This study aims to re-evaluate the nexus between environmental sustainability (ES) and firm financial performance (FFP) by addressing the potential endogeneity, a mostly overlooked aspect, and one of the possible reasons for their inconsistent association.
The study identifies a few specific integrating strategies that could be used as strong and valid instrumental variables (IVs) for addressing endogeneity in the ES-FFP nexus. This is a unique contribution since these strategies have been probed as predictors or moderators rather than IVs in a few previous similar inquiries. The study applies two-stage least squares (2SLS) to data from 260 Pakistani-listed companies from 2018 to 2022.
The findings reveal that ES improves FFP (Tobin’s Q and return of assets) after controlling for evident endogeneity. This relationship is amplified by each employed integrating strategies – ES-related training, reports’ assurance, the number of ES-related pages in annual or sustainability reports and the establishment of ES-related key performance indicators, along with the ES mean value of non-financial industries – as unique, valid and effective external IVs. The findings are robust, consistent and reliable, especially after controlling for endogeneity, as evidenced by the similarity between 2SLS and the generalized method of moments estimations.
The study updates the regulators and companies’ top management, especially chief executive officers, to ensure the development and implementation of specific integrating strategies for promoting ES and maximizing its positive returns for FFP.
The study is original in theorizing and exploring the role of a few integrating strategies as valid IVs to address the largely neglected issue of endogeneity in the ES-FFP nexus.
