Abstract
Using a cross-country dataset covering 9265 observations on 1785 firms representing 53 countries over the period 2004–2019, this study investigates the relation between carbon emissions reduction and corporate financial performance (CFP). We perform OLS regressions with fixed effects. We found that carbon emissions reduction increases the return on assets, the return on equity, and the return on sales, whereas it has no effect on the Tobin’s Q and the current ratio. The positive relationship with the return on assets is stronger for firms with a higher responsibility score. We study country characteristics by modeling GDP growth, overall emissions within a country, and the presence of carbon emissions legislation. Our results indicate that the overall carbon emissions of a country and the presence of carbon emissions legislation are related to both corporate carbon emissions reduction and CFP. Moderating effects of the country’s overall emissions and the presence of carbon emissions legislation do not affect the relationship between carbon emissions reduction and CFP. Despite the further understanding gained, the issue of whether it “pays to be green” can still not be resolved well.
Highlights
We provide the results of the OLS regression on the relation between carbon emissions reduction and corporate financial performance (CFP) as denoted by three variables: ROA, ROE, and ROS
The results indicate a positive relationship between profitability and carbon emissions reduction: firms that are decreasing their emissions have an overall better CFP
We address the “does it pay to be green” issue by investigating whether carbon emissions reduction influences CFP
Summary
Climate change is one of the most threatening and complex challenges the world has ever faced [1]. The challenge of climate change is gaining ever more attention. Countries and organizations they constitute, such as the United Nations and the European Union, are all around the world aiming to reduce overall carbon emissions. Carbon emissions reduction is one of the United Nations Sustainable development goals to reduce the amount of greenhouse gasses by 45% by 2030 [3]. The European Union aims to reduce greenhouse emissions by 55% by 2030 [4]. These goals show the importance of the reduction of the overall greenhouse gasses emission worldwide. Legislators attempt to encourage or enforce firms to reduce their overall emissions, but it is unclear how firms respond to this threat of climate change
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