Environmental performance and financial constraints in emerging markets

ABSTRACT

We examine how corporate environmental performance relates to financial constraints in an environment likely to face high global pressure to address climate change. Using multivariate regressions and a large dataset of over 8,500 firm-years from 24 emerging market countries during 2003 to 2020, we find superior environmental performance (especially relating to carbon emissions) to be associated with significantly lower levels of financial constraints. This finding is robust to an alternative measure of financial constraint, different sample compositions, and to endogeneity concerns. Further analyses reveal that the reductions in financial constraints are significantly higher for firms: (i) in high carbon-emitting countries; (ii) in countries that adopted the 2015 Paris Climate Agreement early; and (iii) that cross-list onto foreign stock exchanges. Finally, we provide evidence to suggest that the environmental aspects of a firm’s CSR efforts mitigate its financial constraints more than can be attained by the other major CSR dimensions. Overall, the findings imply that stakeholders (capital providers) of emerging market firms prioritise environmental concerns and, therefore, reward environmentally responsible firms with cheaper and easier access to financing, especially when global environmental concerns are high.

KEYWORDS:

• Environmental performance
• financial constraints
• carbon emission
• emerging economies

Acknowledgements

We sincerely thank Professor Giovanna Michelon (Editor) and the two anonymous reviewers of our paper for their helpful comments and feedback. However, all remaining errors and omissions remain ours.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 The full Report is available here: https://www.ussif.org/trends or https://www.ussif.org/files/US%20SIF%20Trends%20Report%202018%20Release.pdf [Accessed on 18/02/20].

2 See FT publication 11/12/20: https://www.ft.com/content/d77d5ecb-4439-4f6b-b509-fffa42c194db?shareType=nongift [Accessed on 14/09/21].

3 See the New York Times publication: https://www.nytimes.com/2021/06/09/business/exxon-mobil-engine-no1-activist.html [Accessed on 14/09/21].

4 For example, in October 2019, Extinction Rebellion – a campaign movement – organized a protest which shut down Westminster (UK Parliament) in calls for environmental action. This was part of an “international rebellion” around the world, with similar action taking place in cities such as Berlin, Madrid, Amsterdam, and New York. See link: https://www.shropshirestar.com/news/uk-news/2019/10/07/extinction-rebellion-shuts-down-westminster-in-call-for-environmental-action/ [Accessed on 24/07/20].

5 The current study differs in several ways from Tian and Lin (2019). First, the present study is cross-country, so has implications beyond China. Second, Tian and Lian’s interest is in how financial constraints influence environmental performance, but the reverse is the focus of the current paper. Third, the current study has several other extensions, including examining the moderating roles of high levels of emission, cross-listing, adoption of the Paris Accord, among others.

6 See link for more details about the Ceres Investor Network: https://www.ceres.org/networks/ceres-investor-network

7 See https://www.aviva.com/investors/meeting-agm-2021/ for details of the AGM.

8 The full dossier on the Brent Spar can be found here: https://www.shell.co.uk/sustainability/decommissioning/brent-spar-dossier/_jcr_content/par/textimage.stream/1426853000847/32a2d94fa77c57684b3cad7d06bf6c7b65473faa/brent-spar-dossier.pdf

9 We define emerging market countries based on the Financial Times Stock Exchange (FTSE) country classification, available at https://research.ftserussell.com/products/downloads/FTSE-Country-Classification-Update-2017.pdf [Accessed on 01/09/17].

10 Since total asset is prominent in the KZ index, in untabulated analysis, we drop control variables that are related to total assets. In other analysis, we use sales instead total assets to construct variables that relied on total assets. In both analyses, the main results and conclusions of the study remain qualitatively unchanged.

11 This is calculated as: (−0.0099 × 26.393) /−1.024; where -0.0099 is the coefficient estimate of ENV_SCORE; 26.393 is the standard deviation of ENV_SCORE; and -1.024 is the average KZ index.

12 Countries such as Czech Republic, Greece, Hungary, and Poland are in the European Union (EU) and may thus be influenced by EU environmental regulations. Our results are qualitatively the same when we exclude these countries from the sample. Also, our results remain unchanged when we exclude Pakistan which has limited observation. These results are available upon request, and we are grateful to a reviewer who suggested these analyses.

13 See: https://www.economist.com/graphic-detail/2021/02/02/global-democracy-has-a-very-bad-year for information on the democracy index [Accessed on 15 June 2022].

14 The 32-page Paris Agreement document can be assessed from here https://s3.documentcloud.org/documents/2646274/Updated-l09r01.pdf [Accessed on 09/09/21].

15 More than 10% of our sample firms are cross-listed on major stock exchanges in the US, UK, Germany, France, Australia, among others.