Investors reward environmental performance more than disclosures

Researchers have found a clear link between companies’ environmental performance and their financial performance, whereas disclosures alone are less predictive of profitability.

Upon analysing financial and environmental data from 8,547 companies across 34 countries spanning 2015 to 2022, Researchers from Japan’s Kyushu University concluded that superior environmental performance is positively related to better financial performance – including higher return on assets and lower cost of capital.

However, the same cannot be said of environmental disclosures alone, which do not seem to reduce cost of capital: this suggests that investors’ continuous calls for better sustainability disclosures are really a means to an end, to get access to relevant information about firms’ environmental performance.

“Investors value what companies do for the environment more than what they say,” said Professor Hidemichi Fujii from Kyushu University’s Faculty of Economics. “By taking concrete action on environmental issues, companies signal sustainability and reliability to consumers and investors, lowering perceived risks, and strengthening their appeal as stable and ethical investments.”

Understanding materiality

The researchers developed a new calculation method, giving firms both overall environmental and disclosure performance scores, and materiality-based scores, which assessed their performance on disclosing and improving material environmental issues. 

Applying these two scores, they found that companies with stronger environmental engagement – meaning those that perform better than others on material and non-material sustainability markers AND properly disclose this performance – tend to achieve better financial outcomes, including better short and long-term profits, and reduced costs. 

“Notably, firms with superior environmental performance – rather than those focusing merely on disclosure – demonstrate better financial results and attract greater interest from investors,” the researchers added.

Geographic differences

However, they unexpectedly found that while overall environmental scores have a clear positive link to financial performance, materiality-based scores show a more limited correlation. This led them to explore differences in how environmental efficiency is valued across countries, with interesting findings.

For instance, environmental efficiency is more strongly tied to financial performance in developed economies such as America and Japan, while it remains less significant in countries like Chile and Indonesia.

“This difference likely reflects variations in environmental regulations and public awareness across countries,” explained Siyu Shen, a graduate student at Kyushu University’s Graduate School of Economics and the paper's first author. “In more economically developed countries, where companies have long been engaged in sustainability efforts, improving environmental efficiency can enhance profitability and market valuation. Meanwhile, in developing regions, as the overall regulatory frameworks are still developing, the priority is placed on environmental performance and transparency rather than efficiency.”