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Neglecting sustainability issues can have a substantial impacton a company’s business operations over the medium tolonger term, or suddenly jeopardize the survival of a firmaltogether (tail-risks). 41 Risk reduction is a major outcomeof successfully internalizing sustainability into a company’sstrategy and culture. 42 Properly implemented, superiorsustainability policies can mitigate aspects of these risks byprompting pre-emptive action. 43 Examples include risks fromlitigation as well as environmental, financial and reputationalrisks. 44 The result is a lower volatility of a company’s cashflowsas the impact of negative effects can be avoided or mitigated.Sustainability activities therefore play an important role in afirm’s risk management strategy. 452.2 PerformanceIn an article in the Harvard Business Review, Michael Porter andClaas van der Linde claim that pollution translates to inefficiency.They argue that “when scrap, harmful substances, or energyforms are discharged into the environment as pollution, it is asign that resources have been used incompletely, inefficiently,or ineffectively.” 46 In one example, they examine 181 ways ofpreventing waste generation in chemical plants, and find thatonly one of them “resulted in a net cost increase”. 47 In otherwords, process innovation more than offsets costs in 180 out of181 cases. 48 For this reason, many companies are implementinglong-term sustainability programs and reaping resulting benefits.For example, Coca-Cola has reduced the water intensity of theirproduction process by 20% over the last decade. 49 Anotherexample is Marks and Spencer who introduced ‘Plan A’ to sourceresponsibly, reduce waste and help communities, thereby savingthe firm $200mn annually. 50A recent study by PricewaterhouseCoopers claims that“sustainability is emerging as a market driver with the potentialto grow profits and present opportunities for value creation — adramatic evolution from its traditional focus on efficiency, cost,and supply chain risk”. 51 In that respect, sustainable productinnovation can have a substantial impact on a company’srevenues. Revenues from “Green Products” at Philips, adiversified Dutch technology company, reached EUR 11.8bnrepresenting a share of 51% of total revenues. Philips’ “GreenProducts” offer a significant environmental improvement onone or more “Green Focal Areas”: energy efficiency, packaging,hazardous substances, weight, recycling and disposal and lifetimereliability. 52 Another innovative company, LanzaTech, has comeup with a microbe as a natural biocatalyst 53 that can capture CO 2and turn it into ethanol for fuel. 54 The firm has a partnership withVirgin Atlantic, who believe that such innovation will assist theairline in meeting its pledge of a 30% carbon reduction perpassenger kilometre by 2020. 55Moreover, research by the auditing company Deloitteargues that “sustainability is firmly on the agenda forleading companies and there is growing recognition that it41 See, for example, Schneider (2011) who argues that poor environmental performance can threaten the company’s long-run survival. See also Husted (2005) for adiscussion of how corporate social responsibility could be seen as a real option to firms which can reduce the significant downside risks corporations are exposed to.42 Kurucz, Colbert, and Wheeler (2009).43 This risk reduction feature of ESG has also been documented by Lee and Faff (2009), who show that firms with superior sustainability scores have a substantiallylower idiosyncratic risk. Similar findings are provided by Oikonomou, Brooks, and Pavelin (2012). The insurance value of CSR against risks has also been stressed byGodfrey (2005), Godfrey, Merrill, and Hansen (2009), and Koh, Qian, and Wang (2013).44 See, for example, Bauer and Hann (2010). Additionally, Karpoff, Lott, and Wehrly (2005) show that the market punishes violations of environmental regulation. Inparticular, they conclude that on average, stock prices decrease by 1.69% in cases of alleged violation.45 See, for example, Minor and Morgan (2011).46 Porter and van der Linde (1995a: 122).47 Porter and van der Linde (1995a: 125).48 Porter and van der Linde (1995a).49 Coca-Cola Company (2013).50 Marks and Spencer Group Plc (2014).51 PricewaterhouseCoopers (2010: 2).52 Philips (2014).53 Lanzatech (2014).54 Wills (2014).55 Virgin (2012).13