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

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  • Vashisht, Rupali
  • Calvo-Pardo, Hector
  • Olmo, Jose

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.

Suggested Citation

  • Vashisht, Rupali & Calvo-Pardo, Hector & Olmo, Jose, 2025. "A causal analysis of environmental and financial performance: Differences between brown and green firms," Economic Modelling, Elsevier, vol. 144(C).
    • Handle: RePEc:eee:ecmode:v:144:y:2025:i:c:s0264999324003067
    DOI: 10.1016/j.econmod.2024.106949
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    More about this item

    Keywords

    Simultaneous equation modeling; Environmental pillar score; Return on assets; Environmental disclosure score;
    All these keywords.

    JEL classification:

    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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