Environmental Investment and Firm Performance: A Panel VAR Approach

Abstract

This paper analyzes the relation between three dimensions of firm performance - productivity, energy efficiency, and environmental performance - and shed light on the role of environmental investment. Data from Swedish industry between 2002 and 2008 is utilized to generate the three performance measures at the firm level. Environmental investments are efforts to reduce environmental impact, which may also affect firm competitiveness, in terms of changes in productivity, and spur more (or less) efficient use of energy. A panel vector auto-regression (VAR) methodology is utilized to investigate the causal relationship between the three dimensions of performance and environmental investment. Results show that energy efficiency and environmental performance are integrated. Improved environmental performance and energy efficiency - induced by external or internal policy - boosts next period productivity, which would corroborate the Porter hypothesis and the notion of strategic corporate social responsibility (CSR). An increase in productivity constrains next period environmental performance and energy efficiency, while increasing environmental investments. This is indicative of opportunism or the available funds hypothesis. The former suggesting in good times managers allocate resources to e.g. managerial perks rather than improving environmental and/or energy performance, while still, to avoid regulatory penalty, uphold some level of environmental investment. The latter explanation argues that managers invest in environmental capital in order to reduce environmental impacts and boost goodwill for their business, but this investment requires resources and, in the short-term, harms energy and environmental performance. Finally, an increase in environmental investment improves next period environmental performance, which would suggest that environmental investments have the intended and expected effect; it reduces the environmental burden caused by the firm. As a consequence, in a second step, the increased environmental performance will tend to increase productivity in the next period, which suggests that environmental investments can boost productivity channeled via enhanced environmental performance. 1