Measurement and disclosure may be the least exciting parts of a carbon management strategy, but they may also be the most important. A study from Gies College of Business categorized a dozen carbon management practices into three clear "bundles" and revealed which bundles were associated with stronger financial performance. Their analysis showed that measurement and disclosure form the foundation of a successful carbon management program.

“We were first surprised to find that the measurement and disclosure bundle was not significant,” said Anand. “So, we decided to dive deeper. When you talk to people who do this on a day-to-day basis, they'll tell you that some things are the baseline; you must do them. Measurement and disclosure aren't going to give you a big bump in performance by themselves. But if you don't do them, you're not going to get the benefit of the other practices.”

Three Bundles of Practices

In “Carbon Management Practices and Associations with Firm Performance”, published in the Journal of Environmental Management, Gopesh Anand and Ramanath Subramanyam of Gies Business collaborated with coauthor Anqi Wu (Florida International University) to analyze seven years of data from S&P 500 firms and identify which carbon management practices are linked to better firm-level outcomes. This study was part of Wu's doctoral dissertation work in the Department of Business Administration at Gies Business.

“If you tell companies that they need to pay attention to environmental impact, it's hard to convince them with a whole long list of practices,” said Anand, Professor of Business Administration and William N. Scheffel Faculty Scholar. “So, we clustered the practices into fewer practice bundles. That allowed us to look for patterns in how those bundles relate to performance. The intention was to be able to tell companies, ‘This is where you need to focus your time and resources.’”

Drawing on the natural-resource-based view of the firm, which holds that competitive advantage can arise from how firms manage their relationships with the natural environment, the researchers organized the practices into three bundles. The first, employee engagement, captures how a firm incentivizes its workers to participate in environmental goals. The second, long-term orientation, signals how well the firm anticipates and identifies long-term risks. The third, measurement and disclosure, is what the term "ESG" might bring to mind: target setting, emissions and pollutant reporting, and disclosing impact data.

The researchers built a dataset from the Carbon Disclosure Project (CDP), a global reporting system through which firms document sustainability efforts. They analyzed data from 312 companies from 2011 to 2017, validating their three-bundle framework and linking these bundles to firm financial performance data. Wu, the lead author of the study, led much of the painstaking data work, including navigating the CDP's data structure and constructing the controls that enabled the team to draw confident conclusions.

“We know about this from a few years back,” said Subramanyam (right), Professor of Business Administration and William N. Scheffel Faculty Scholar. “Companies hear a lot of different guidance about how to do well for the environment. We realized that this data offered us an opportunity to identify the clusters, or bundles, of practices that firms could use to succeed. Some are straightforward, such as compliance with rules, while others are for proactively making the right environmental choice. Some are for preventing future litigation—things like that.”

The results showed that two of the three bundles, employee engagement and long-term orientation, were both associated with higher firm performance as estimated by return on assets (ROA, a measure of profitability) and Tobin's Q (the ratio of an asset's market value to its replacement cost). Firms that engaged employees and took a long-term view toward climate risk outperformed their peers. The third bundle, measurement and disclosure, however, was not directly associated with stronger financial performance. Instead, the team found that it served as the backbone supporting everything else.

You Can't Manage What You Can't Measure

The researchers used a constraining factor model to determine that the third bundle, measurement and disclosure, acts as a kind of bottleneck. When a firm's measurement and disclosure practices lag behind the other two bundles, the positive effects of employee engagement and long-term orientation disappear entirely.

For Anand, the finding resembles a familiar concept from operations management: the difference between order qualifiers and order winners. In that view, the measurement and disclosure bundle is a qualifier – a foundation that won't do much on its own but without which nothing else works quite right.

“We're telling companies that measurement and disclosure are where you start,” said Anand (right). “It's the minimum. If you're not doing measurement and disclosure, you won't be able to engage employees. You're not going to have a long-term view. We're saying, ‘You need to do that first.’ Without it, don't even try anything else.”

For Subramanyam, the research points to a broader principle.

“We kept thinking about the well-known quote [attributed to Peter Drucker] that you cannot manage what you cannot measure,” said Subramanyam. “Our results tell us there's truth to that. The more you track performance, prioritize transparency, and measure, the more you have a reliable baseline to return to. When you wonder whether incentives are working, you can always go back to the measurement process and verify. It's a reliable cross-check.”

Good Business for a Good Planet

These findings arrive during a moment of change for corporate sustainability. Shifting regulatory environments, policy landscapes, and media attention all affect climate and sustainability discourse. But for Anand, one takeaway is that the data suggest doing good for the environment can also be good for business.

“It's also heartening to see that companies that are paying attention to the environment end up getting rewarded by the stock market,” said Anand. “A lot of companies are doubtful about spending their time and effort in this pursuit. What we see is that if done the right way, the stock market will also reward you for your efforts.”

The researchers were also heartened to see the benefits of engaging employees.

“You can make them partners,” said Subramanyam. “All of your employees are partners in your mission. Get them engaged, give them incentives. Everybody's better off, and the environment is better off."