2.4 Empirical Literature
2.4.1 Carbon Output Intensity (Emissions) and Financial Performance
2.4.1.2 Carbon Output Intensity and Accounting-Based Performance Measures
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2.4.1.2 Carbon Output Intensity and Accounting-Based Performance
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significant effect of environmental performance on ROA and ROE for gold ratings, with CSR disclosure showing a significant effect on ROE, but not on ROA.
Furthermore, sustainability performance/ corporate social responsibility disclosure showed a significant effect on ROA and ROE.
On the relationship between emissions reduction and the firm’s economic performance, Nishitani et al. (2011), employing panel data of Japanese manufacturing firms from 2002-2008, found that firms that have reduced pollution emissions increased their economic performance through the increase in demand for their products and an improvement in productivity.
Testing the assertion that environmental munificence and dynamism moderate discretionary social responsibility effect on economic performance, Goll and Rasheed (2004) sampled 62 firms through questionnaires for discretionary social responsibility data, and archival sources for financial performance (ROA & ROS) and environmental munificence and dynamism using moderated regression analyses and sub-group analyses. The findings showed a significant moderating effect of environmental performance on the social responsibility and financial performance relationship. The findings also indicate that discretionary social responsibility contributes to a firm’s financial performance in environment that is dynamic and munificent.
Focusing on whether commitment of companies to stakeholders has a better relationship with financial results and determining the extent and pattern of corporate disclosure in the top listed companies in the ASEAN region, Waworuntu et al. (2014), using correlation analysis showed that there exist a significant negative correlation between environmental commitment (EC) and ROA in the energy sector. The paper finds that companies in the financial services sector provide a very limited amount of environmental disclosures and that their economic disclosure has a positive correlation with ROE and a significant positive relation between EC and ROA. The paper finds a moderate to strong positive correlation
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between variables when analysed as a whole, while the correlation result varies when broken down into individual countries and sectors.
Investigating into how change in corporate social responsibility relates to change in accounting-based performance measures, Ruf et al. (2001) found support for the assertion that a dominant stakeholder group, such as shareholders, enjoys economic gains when demands of multiple stakeholders are met. The paper also found that change in corporate social responsibility positively affects growth in sales for the current and subsequent period. The implications are that firms gain short-term benefits when they improve corporate social responsibility.
Studying the relationship between corporate social responsibility and financial performance of Islamic banks across thirteen countries utilising a corporate social reporting (CSR) disclosure index covering ten dimensions, Mullin et al. (2014) found a positive association between corporate social responsibility disclosure and financial performance. Further analysis using three stage least squares showed causality between the two endogenous variable runs from financial performance to corporate social responsibility disclosure, the indication that corporate social responsibility disclosure is determined by financial performance.
Analysing the role of corporate social responsibility disclosure (CSRD) in the annual reports on firms’ financial performance, Dewi and SE (2015), focusing on mining corporations listed on the Indonesia Stock Exchange during 2013–2015, found that CSRD influences ROE. On the other hand, CSRD does not influence ROA.
Focusing on economic performance of companies listed on the sustainability index in comparison with the performance of companies listed on the Sao Paulo Stock Exchange index using profitability and liquidity ratios and employing cluster and non-parametric analysis, Santis et al. (2016) found no evidence of financial performance differences between companies from each of the indices.
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Using Bloomberg's Environmental Social Governance (ESG) Disclosure score of S&P500 firms spanning from 2007-2011, Nollet et al. (2016) employed linear and non-linear models to assess the relationship between corporate social performance and financial performance measured by return on assets (ROA), return on capital (ROC) and Excess Stock Returns (ESR). The linear model suggested a significant negative relationship between corporate social performance and Return on Capital.
The non-linear models showed a U-shaped relationship between corporate social performance and Return on Assets and Return on Capital. The findings indicate that in the longer run, corporate social performance effects are positive.
Disentangling ESG disclosure score into environmental, social and governance sections, the study found a U-shaped relationship between the governance sub- component and financial performance.
Analysing the relationship between corporate social responsibility and financial performance measured by return on assets (ROA) and Tobin's q, Lioui and Sharma (2012) found significant negative relationship between corporate social responsibility strengths and concerns and firms' ROA and Tobin’s q. When the interaction between firms' environmental efforts and research is accounted for, the results showed that while the direct impact of environmental and corporate social responsibility on financial performance is still negative, interaction of corporate social responsibility and research and development has a significant positive effect on financial performance. Corporate social responsibility strengths and concerns seemed to harm financial performance as they are perceived a potential cost.
Nonetheless, corporate social responsibility activity is deemed to enhance research and development efforts of firms which are deemed to improve value.
On how environmental management practices (measured by carbon reduction, energy efficiency, and water usage) relate to financial performance (measured by return on equity), Nyirenda et al. (2013), utilising a case-based approach and employing multiple regression statistics confirmed that there is no significant relationship between environmental management practices in South Africa mining
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firms listed under the SRI and financial performance measured by return on equity (ROE).
2.4.2 Carbon Input Intensity (Energy usage) and Financial Performance