Nexus Between Firms’ Emissions and Corporate Financial Performance in Africa: Empirical Evidence from Panel VAR Models

Firms’ emissions, encompassing greenhouse gas (GHG) emissions such as carbon dioxide and methane, along with air pollutants like sulfur dioxide and particulate matter, have considerable environmental, health, and economic implications. GHG emissions are a major driver of climate change, leading to extreme weather events, rising sea levels, and ecosystem degradation, while air pollutants exacerbate respiratory and cardiovascular illnesses. Furthermore, these emissions elevate healthcare costs, diminish labor productivity, and require substantial remediation efforts. Consequently, reducing emissions is vital for sustainable development. When emission reductions correlate with increased profitability, firms and investors are motivated to engage in climate change mitigation, underscoring the need to understand the interplay between a firm’s emissions and its performance in informing emissions reduction strategies. This study primarily aims to investigate the causal relationship between a firm’s emissions and its financial performance, examining whether emission reductions can improve profitability and thereby create financial incentives for firms and investors to adopt more sustainable practices. Using firm-level data spanning 2005 to 2021 across several African countries, the analysis provides empirical insights into this linkage. GHG emissions and air pollutants serve as proxies for firm emissions, based on data from the S&P Capital IQ Pro-Environmental Package. To analyze the dynamic and causal relationship between emissions and financial performance, we apply a panel vector autoregression (VAR) model. Our results indicate a bidirectional causality between these variables, evident across various emissions measures. Specifically, we find that firm emissions have a significant negative impact on financial performance, while enhanced financial performance contributes to a reduction in emissions.