How investing in environmental innovation helps the bottom line

Our researchers

Mengjie Yang

Overview

A study by Monash Business School Accounting researchers reveals that investing in new pollution prevention technologies not only helps the environment but improves a firm’s financial performance

In good news for firms wanting to embed sustainable practices across their business, Monash Business School research shows that investing in pollution prevention technologies, rather than pollution controls, lead to long term financial benefits.

Using a data set of green patents over a ten-year period to compare investments in pollution prevention or control technologies, the research reveals that firms’ pollution prevention patents help its future sales growth, gross margin and operational efficiencies.
The findings come as regulatory pressures and societal demands for sustainability rise.

Pollution prevention technologies, which reduce waste and emissions through product redesign or changing the production process, are more effective in improving both financial and environmental performance compared to pollution control methods, which typically rely on end-of-pipe solutions. This means a production process is left unchanged but clean up devices are added to the end of production.
The relationship between pollution prevention and better financial and environmental outcomes is even stronger for businesses which have a high reliance on energy use or have a history of using resources less efficiently.

“For organizations that may have hesitated due to concerns about costs or uncertainties, our findings show that pollution prevention is not only an ethical or regulatory decision but also a financially viable and strategic one,” says author Dr Mengjie Yang.

“This study was motivated by the growing need to understand how firms can achieve both financial and environmental performance. Because of the perceived trade-off between profitability and sustainability due to the exorbitant pollution abatement costs and firms’ preference for financial performance over environmental performance, firms’ incentives to cut pollution depend on whether they can achieve their environmental goals without sacrificing financial performance.”

The findings provide practical evidence for firms seeking to embed sustainable practices into their business that a proactive rather than reactive approach to sustainability provides financial benefits and creates long-term value for stakeholders.

Takeaways for companies, regulators and government

The findings have implications for governments aiming for net-zero emissions targets and for business leaders making environmental investments.
It provides a strong business case for businesses to adopt proactive sustainability measures. It identifies mechanisms, such as cost efficiencies and reputation gains, by which using pollution prevention technologies can improve business performance.
As stakeholders, including investors, regulators, and consumers, increasingly prioritise sustainability, firms adopting pollution prevention strategies are likely to gain competitive advantages, such as enhanced reputation, customer loyalty, and access to green financing opportunities.

Implications for research

Currently, one of the most downloaded articles in the Journal of Accounting and Economics, there is significant interest in the findings from the academic community and industry practitioners.
While green innovation is widely discussed in academic literature, there is limited research that distinguishes between pollution prevention and pollution control strategies and shows the broader effects of these choices.
The study provides empirical evidence that differentiates between pollution prevention and pollution control, rather than treating green innovation as a single, uniform concept.
The study helps understand the trade-off between environmental sustainability and financial performance. It shows that firms can strike a balance between environmental sustainability and financial performance by adopting a proactive rather than reactive approach to addressing environmental issues.

Want to know more?

Cheng, Q., Lin, A. P., & Yang, M. (2025). Green innovation and firms’ financial and environmental performance: The roles of pollution prevention versus control. Journal of Accounting and Economics, 79(1), 101706.