ABSTRACT
This chapter examines how environmental performance and profitability are related to each other. It explores profitability into its two components, revenues and costs. The chapter also explores the effect of environmental performance on revenues. It summarises the existing literature about the impact of environmental performance on overall profitability, measured as return on assets (ROA), and compares the results to expectation from the analysis of revenues and costs. The chapter discusses the direction of causality by focusing on different components of firm value and analysing how each component is affected by the firm's environmental performance. The value of a firm can be computed as the free cash flows of the firm discounted with its financing costs. The environmental performance of a company can affect revenues through various channels. S. Konar and M. A. Cohen investigate the effect of pollution and environmental litigation on firm value for manufacturing firms for the year 1989.
