Is there a trade‐off between environmental performance and financial sustainability in microfinance institutions? Evidence from South and Southeast Asia

The environmental performance of microfinance institutions (MFIs) has received considerable attention in recent years. However, the question of whether MFIs' involvement in environmental practices can drive their financial sustainability has yet to be addressed. This is the knowledge gap that we intend to investigate in the current study. Specifically, using a panel of 587 MFI‐year observations for the 2007–2014 period, we investigate whether pursuing proactive environmental strategies, individually and in aggregation, can improve the financial sustainability of MFIs in South and Southeast Asian countries. By analyzing aggregate environmental performance, we demonstrate that environmental performance adversely influences the financial performance of MFIs. This provides support for the trade‐off hypothesis that predicts that higher levels of environmental practices worsen firms' financial sustainability. Our results also show that the relationship between the individual environmental performance dimensions and financial performance of MFIs varies with the individual dimension of green practice being considered. Finally, we find that there is a significant variation in this relationship across MFI ownership types. The findings have valuable implications for practitioners, investors, and policymakers.