How environmental ESG performance can weaken business financial performance : Evidence from the Nordics, the United States, and China
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This study examines the negative relationship between environmental performance and a firm’s financial performance. The study analyzes publicly listed companies within three markets: the Nordics (main market, OMXN40), the United States (S&P 500), and China (CSI300) over a ten-year period, 2015–2024. Environmental performance is proxied by the Environmental pillar score of the ESG total score, while financial performance is assessed through return on assets (ROA), return on equity (ROE), and market value (Tobin’s Q).
The negative relationship is examined both long-term and short-term. A long-term relationship is examined by employing a two-way fixed-effects panel regression (TWFE), while a short-term relationship is examined by a complementary event study capturing Nordic market reactions on selected environmental mandates. The event study serves the purpose of a robustness test as well.
The findings communicate limited support for the negative relationship between environmental ESG performance and financial performance. A plausible finding was found in the Nordics, where a weak and non-linear relationship between environmental performance and ROA was discovered, suggesting that environmental performance has a negative effect on operational efficiency. However, no statistically significant negative effects were observed across other measurements of financial performance, neither in the US nor in the Chinese markets. In addition, the hypothesis of negative effects being more pronounced in capital-intensive industries was not supported either. Similarly, the event study findings also suggest only minimal support for market reactions on selected environmental mandates. In the end, Hypothesis 1 is partially rejected, and Hypothesis 2 is fully rejected.
In conclusion, the findings communicate that the relationship between environmental ESG performance and financial performance is complex and market-dependent. It is viewed that environmental commitment may result in increases in a firm’s operational expenses, but the engagement does not affect either positively or negatively the financial performance in the long run. In the short term, when an environmental mandate is introduced and adopted in a well-established market with strict environmental regulatory frameworks, it also does not pose any risk.