Are index measures better than individual measures in assessing the association between environmental and financial performance? A multivariate analysis study

Abstract

In this study, we investigate the association between firms' environmental and financial performance. Using KLD's measures of environmental performance 13 of their variables were subject to factor analysis. Factor analysis is used to investigate how variables would cluster together into factors (based on the joint variations between variables) and then we investigated the association between this constructed factor and the firms' annual return. The factor analysis yielded three factors, non-chemical concern variables, strength variables and chemical concerns variable. Results point out that only the chemical concern factor is significantly associated with the firms' annual return. The results indicate that individual variables combined into an index measure may not necessarily improve or strengthen the association. Insignificant variables may dilute the significance of other variables leading to an insignificant index measure, or maybe positively (negatively) correlated variables may dominate the direction of association in a particular factor by outweighing negatively (positively) correlated variable respectively, However it highlights the true variables/factors that would better represent the construct addressed in the association.