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ArticleCarbon Emissions Reduction and Corporate FinancialPerformance: The Influence of Country‐Level CharacteristicsRobin van Emous 1, Rytis Krušinskas 2 and Wim Westerman 1,*Department of Economics, Econometrics and Finance, Faculty of Economics and Business, University ofGroningen, 9747 AE Groningen, The Netherlands; [email protected] School of Economics and Business, Kaunas University of Technology, LT‐44029 Kaunas, Lithuania;rytis.krusin[email protected]* Correspondence: [email protected]: van Emous, R.; Krušinskas,R.; Westerman, W. CarbonEmissions Reduction and CorporateFinancial Performance: TheAbstract: Using a cross‐country dataset covering 9265 observations on 1785 firms representing 53countries over the period 2004–2019, this study investigates the relation between carbon emissionsreduction and corporate financial performance (CFP). We perform OLS regressions with fixed ef‐fects. We found that carbon emissions reduction increases the return on assets, the return on equity,and the return on sales, whereas it has no effect on the Tobin’s Q and the current ratio. The positiverelationship with the return on assets is stronger for firms with a higher responsibility score. Westudy country characteristics by modeling GDP growth, overall emissions within a country, and thepresence of carbon emissions legislation. Our results indicate that the overall carbon emissions of acountry and the presence of carbon emissions legislation are related to both corporate carbon emis‐sions reduction and CFP. Moderating effects of the country’s overall emissions and the presence ofcarbon emissions legislation do not affect the relationship between carbon emissions reduction andCFP. Despite the further understanding gained, the issue of whether it “pays to be green” can stillnot be resolved well.Keywords: carbon emissions reduction; corporate financial performance; country‐level characteristicsInfluence of Country LevelCharacteristics. Energies 2021, 14,6029. https://doi.org/10.3390/en14196029Academic Editor: Philipp BagusReceived: 28 July 2021Accepted: 18 September 2021Published: 22 September 2021Publisher’s Note: MDPI stays neu‐tral with regard to jurisdictionalclaims in published maps and institu‐tional affiliations.Copyright: 2021 by the author. Li‐censee MDPI, Basel, Switzerland.This article is an open access articledistributed under the terms and con‐ditions of the Creative Commons At‐tribution (CC BY) license . IntroductionClimate change is one of the most threatening and complex challenges the world hasever faced [1]. The main cause of climate change is carbon emissions that are released intothe air [2]. The challenge of climate change is gaining ever more attention. Countries andorganizations they constitute, such as the United Nations and the European Union, are allaround the world aiming to reduce overall carbon emissions. For instance, carbon emis‐sions reduction is one of the United Nations Sustainable development goals to reduce theamount of greenhouse gasses by 45% by 2030 [3]. The European Union aims to reducegreenhouse emissions by 55% by 2030 [4]. These goals show the importance of the reduc‐tion of the overall greenhouse gasses emission worldwide. Legislators attempt to encour‐age or enforce firms to reduce their overall emissions, but it is unclear how firms respondto this threat of climate change.Moreover, existing studies still leave the debate open about whether it pays to begreen. On the one side [5], they claim that more polluting firms have a better corporatefinancial performance (hereafter: CFP). The main argument is that being or becominggreen requires investments and it is not certain that these will be earned back. Delmas etal. [6] show that becoming green reduces the short‐term profitability of firms but pays offin the long term. This short‐term decrease in profitability may affect the decisions makingof managers due to short‐term performance targets. In addition, these arguments can pro‐vide an answer to the issue of why firms respond to the climate change issue slowly [7].On the other hand, researchers have found that firms with lower emissions have a betterEnergies 2021, 14, 6029. rnal/energies

