The corporate environmental and financial performance nexus: a comparison of corporations in China and Japan

Abstract

Following the initiatives of the United Nations Framework Convention for Climate Change (UNFCCC) and especially since the Paris Agreement of 2015, corporate environmental performance has become a critical component of corporate financial performance. Particularly, stakeholder pressure has driven environmental and financial inclusion targeted at raising corporate performance. Hence, this paper examines the link between corporations’ environmental performance (CEP) and corporations’ financial performance (CFP) using annual panel data from 130 corporations from China and 166 corporations annually over the years from 2010 to 2018. The empirical results from the FMOLS and ARDL tests show that corporations’ good emission preventive practices translate into improved financial performance in Japan but not in China, which is a reflection of the advanced earlier development of environmental governance in the former and the latecomer status of the latter. Nevertheless, environmental disclosure raises corporate financial performance in both China and Japan in the long run but CSR strategy is negatively correlated with corporate financial performance. Also, while the Dumitrescu Hurlin causality test shows that there is significant bidirectional causality between CEP and CFP in the Japan sample, this relationship is weak in the China sample. While the results confirm actions by Japan and China to strengthen corporate environmental governance, the initiatives in China should be quickened to enhance the relationship between CEP and CFP.