Twin Pistons

A clean environment always makes for good economics

Published: Friday 30 November 2001

Twin Pistons

-- The connection is unmistakable. All the top performers in the ratings are also those making huge profits. Those at the bottom are about to close shop. Maruti Udyog Ltd and Hero Honda Motors India Ltd, both in the top 10, are raking in millions, while Bajaj Tempo Limited and Hero Puch, which are lower down, are on their way out. The logic is simple: if a company improves its environmental performance, its profits are bound to increase. And with profits, the company can invest the surplus to further enhance its performance. Environment and profits are closely connected because good environmental management practices demand efficient management of resources, less wastages, less pollution and thus lesser costs.

grp found the correlation between environmental rating and profits for companies more than 10 years old to be 0.67. This means that there is 67 per cent likelihood that a company with good environment sense will make profits. In terms of value, this is a medium intensity correlation. But considering the heterogeneity in the production process and products between the companies, it is a fairly tangible correlation (see graph: Gliding in tandem ).

However, if we consider two-wheeler and four-wheeler segments separately, where the companies are more than 10 years old and are making similar type of products, the coefficient of correlation is 0.81 and 0.76 respectively. Therefore, there is a fairly tangible correlation between the environmental performance and economic performance of companies. It is important to note that new companies were not considered because most of them are yet to stabilise and make substantial profits.

Moreover, the link can explain that being environment-friendly also helps companies tide over the slump that is beginning to set in the automobile sector. Maruti Udyog Ltd and Hero Honda Motors India Ltd will continue to make profits, albeit less, despite the recession, while the environmentally-poor companies will have to call it a day.

During its first rating on pulp and paper too, grp found a strong relationship between economics and environment. The project found a strong statistical support in the performance of various segments to reinforce the fact that sound environmental practice leads to good economic performance.

J K Paper Mills, which topped the ratings, was among the top grosser in the sector, while Amrit Paper Mills and Mukerian Paper Mills, which were at the bottom of the pile, were also loss-making companies.

Green direction
Across the boardrooms of the world, environmental discipline is increasingly dictating the business practices for companies. Companies scrutinise the environmental track record of their suppliers, vendors and partner associations during negotiations. This is because the image of a company is its greatest asset and a good standing among the stakeholders. Financial institutions, investors and shareholders have all become environment conscious. For example, multinational companies doing well financially are also those that are investing in environmentally sound practices. Unfortunately, this trend is yet to take roots in India.

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