A recent study reveals that US government procurement plays a powerful role in shaping corporate environmental behaviour. Titled Government Procurement and Corporate Environmental Policies, the study investigates how government agencies, acting as customers, influence the environmental performance of their contractors. By analysing data from approximately 800 public firms in the US between 2001 and 2019, the researchers found that companies with federal government contracts consistently reported lower levels of toxic pollution than those without.

Co-authored by academics from Henley Business School, the University of Leeds and the University of International Business and Economics, China, the research shows that firms supplying goods and services to the federal government significantly reduce their toxic emissions.

Why government contracts make a difference

The authors identify two main reasons for this. Firstly, firms with government contracts are more likely to strengthen internal environmental governance, such as appointing sustainability directors and offering environmental training to employees. Secondly, they invest more in pollution prevention, including cleaner technologies and better operational practices.

The impact is even greater for government contractors with longer-term contracts, those whose revenue relies heavily on government contracts, and those without political connections. This suggests that government oversight is a key driver of improved environmental performance.

To test whether the results were more than just coincidence, the researchers examined what happened when powerful congressional committee chairs changed - events that typically lead to increased government spending in their home states. Firms that went through these changes showed a sharp drop in pollution, reinforcing the idea that government procurement can drive positive environmental outcomes.

The study also found that companies with a history of environmental violations were less likely to win future government contracts, showing that sustained performance matters not just for the duration of a contract but beyond.

Professor Bin Xu, Professor of Finance and Accounting at Henley, said:

“This research sends a clear message to business leaders. Sustainability isn’t just good for the planet, it’s becoming a critical factor in securing and maintaining government contracts. Environmental responsibility is no longer optional, it’s a competitive advantage.”

The study was published in the Journal of Financial and Quantitative Analysis.