Energies 2021, 14, 60292 of 20CFP compared to more polluting firms [8]. Fujii et al. [9] show that firms with lower emis‐sions had better profitability and a higher capital turnover. Fernández‐Cuesta et al. [10]found that firms with a better carbon performance were able to obtain more long‐termfinancial debt to finance their environmental investments. Gallego‐Alvarez et al. [11]found that during times of economic crisis, the synergy between environmental and fi‐nancial performance is higher, indicating that firms must invest in sustainable projects toenhance their relationship with stakeholders even during crisis times.Our study contributes by exploring the effect of carbon emissions reduction on thefinancial performance of firms by using the following financial performance indicators:return on assets (hereafter: ROA), return on equity (hereafter: ROE), return on sales (here‐after: ROS), Tobin’s Q, and (as a new element) the current ratio (hereafter: CR). Gallego‐Alvarez et al. [12] suggest that future research into the relationship between CFP and car‐bon emissions reduction should include the effect of country characteristics in a largecross‐country sample. Their suggestion formed the foundation for this research. Thisstudy will look at an extraordinarily large cross‐country sample including 1785 firms cov‐ering 53 countries over the period 2004–2019, by using financial and environmental firm‐level data from the Thomson Reuters Eikon Database. Moreover, we investigate the effectof overall carbon emissions, economic development, and the presence of carbon emissionslegislation within the home country of a firm, by using country‐level data from the WorldBank Database. We test this by including countries’ overall emissions and a dummy thatindicates the presence of carbon emissions legislation within a country as a moderatingvariable. The inclusion of the effect of carbon emissions legislation connects to a sugges‐tion made by Lewandowski [7] that future research should focus on the incentives firmshave to reduce their emissions. We control for overall growth in GDP by including thiscountry characteristic as well [13].2. Literature Review and Hypotheses DevelopmentThis section covers the existing literature used to provide background for this study.The first part focuses on the relationship between carbon emissions reduction and CFP;the second part includes the moderating effect of country characteristics on the relation‐ship between carbon emissions reduction and CFP, and the third part includes the firm’slevel of responsibility as moderating effect on the relationship between carbon emissionsreduction and CFP.2.1. Carbon Emissions Reduction and CFPThe relation between carbon emissions and CFP has been studied before. Busch et al.[5] found that more polluting firms performed better financially compared to firms withlower emissions. However, Busch and Lewandowski [14] found evidence that firms withlower emissions performed better financially. In addition, studies on the relation betweencarbon mitigation and CFP also showed mixed results. Gallego‐Alvarez et al. [12] foundthat carbon emissions reduction improves the CFP in terms of return on equity and returnon assets. Lewandowski [7] found that carbon emissions reduction leads to an increase inthe return on sales but a decrease in CFP measured by Tobin’s Q. Kim et al. [15] showedthat carbon mitigation reduces the costs of capital, this reduction can be used to overcomecosts that come along with emission reduction. Delmas et al. [6] found that the short‐termprofitability of firms is affected by carbon emissions reduction, but also showed that To‐bin s Q improves due to the emission reduction, suggesting that investors see the potentiallong‐term value of the mitigation of the emissions. The goal of this study is to understandthe relation between carbon emissions reduction and CFP and to assess the effect of coun‐try characteristics on this relationship, as suggested by Gallego‐Alvarez et al. [12]. Themain research question can be stated briefly as follows: “Does carbon emissions reductionimpact the CFP of firms?”In addition, the measurement of CFP differs among the different studies. Lewan‐dowski [7] uses the ROA, ROE, ROS, ROIC, and Tobin s Q. Delmas et al. [6] use the ROA

Energies 2021, 14, 60293 of 20and Tobin s Q. Gallego‐Alvarez et al. [12] use the ROA and the ROE. Most of the research‐ers, therefore, mainly focus on accounting profitability measures. To cover the effect ofthe market value of firms, the Tobin s Q is included since the Tobin’s Q ratio reflects theexpectations of the stock market on the future profitability and growth of firms [16]. Basedon the mixed results, we formulate the main hypothesis without direction, as follows:Hypothesis 1 (H1). Carbon emissions reduction influences the CFP of firms.2.2. Carbon Emissions Reduction, CFP, and Country CharacteristicsWe investigate the effect of two country characteristics. First, we look at the effect ofthe overall carbon emissions of a country