Carbon Policies, Environmental Responsibility, and Financial Performance: Empirical Evidence from the Indirect Carbon-intensive Global REITs Sector

As carbon regulations continue to tighten, a key question emerges: should firms proactively adopt environmental responsibility to effectively manage the risks and opportunities presented by these heightened carbon policies? This study assesses the effect of carbon initiatives (e.g., Emission Trading System and carbon tax) on firms' financial performance, moderated by the environmental responsibility of firms, a crucial aspect that has been largely overlooked in the literature, especially in the context of indirect carbon emission-intensive sectors. By analyzing data from global Real estate Investment Trusts (REITs) spanning from 2003 to 2022, the study reveals that REITs with better environmental performance are more resilient against carbon policy shocks. This reflects the importance of firms' environmental commitment as a protective measure for investors, particularly when confronted with new environmental policies. The findings also align with Porter's (1990) early movers assertion that firms that adopt advanced environmental standards early can gain first-mover advantages, ultimately enhancing their financial performance. This suggests that firms should prioritise sustainability, as those who are better equipped are more likely to succeed in the swiftly transitioning low-carbon economy of the future. This also emphasizes the significance of incorporating firms' environmental commitment into the analysis. The implications of these findings are profound and have been thoroughly discussed.