Carbon performance versus financial performance

Extant literature has failed to document consistent evidence that socially responsible activities are positively related to financial performance. Such an inconclusive result raises the question of identifying the incentive for firms to voluntarily commit resources for carbon mitigation. Our study attempts to address this issue by investigating the relation between carbon performance and financial performance. We employ a sample of US S&P 500 corporations and use emissions reduction to measure carbon performance and Tobin’s Q to measure financial performance. In order to mitigate the concern of endogeneity, we also consider the influence of carbon disclosure on the relation by conducting simultaneous equations analysis. The results show a positive relation between carbon performance and financial performance. In addition, we find firms with better financial performance tend to be more transparent in carbon disclosure. These findings contrast with previous studies that typically report mixed results. A higher degree of correspondence between carbon performance and financial performance indicates managers who have financial and social obligations and who have chosen carbon projects that have not only improved firm green image but have also generated tangible economic benefit.