangled knot of opposing and aligning interests, Quélin and his research team measured how attentive a company is to the interests of all its relevant stakeholders. “We wanted to see how company stakeholder orientation impacts profitability. At the same time, managers are increasingly concerned about their corporate social and environmental responsibilities and are proactive about this, so we also wanted to understand the impact of these behaviors.” 

The intersection between environmental proactivity, stakeholder interests, and profitability 

To understand the links between stakeholder orientation, environmental proactivity and profitability, the team collected data on the food and beverage industry and the household and personal products industry. These sectors were selected as they are essential to our modern lives. They also have significant socio-environmental impact through their manufacturing, packaging and distribution processes. Stakeholders then include suppliers of packaging, spare parts and equipment; wholesalers and distributors, transport companies, factories-stores...

Guillemet

A company that is attentive to a broad range of stakeholders will improve its profitability if it is also environmentally proactive"

Analysis by structural equation modelling found that, overall, it does not seem to pay if too much attention is given to too many stakeholders. There is a negative link between companies with high stakeholder orientation and their profitability. One of the main reasons for this is thought to be that when resources are dedicated to a wide range of stakeholders to create long-term value, what you see is an immediate loss in profitability. In addition, Quélin notes that although there is added value in the company, this is not reflected in traditional monetary profits. 

However, when environmental proactivity is added to the mix, this effect is reversed. High stakeholder orientation coupled with company investment in environmental sustainability becomes a positive driver of company profitability: “Environmental proactivity mediates the link between stakeholder orientation and profitability. This means that a company that is attentive to a broad range of stakeholders will improve its profitability if it is also environmentally proactive.” 

Environmental innovation drives profits 

The two industries examined in this study are oligopolies: they are dominated by a few large companies that call the shots. “In contrast to economic theory, our results show that members of an oligopoly can benefit if they innovate,” Quélin explains. “In acting fast to redesign processes to become more environmentally friendly, they become recognized by customers as an environmental leader. Consequently, they benefit financially.” Quélin then broadens the view to include other industries: “Stakeholders and end-users are sensitive to environmental policies, so it is important that all industries start to adopt proactive environmental policies. Management theory says that innovation comes at a cost, but here we show that proactivity can pay.” 

Guillemet

In acting fast to redesign processes to become more environmentally friendly, they become recognized by customers as an environmental leader. Consequently, they benefit financially.” 

When asked for any concluding advice, Quelin offers: “There is an ethical responsibility for all companies to pay attention to environmental issues. They need to consider what is being left for the next generation and this goes beyond imposed regulations. They have a responsibility to engage in proactive behavior towards the environment and, when combined with stakeholder orientation, this can drive profits up.” 

Based on an interview with Bertrand V. Quélin on his paper “Do Stakeholder Orientation and Environmental Proactivity Impact Firm Profitability?” coauthored with Franck Brulhart and Sandrine Gherra (Journal of Business Ethics, 2017).

Practical Applications
Practical Applications

Companies are often under the impression that making processes more environmentally friendly and sustainable comes at a cost. However, in contradiction to traditional ideas, this work shows that environmental proactivity can be beneficial financially: “Companies need to take note that, if stakeholder orientation and environmental proactivity are managed well, over time this can improve company performance,” Quélin advises. “Companies that are part of oligopolies should be aware that in moving quickly with policies they can become industry leaders and reap maximum benefits."

Methodology
Methodology

Quélin, Brulhart and Gherra used structural equation modelling to explore the links between stakeholder orientation, environmental proactivity and profitability. The team collected data on two industries: the food and beverage industry and the household and personal products industry. Data on these ubiquitous industries can have significant socio-environmental impact due to their manufacturing, packaging and distribution processes. In their analysis, they found that environmentally proactivity can mediate a negative link between stakeholder orientation and profitability. They see that environmentally proactive companies are more attentive to a broad array of stakeholders, and this in turn increases their profitability.