Effect of Green Policy on the Financial Performance of a Company


The businesses in the world today are under the constant watch of how well they are contributing towards the sustainability of the earth and its resources. While this was, enforced in the past through some environmental organizations, nowadays companies have come to embrace this challenge to come up with innovative products and at the same time environmentally-friendly (Opschoor and Turner 234). Media has come to highlight these efforts with the Newsweek establishing a rating of 500 companies in different sectors with regard to their green policies (Newsweek). In this study, we look at three different firms in different sectors and analyze the effect of good ratings in green policy on the finance of those firms.

Our companies of choice include:

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  • NIKE Company (products and Cars sector)
  • Hewlett- Packard (Technology sector)
  • Coca-Cola Enterprises (Food and beverage sector)

However, we look at whether the initiatives assist the companies indicated in improving their financial performances.

The implementation of a green policy was expected to improve the finance of a company in the following ways;

It was assumed that all companies derived their resources from the people and the future performance of these companies relied on these same people. So by contributing towards sustainability the companies ensure that they maintained their future market (Serret and Johnstone 125).

Second, the cost of disposals such as the e-waste was hazardous to the well-being of the people even their own employees. When life became very hazardous the premium issues like insurance would go high and this would cost more in paying for such claims (Opschoor and Turner 236). The cost of hefty penalties to companies that did not comply was so much compared to the requirements that were required.

The effect of the negative campaign was affecting the market of the shares of the company as it ruined their image. In response to these, the companies invested heavily in research and development to come up with products that were environmentally friendly in terms of decomposition, recyclability, mercury content, and energy use ( Serret and Johnstone 125).

Newsweek Green Scores

Newsweek evaluates the environmental impacts under four heading:

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The environmental Impact score: this is based on data compiled by Trucost, this data is quantized and analyzed with reference to the impact of organizations’ activity on the environment(Newsweek). The environmental Impact score is obtained as a result of analysis of four major elements which include; Greenhouse Gas Emissions, water use, tangible waste disposed, and emissions contributing to acidic rainfall. The four effects are normalized according to revenue (Newsweek).

Evaluating the three companies we obtain the following scores:

COMPANY SCORE Industrial Sector Ranking Top 500 Ranking
Nike Company 77.10 3rd 114th
Coca-Cola Enterprises 17.6 2nd 413th
Hewlett-Packard 64.8 35th 175th

Source: Newsweek 500 Companies Green Ranking.

The Green Policies and Performance Score is derived from data collected by KLD, and it relates to the performance of the green policies adopted by the different firms. The policies are analyzed with reference to the performance of policies geared towards climate change and environmental pollution. This score also takes into account the environmental impact of the companies’ products as well as the organization’s stewardship towards environmental management (Newsweek). Analyzing the scores for the three companies reveals the following:

COMPANY SCORE Industrial Sector Ranking Top 500 Ranking
Nike Company 78.31 1st 13th
Coca- Cola Company 66.27 6th 48th
Hewlett- Packard 97.90 2nd 3rd

Source: Newsweek 500 Companies Green Ranking.

The Reputation Score is based on the opinion of academics, professionals, and other environments on the respective company’s corporate social responsibility (CSR). The score is arrived at through weight of 3:2:1 for views from the CEO of the listed companies, a participant from the sector, and other participants respectively (Newsweek). The three companies’ performance in this score is analyzed below:

Company SCORE Industrial Sector Ranking Top 500 Ranking
Nike Company 89.90 1st 4th
Coca- Cola 70.12 2nd 15th
Hewlett-Packard 88.44 1st 5th

Source: Newsweek 500 Companies Green Ranking.

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These scores contribute to the overall environmental impact score referred to as the Green Score. The three scores are mapped to a 100-point scale, they are given a weighting of 45-45-10(Newsweek).

Company Score Industrial Sector Ranking Top 500 Ranking
Nike 93.28 1st 7th
Coca-Cola 83.26 1st 36th
Hewlett Packard 100.0 1st 1st

Source: Newsweek 500 Companies Green Ranking.

