The effect of carbon performance on corporate financial performance in a growing economy

Purpose - This study aims to examine the impact of carbon performance on firm financial performance by using Republic of South Africa CDP company data from 2014 to 2015. Design/methodology/approach - The study considered 63 companies on the Republic of South Africa CDP database. Content analysis was used to extract both carbon performance data and firm financial data. The data were analysed using panel data analysis and partial derivative approaches. Findings - The findings indicate that carbon performance produces a positive relationship with return on equity (ROE) and return on sales (ROS). Conversely, it generates a negative relationship with return on investment (ROI) and market value added (MVA). Furthermore, the study highlights that carbon performance pays and that the relationship with financial performance (ROE, ROS, ROI and MVA) deepens as the corporate growth rate increases. Practical implications - Companies that integrate carbon performance initiatives reap substantial financial gains, and this relationship is strengthened as the company’s growth rate increases. Originality/value - The research questions and data collected from Republic of South African CDP firms are original and provide important evidence on the impact of carbon performance on firm financial indicators. Furthermore, many empirical studies focus on highly industrialised countries; this study examines this issue in the emerging South African economy which has experienced rapid growth of emissions in recent years. While most previous studies on the relationship between carbon performance and firm financial performance used a single class of corporate financial measures, this study used both accounting- and market-based indicators. It also investigated how firm growth moderates the association between carbon performance and diverse financial performance measures. Finally, pressure exerted by green stakeholders since the introduction of the Johannesburg Stock Exchange’s sustainability criteria in 2004, as well as government policies, has a profound impact on the South African business context; it is hence important to examine corporate environmental management activities in the context of the association between carbon performance and firm performance.