Abstract
The authors examined environmental responsibility and financial performance nexus of Johannesburg Stock Exchange’s socially responsible investing manufacturing and mining firms during the period of 2008-2014. The study employs annual panel dataset of fourteen manufacturing and mining companies on the index, and Granger causality analysis using Gcause2 Baum’s version. The paper found unidirectional causal relationship between environmental responsibility, measured by emissions intensity and equity returns, and bidirectional causal relationship between emissions intensity and market value of equity deflated by sales at 1% significant levels. Impliedly, improvements in ‘energy efficient technologies’ to reduce fossil energy consumption (prevention activities) seem to exhibit value destroying tendencies, while improvements in ‘end-of-pipe’ activities seem to estimate a drive market value of equity deflated by sales and equity returns. The Pesaran CD and Breusch-Pagan LM tests confirmed existence of cross-sectional dependence amongst panel members. The authors tend to support institutional and stakeholder theories.
Highlights
Past decades have seen researchers examining financial implication of sustainable performance amidst global warming and depletion of fossil-energy source
Whereas our results showed that prior improvement in emissions intensity subsequently improves in equity returns, we found that prior improvement in emissions intensity or market value of equity deflated by sale subsequently improves each other
Our empirical results showed that lags of energy usage intensity and financial performance measured by return on assets (ROA), return on sales (ROS) equity returns (EQRTNS) and market value of equity deflated by sales (MVE/S) do not improve the forecast of either factors under study
Summary
Environmental accounting research in the past few decades has examined effect of ‘green performance’ on financial performance, but is still providing mixed empirical findings. Patari et al (2014) examined social responsibility measured by “strengths” and “concerns” causal. Makni et al (2009) examined social responsibility and financial performance relationship employing Granger causality analysis and concluded that no significant relationship existed between social responsibility and financial performance, except for market returns. Surroca et al (2010) examined social responsibility and financial performance relationship and showed that no significant association existed between social responsibility and financial performance relations. Guenster et al (2011) found a link between ecological responsibility and fiscal performance and Gonzalez-Benito and Gonzalez-Benito (2005) examined sustainability pro-activeness effect on financial performance and demonstrated that sustainability management enhances corporate competitiveness, some sustainability practices produce negative effects. Erhemjamts et al (2013) assessed the effects of social initiatives on firms’ investment performance applying two-stage least squares and showed that social responsibility and financial performance relationship is robust. On the basis of the review of literature, this paper hypotheses as: H0: There is no bi-directional causality between environmental responsibility and financial performance of JSE’s SRI manufacturing and mining firms
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