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Can Air Pollution Cloud Your Business Judgement?

Firms based in cities with high levels of air pollution have much lower efficiency when it comes to corporate investments, new research shows
Firms based in cities with high levels of air pollution have much lower efficiency when it comes to corporate investments, new research shows
  • Air pollution has a negative impact on firms’ investment efficiency
  • The impact is heavier for smaller firms
  • Improving the indoor air quality, moving decision-making to less polluted locations, or relocating an entire company can help

Elon Musk might have destroyed Twitter, but it’s fair to say he’s done a good job of helping to protect the environment by tuning into the untapped potential of electric cars and turning what was once a much mocked idea by the motor industry into an attractive, lucrative, and cleaner reality.

It’s now 2023 and the messaging around reducing emissions, waste and pollution has never been more emphatic. We must clean up our collective act, if we are to stand a chance of achieving the United Nation’s goal of becoming net zero by 2050. Neither billowing smoke towers nor gas guzzling cars can have a place in the future.

There is, of course, the human, emotional appeal to create a cleaner world; whether via a sobering reflection from David Attenborough narrating a turtle imprisoned in plastic, or through desperate charity appeals for help after record long droughts in already war stricken countries.

But could there also be an appeal for the business world, beyond simply being seen to do the right thing? The demand is there; from customers, from government and from wider society for organisations to act more ethically. But such actions take time, effort and expense – all things that CEOs would rather not spend if a ROI cannot be guaranteed.

But maybe it can be.

Hitherto overlooked is the direct effect dirty air is having on the prospects of our working lives, beyond public health. We’re all too familiar with the smog-filled images of Delhi’s skyline, obscuring the horizon of India’s biggest financial district, and showing the problem is on the world economy’s doorstep.

New research aims to clear the air, so to speak, on the cause and effect relationship between a lack of fresh air and a very real case of business brain fog.

Guanming He, Professor in Accounting at Durham University Business School, alongside Tiantian Lin, from Beijing Jiaotong University, found that firms based in a city with high levels of air pollution have much lower efficiency when it comes to corporate investments.

The pollution, the researchers say, adversely impacts managers’ mood, judgement, and decision-making on corporate investments. As a result, firms are risking their profits.

To discover this, Professor He and his colleagues used data from the Air Quality Index (AQI) in China and compared recorded pollution levels to the financial, governance, and stock market data for more than 2000 listed firms between 2014 and 2019.

Strikingly, the researchers found that the degrees of inefficient investments, over-investments, or under-investments by firms located in the worst polluted cities are, on average, 7.6%, 8.6%, and 5.5%, respectively, higher than those located in the less polluted cities.

“As investment efficiency of a firm is lowered by air pollution, the firm might face shrinking profitability and deteriorating performance, losing their competitive advantage in the long term”, Professor He said.

As well as lost profits, Professor He suggests there is also a significant risk posed to professional reputation and career prospects. “Managers might also suffer, as their compensation and career prospects are often tied to the profitability and performance of their firms,” he continues.

There has been significant effort, in recent years to create and protect green spaces in cities, so is this helping to curb the problem? It seems not. The researchers discovered that a city’s green space coverage and humidity did not provide any real boost to firms’ investment efficiency, but did not hinder it either.

And, as always, it seems the smallest firms have the most to lose. The researchers found that the negative impact of air pollution on investment efficiency is stronger for small firms, non-state-owned firms, financially constrained firms, and firms faced with high business risk or fierce industrial competition.

So what can a business owner do to protect themselves? The researchers proposed two potential solutions. First is to improve the indoor air quality of the workplace; for example using ecological and healthy green building materials, air purifiers, houseplants or even adopting flexible working practices, to ensure managers are breathing less polluted air.

Secondly, firms might consider moving their investment decisions making processes to alternative branches or offices which have higher air quality. If moving locations is not at all possible, Professor He suggests having investment decisions reviewed by an investment expert based outside of heavily polluted areas.

But, overall, these are just minor actions designed to help businesses cope with the reality of a much bigger problem. The researchers’ message is clear; in order for businesses to remain efficient, profitable and, ultimately, successful, greater steps need to be taken by organisations, government and society to tackle climate change. Their findings underscore the importance of reducing air pollution as corporate investments in promoting a country’s economic growth.

Data from the world air quality index isn’t just limited to countries like China and India in the east. The second biggest financial centre in the western world, the USA, ranks in the bottom 30 for worst air quality and pollution. 

And, for any manager reading this and believing they may well be impervious to such risks, it’s worth considering that contributing to pro-eco initiatives can actually provide a boost for business growth and resilience in turbulent times.

In summary, firms in these danger zones might need to jump ship or work very differently. Failing to do this may risk directors going from thinking straight to dire straits very quickly.

By, James Dugdale

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