to see whether the effect of carbon emissionsreduction is different within more polluting countries. Alonso‐Martinez et al. [17] foundthat the overall carbon emissions of a country are related to the environmental, social, andgovernance (ESG) responsibility of firms. They suggest that higher levels of pollution raisethe awareness towards environmental sustainability within a country. Jiménez‐Parra etal. [18] claim that the concerns around air pollution lead to greater environmental de‐mands by stakeholders. The second hypothesis deals with pollution within a country andreads as follows:Hypothesis 2 (H2). The relationship between carbon emissions reduction and CFP is influencedby the overall carbon emissions within a country.Firms have multiple incentives to reduce their overall emissions, which are drivenby the pressures of different stakeholders thriving on the importance of climate awareness[19]. The main stakeholder used in this study is the legal authorities that implement reg‐ulations to achieve overall greenhouse gasses reductions. These days, more and more ma‐jor organizations such as the United Nations, the European Union, and a wide variety ofcountries set climate goals to reduce their overall emissions. To achieve these goals, theyintroduced multiple market‐based mechanisms that can be distinguished into two groups:quantity control and price control [20]. Cap and trade emissions trading schemes are themost important as to quantity control, with 27 trading schemes being implemented world‐wide [21]. In a cap and trade system, companies with higher carbon emissions have tolower their emissions or have to buy additional allowances, whereas companies with alower level of emissions are able to sell their surplus of allowances [22]. The price controlmechanism focuses on the taxation of carbon emissions. Both systems are implemented ina wide variety of countries. A meta‐analysis by Galama and Scholtens [8] indicates thatthe positive relationship between CFP and CEP is higher for countries that have morestringent carbon regulations. New to the existing body of work is that we include thepresence of a market‐based mechanism within a country as a moderating variable.The impact of cap and trade systems on CFP has been previously researched; how‐ever, the results are mixed. Brouwers et al. [23] found that only firms that are not able topass their costs to their customers are negatively impacted. Griffin [24] shows that the netincome of Californian firms was negatively impacted by the AB32, the Californian cap,and trade system. Moreover, Delmas et al. [6] found that the short‐term profitability offirms is negatively impacted by carbon emissions reduction, which is the main goal ofthese programs. Marin et al. [25] show that the EU Emission Trading Scheme (henceforth:EU ETS) has a positive impact on the turnover, investment intensity, and labor produc‐tivity of firms. De Giovanni and Vinzi [26] found no relationship between the impact ofthe EU ETS and CFP. Jong et al. [27] show that shareholders regard the EU ETS as value‐relevant, which is in line with the positive relation Delmas et al. [6] found between Tobin sQ and carbon emissions reduction. Taxation is the most important quality control mecha‐nism, being fully implemented in 25 countries. Luo and Tang [28] researched the impactof the implementation of carbon tax and concluded that shareholders value is negativelyassociated with the implementation of carbon tax regulations, which can be caused by an

Energies 2021, 14, 60294 of 20increase in competition of firms in countries without carbon taxation [29]. Their resultsalso show that the carbon emissions of the firms within their sample were negatively cor‐related to their abnormal returns.To examine the effect of regulatory forces to enforce carbon emissions reduction, thethird hypothesis focuses on the effects of carbon emissions legislation within a country.Galama and Scholtens [8] indicate that the positive relation between CFP and CEP isstronger in countries with more stringent climate policies. To investigate whether such aclaim stands, we include a variable measuring the presence of carbon emissions legisla‐tion. Moreover, we look into two different mechanisms: carbon emissions trading schemesand carbon taxation.Hypothesis 3 (H3). The relationship between carbon emissions reduction and CFP is influencedby the presence of carbon taxation or emission trading schemes within a country.2.3 Carbon Emissions Reduction, CFP, and ResponsibilityRusso and Fouts [30] argue that firms that act responsibly to reduce their environ‐mental footprint can create a compe