Driving green: Financial benefits of carbon emission reduction in companies

Abstract

This paper explores the relationship between carbon emissions reduction and corporate financial performance, leveraging a rich dataset of 14,866 observations from 2768 companies across 36 countries and regions, and 35 industries over the period 2002–2022. We find that carbon emissions reductions improve company financial performance, as measured by return on assets and return on equity, with this effect being even more pronounced for companies with higher carbon intensity. Additionally, country carbon regulations are positively associated with a company's financial performance, while higher ESG scores negatively impact it. Notably, we find no significant role for CSR reporting in driving financial gains. Overall, our findings suggest that companies can enhance financial performance by intensifying their carbon emission reduction efforts while also contributing to environmental stewardship. We recommend that businesses adopt tailored sustainability strategies that account for country, firm, and industry-specific factors to maximize these benefits across different regional and sectoral contexts.