Radial and non-radial approaches for environmental assessment by Data Envelopment Analysis: Corporate sustainability and effective investment for technology innovation

Author: Sueyoshi, T., Wang, D.
Publication: Energy Economics

Abstract:

Environmental assessment and protection are important concerns in modern business. Consumers are interested in corporate effort and investment for environmental protection. It can be easily imagined that they avoid purchasing products from dirty-imaged companies even if their prices are much less than the ones produced by green-imaged companies. A green image is recently a very important concern for corporate survivability in a competitive global market. By extending previous works on environment assessment and corporate sustainability, where companies need to consider both economic prosperity and pollution prevention in their operations, this study discusses a new use of Data Envelopment Analysis (DEA) for environmental assessment by utilizing its radial and non-radial measurements. The proposed radial and non-radial approaches may guide corporate leaders, managers and policy makers by providing not only quantitative assessment on their efforts for environmental protection but also information regarding how to invest for technology innovation on abatement of undesirable outputs. The empirical investigation identifies that the green investment in U.S. energy industry is useful for improving its unified (operational and environmental) performance if operational performance is measured by ROA (Return on Assets) and an amount of CO₂ emission reduction because the industry is the largest emitter among seven industry sectors examined in this study. The green investment makes it possible that firms can increase their net incomes by a good corporate image. However, if the financial measure is replaced by a corporate value (i.e., Tobin's q ratio, mainly measured by stock price), the energy industry does not exhibit the best investment opportunity because the effect of green investment is limited on enhancing its corporate value. The energy industry is a very large process industry so that the green investment does not immediately increase its corporate value as found in the other industrial sectors such as information technology industry.

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