A causal analysis of environmental and financial performance: Differences between brown and green firms

Rupali Vashisht, Hector Calvo-Pardo and Jose Olmo
Authors registered in the RePEc Author Service: Hector Fernando Calvo Pardo

Economic Modelling, 2025, vol. 144, issue C

Abstract: This study investigates the two-way relationship between corporate environmental performance (EP) and corporate financial performance (FP). The relationship between EP and FP remains ambiguous after decades of study. To contribute to the ongoing debate, we estimate a system of dynamic equations simultaneously by deploying structural equation modeling (SEM). The study employs annual data on all constituents of the S&P 500 index from 2011 to 2020 retrieved from Bloomberg and Refinitiv. In contrast to most literature, this study conclusively finds that FP affects EP only for a subset of firms (brown firms) while the effect of EP on FP differs across model specifications, estimation methods and measures of FP and EP, rendering the effect inconclusive. Further, the findings reveal that environmental expenditures entirely moderate the effect of FP on EP. The study concludes that FP boosts EP in brown firms only when environmental expenses are incurred.

Keywords: Simultaneous equation modeling; Environmental pillar score; Return on assets; Environmental disclosure score (search for similar items in EconPapers)
JEL-codes: C33 G32 M14 Q56 (search for similar items in EconPapers)
Date: 2025
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:144:y:2025:i:c:s0264999324003067

DOI: 10.1016/j.econmod.2024.106949

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