Financial performance of the organizations

The analysis of the organizations’ Financial Performance can be analyzed below (OneSource);

P/E ratio Operating Profit Margin Net Profit Margin Share prices
2009 2009 2008 2007 2009 2008 2007 2009 2008 2007
Nike
Company
22.32 10.2 13.4 13.5 7.8 10.10 9.1 17.9 15.9 14.0
Coca- Cola 18.59 26.6 26.4 25.1 22.0 18.21 20.7 10.35 9.97 8.96
Hewlett-Packard 16.39 8.9 8.9 8.4 6.7 7.0 7.0 17.09 17.44 16.96

Source: One source site.

The impact of Green policy on the Financial Performance of the companies chosen.

The question to be addressed in this study will be doing high ratings reflect better performance in terms of financial performance. The financial performance of a company is a reflection of a combination of efforts that emanate from the company’s strategy, in terms of marketing, research, and development, as well as the financial structuring of an organization. Tracing the effect of green policies on the performance of an organization has not been an easy task since there is no particular market is identified as emanating from the application of green policies. The investment in green policies is expected to yield returns after a long period of time (OneSource).

The effect of a green policy may affect the company from two ways. It may affect the company yield and at the same time affect the reputation of the company. A ratio that describes the two in detail is called the P/E ratio. This ratio looks at the performance of a company from price of shares and from the earning from operations (OneSource).

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For this comparison I choose to use the P/E index since the issue of saving is very complicated.the returns from such efforts of green policy are expected to be recovered long later in the operation of the company. We can only assume that the adoption of these policies boosts the stakeholders’ confidence there by boosting the share price of the shares associated with these companies. The value used is referred to as the Book value of shares is the value of the shareholders equity after all debts are paid accordingly. A High Ratio indicates better safety and better confidence on the part of shareholders (OneSource).

This can be indicated by the price of Hewlett Packard in 2008 when it released the results of its good performance in terms of adoption of the Green policy. The company indicated that it had surpassed previously set benchmarks, which was positive received by the shareholders. The intention to offer green products in the coming Vancouver Olympics could have been a contributor to the rise in book value in 2009. While recent measures by Nike of making shoes from recyclable materials would have contributed to the rise in its share price in 2009.

However, to the management the price of share as a reflection to its performance is measured using the price Earnings ratio. A high PE/ration indicates that the price of share was moved by other factor other than the performance of the company while a low P/E ration indicates that investors analyze the performance of the shares of a company on the basis of performance only.

Following this kind of analysis then it means that Hewlett-Packard ration is the lowest, followed by Coca-Cola enterprises and Nike has the highest. From the above discussion the it proves that the share price rise of Hewlett-Packard was dependent on the performance than other issues meaning that the impact of Green Policy on Hewlett Packard was positive in comparison to the other two companies.

The international presence of the three companies varies adamantly. However, a look at the price increase of share also reveals that the high P/E ratio was as a result of expectation of future rise of the share. This is due to the yet policies that are to be adopted by the other two companies. The Green policy performance score according tome displays the best result in relation to the share price. This is because most green policies have been integrated into the objectives of the companies. A better performance indicates a better performance of the organizations in question

A recommendation of the most representative score

The major explanation I would provide is that following the expectations of the public in relation to the application of Green issues the expectations on Nike and Coca-Cola are many. In that relation then you find that if these initiatives are adopted the image and perception of these companies will rise prompting a rise in the share price. If the market analyzes the issue this way then the demand for the equity of such shares will increase and thereby increasing the price of shares at a higher rate as compared to the earnings of the company. This boosts the P/E of company’s shares.

Work cited

Newsweek magazine. 2010. 500 companies Green listing. Web.

Newsweek magazine. 2010. Coca-Cola Enterprises Green scores. Web.

Newsweek magazine. 2010. Hewlett-Packard Green scores. Web.

OneSource Business Information. 2010. Analysts view of financial performance of Nike. Web.

OneSource Business Information. 2010. Analysts view of financial performance of Hewlett-Packard. Web.

OneSource Business Information. 2010. Analysts view of financial performance of Coca-Cola. Web.

Serret Yse and Nick Johnstone. The distribution effects of environmental policy. Massachusetts: Edward Elgar Publishing limited, 2006

Opschoor J B and R. Kerry Turner. Economic incentives and environmental policies: principles and practice. Dordrecht: Kluwer Academic Publishers, 1994.

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