۱٫ Background

۲٫ Purpose of study

۳٫ Theoretical foundations and research framework

۴٫ Methodology

۵٫ Model setup

۶٫ Results and discussion

۷٫ Conclusions, limitations, and future research

Appendix 1. List of Industry Sectors in the Dataset

Appendix 2. Industry–Level Random EP Effects (p_j) on FP

Appendix 3. Company–Level Random EP Effects (s_ij) on FP

References

Abstract

Many business managers start to adopt environmental-friendly activities due to pressures and concerns regarding the potential adverse environmental impacts from their regular activities. However, there is no consensus regarding whether better environmental performance can lead to superior financial performance. Academic research also shows mixed or even contradictory results, possibly due to various limitations and problems. This study builds a multilevel framework to study the complicated relationship between environmental performance and financial return and synthesize those non-consensus results in many previous studies. An overall positive relationship is found between environmental and financial performance with variations across companies and industries due to the company- and industry-level heterogeneities. A negative relationship is also identified for some firms in some industry sectors. Moreover, the bi-directional causal relationship between environmental and financial performance also implies that it is necessary for companies to have sufficient financial resources in order to implement proactive environmental strategies and initiatives. The findings in this study make contributions to the literature, provide guidelines for managers and investors, and give implications for policymakers.

Background

As society has been paying more and more attention to the negative impacts of many business operations on the environment, firms are facing increasing pressures to improve their social responsibility and achieve sustainable development. As an important component of corporate social responsibility (CSR), environmental management (EM) has been gaining soaring attention from consumers, businesses, governments, non–governmental organizations (NGO) and academics as well. Many stakeholders have been starting to urge firms to reduce their existing or potential negative impacts on the natural environment, community, and society. Numerous regulations and policies have been proposed by government agencies and NGOs aiming to reduce or prevent environmental deterioration. Accordingly, an increasing number of firms started to adopt EM practices under compulsion or voluntarily. For example, based on the study from KPMG, about two-thirds of the largest companies in western countries have engaged in green or sustainable development to some extent and published related environmental disclosure reports (KPMG, 2011). The costs related to EM activities have kept increasing substantially (Barbera and McConnell, 1990).

How does a firm’s EM affect its financial performance (FP)? Does it pay to be green? After decades of theoretical and empirical studies, there still seems no conclusive results (Konar and Cohen, 2001; Wagner et al., 2001). Overall, two opposite opinions exist. On the one hand, the neoclassical school of economics argues that additional costs will be incurred for firms from conforming environmental regulations (Walley and Whitehead, 1994). Thus, expenditures and efforts devoted to EM practices to improve environmental performance (EP) are usually viewed as extra costs that will decrease financial returns. On the other hand, drawing on resource-based view (RBV), Porter’s hypothesis and stakeholder theory, researchers suggest a positive relationship between EP and FP because of increased legitimacy and sustainability (Clarkson, 1995; Porter, 1991; Hart, 1995; Porter and van der Linde, 1995; Li et al., 2019). In strategic management studies, RBV has been used for decades to explain corporation competitive advantages by arguing that firm’s rare and valuable resources or capabilities are hard to imitate or substitute (Wernerfelt, 1984). Hart (1995) posits that “capabilities that facilitate environmentally sustainable economic activity” (p. 991) is critical for a firm when building competitive advantages with the acceleration of negative impacts on natural resources and environment in both scale and scope from human activities. Porter’s hypothesis and stakeholder theory argue that extra benefits such as cost reduction and innovations from EM can offset the costs of complying with environmental regulations with improved efficiency and enhanced competitive advantage