The relationships among carbon dioxide emissions, environmental practices, and financial performance : international evidence

Abstract

Accelerated global warming and climate change have encouraged a large number of researchers to investigate the relationship between carbon dioxide (CO2) emissions and financial performance, but their studies have produced mixed findings. Although previous studies have identified factors related to firm characteristics (e.g., materiality industries) and external influence (e.g., consumer awareness) to explain for the mixed findings, they have neglected the significant role of environmental practices in the relationship between CO2 emissions and financial performance. Firms that generate CO2 emissions face legitimacy threats and therefore implement environmental practices with the aim to reduce CO2 emissions. The implementation of environmental practices has the potential of incurring costs as well as real economic gains, thereby affecting the financial performance of firms. It is therefore important to examine environmental practices that are instrumental in addressing CO2 emissions to achieve financial performance. Grounded in the legitimacy theory, this study examines whether integrated environmental practices (i.e., the combined practices of emission reduction, resource use, and environmental innovation) and its individual practices - emission reduction practices (i.e., reducing emission in production and operational processes), resource use practices (e.g., reducing the use of materials, energy or water), and environmental innovation practices (e.g., creating new market opportunities via eco-designed products) mediate the relationships between scopes 1, 2 and 3 CO2 emissions variations (i.e., increase or decrease) and financial performance (i.e., ROA and Tobin’s q). These environmental practices are worth investigating as they contribute to global efforts to reduce CO2 emissions and mitigate climate change. To achieve this objective, panel data are collected from 122 companies in different industries from the Refinitiv Eikon DataStream database. The data are analyzed by using the causal steps approach and bootstrapping method, which help achieve the research objectives and offer empirical evidence to answer the research questions proposed in this study. The results show that a decrease (an increase) in each scope of CO2 emission increases (decreases) the performance in implementing integrated environmental practices and emission reduction practices and implementing integrated environmental practices and emission reduction practices increases ROA. Thus, both types of practices have negative mediating effects on the relationships between each scope of CO2 emission variation and ROA. The findings indicate implementing integrated environmental practices and emission reduction practices for CO2 emission reduction is the legitimacy process/activity that reflects the capabilities of firms to address CO2 emissions. The legitimacy obtained from implementing such practices is considered to be an operational resource, which helps companies reap profitability. Besides, implementing integrated environmental practices and emission reduction practices is not simply a response to regulatory and stakeholder pressures, but also helps companies transform their legitimacy threats into financial benefits (i.e., profitability). However, neither integrated environmental practices nor emission reduction practices mediate the relationships between each scope of CO2 emission variation and Tobin’s q. Resource use practices and environmental innovation practices do not mediate the relationships between each scope of CO2 emission variation and financial performance. Based on the above findings, managers can prioritize integrated environmental practices and emission reduction practices into their strategic plans and consider them as the legitimate process/activity and an operational resource to increase profitability. Policymakers could develop target environmental regulations for reducing each scope of CO2 emission by considering integrated environmental practices and emission reduction practices, to contribute to the goal of limiting the global average temperature increase to within 1.5°C.