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Political demands for environmental improvement create obligations for managers that can conflict with shareholder value creation. While differentiating products along environmental lines is a conceptually straightforward way of reconciling these apparently conflicting demands, not all attempts to do so have succeeded. This article describes three requirements for successful environmental product differentiation: (1) firms must discover or create a willingness in consumers to pay for public goods; (2) they must overcome barriers to the dissemination of credible information about the environmental attributes of their products; and (3) they must defend themselves against imitation. More broadly, environmental strategy must be integrated with the overall strategy of the business. The appropriate environmental strategy depends, like the business''s overall strategy, on the fundamental economics of the industry and the business''s internal capabilities - basic constraints that have often been obscured in the academic debate about business and the environment.