article · Review of Accounting and Finance
This study investigated the financial impact of environmental investments in 4,081 firms across 25 emerging countries between 2010 and 2022. Using various regression models, it explored the relationship between Environmental, Social, and Governance (ESG) disclosure scores, carbon emissions intensity, and firm profitability. The research found that companies with lower carbon dioxide emissions achieved higher profitability. However, high ESG disclosure scores did not directly lead to superior performance, instead showing a positive curvilinear U-shaped relationship with a specific threshold. Furthermore, firms with sustainable investments demonstrated greater financial resilience during the COVID-19 pandemic, highlighting the importance of such investments for long-term profitability and stability in turbulent times.
This research helps businesses and policymakers in emerging markets understand how environmental actions affect financial success. It shows that reducing carbon emissions can boost profits and that sustainable investments can make companies more resilient during crises, guiding strategic decisions for a greener economy.
This research provides valuable insights for financial analysts and investors to better forecast firm value and stock prices by considering ESG investments. Corporate managers can use these findings to develop proactive carbon emission reduction strategies to safeguard competitive advantage. Policymakers can leverage the results to design rigid policies that promote a green economy and mitigate climate change risks. This is applied research informing strategic decision-making and policy formulation.
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Purpose This study aims to explore how environmental investments impact the firm financial outcomes in emerging markets using a sample of 4,081 firms across 25 emerging countries from different regions from 2010–2022. Design/methodology/approach Fixed effect regressions with robust standard errors for unbalanced panel data are used to investigate the impact of Environmental, Social and Governance (ESG) disclosure scores and carbon emissions intensity on firm profitability. The authors used simultaneous quantile regressions with bootstrapped standard errors to allow for estimating parameters of different quantiles of superior and inferior financial performers. Non-linear regressions are used to test for curvilinear relationships. Two-stage least squares regressions are used to mitigate concerns of endogeneity. Findings The results reveal that firms with less emissions of carbon dioxide report high profitability, however, firms with high ESG disclosure scores do not achieve superior performance. The authors detect a positive curvilinear U-shaped relationship and determine threshold level of ESG scores. Furthermore, firms with sustainable investments have more resilient performance during COVID-19 pandemic. Research limitations/implications A comprehensive analysis of the complex effect of environmental sustainability on financial performance in emerging markets uncovers the strategic motivations behind ESG disclosures and the thresholds where environmental performance translates into financial gains. Overall, this study emphasises the significance of sustainable investments in enhancing long-term profitability and resilience in emerging markets during turbulent times. Practical implications Proactive carbon emission reduction strategies are essential to safeguard firm competitive advantage. Firm ESG investments should be considered when forecasting firm value and stock price. There is a growing need for rigid policies to promote a green economy and mitigate climate change risks. Originality/value Offers a unique setting to examine the association between firm environmental and financial performance across emerging countries and regions. It explores the non-linear shape and magnitude of this relation across high-low quantiles of profitability. It sheds new light on the impact of sustainable practices on firm resilience during COVID-19 pandemic.
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DOI: 10.1108/raf-01-2024-0027
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