Recycling efforts linked to stronger business financing
Sustainable waste management improves firms’ profitability, reputation and access to supplier credit, with the strongest benefits in competitive and tightly regulated markets
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“Going green” can boost businesses’ bottom lines, according to research from the United Arab Emirates University (UAEU).
“In an era of escalating climate concerns and mounting pressure for corporate sustainability, the findings provide compelling evidence that going green is not only ethically sound, but also financially strategic,” says Nader Atawnah, associate professor of economics and finance in the College of Business and Economics at UAEU.
Companies that engage in effective waste recycling receive more favourable credit terms than those that generate more waste, according to a paper Atawnah published in the International Review of Economics & Finance.
Waste is a growing global concern. According to the World Bank, waste generation is expected to increase from 2 billion tonnes in 2016 to 3.4 billion tonnes by 2050. This waste threatens ecosystems, exacerbates the effects of climate change and poses serious health risks, says Atawnah.
Using a global sample of businesses from 42 countries, Atawnah and a colleague from King Abdulaziz University in Saudi Arabia examined how waste management affects access to trade credit from suppliers. Trade credits are the arrangements that allow companies to acquire goods from suppliers with delayed payments. They are a vital source of short-term financing for businesses. For example, studies show that about 80 per cent of American firms rely on trade credit, and that the value of this credit is more than traditional bank loans.
The reason companies that engage in waste recycling get greater access to trade credit is two-fold, says Atawnah. These firms typically have lower operational expenses as they are more efficient and use their resources optimally. “This in turn boosts profitability and makes them more attractive credit partners,” he says. The second element is overall value. Firms’ values are reflected in market indicators, “further strengthening their attractiveness and reliability in the eyes of suppliers”, he says.
However, these effects were not uniform. “Our study shows that the relationship between waste recycling and trade credit varies significantly across different institutional, market and industry settings,” Atawnah says.
For example, the positive impact of waste recycling on credit is stronger in developed countries, where environmental regulations are more rigorous and enforcement is more consistent, he says. The impact is also “significantly stronger in competitive markets where intense rivalry makes waste management an important differentiating signal for suppliers”. Additionally, it is also more pronounced in environmentally sensitive industries, such as energy, chemicals and mining. These are industries where companies face heightened regulatory scrutiny and reputational risk, he says.
The research has “significant real-world implications for businesses, policymakers and society”, Atawnah says. “It demonstrates that investments in waste management and recycling programmes can yield measurable returns through improved access to supplier financing. This is particularly valuable for small and medium-sized enterprises that may struggle to secure traditional bank loans and rely heavily on trade credit for working capital.”
Going forward, Atawnah aims to investigate how waste management affects formal financing, such as bank loans and the cost of these loans. “We also intend to examine the impact of environmentally responsible practices on bond market pricing, equity valuations and access to venture capital or private equity,” he says. “Together, these extensions would provide a more comprehensive understanding of the financial returns to environmentally responsible firms.”