Environmental management practices and financial performance: evidence from large listed Indian enterprises

Abstract

Large enterprises have been at the forefront of environmental management with active participation in industrywide programs and adoption of a ‘beyond compliance’ approach. The present study revisits the premise of environmental–financial linkage in an Indian context with a focus on large listed enterprises. We develop a comprehensive dataset of 459 large listed Indian companies covering major manufacturing and service sectors of the economy over an eleven-year period from 2008–09 to 2018–19. Static and dynamic regression models are used to gauge the impact of environmental management practices on firm profitability (Return on Assets and Return on Equity) and market valuation (Tobin Q, Market to Book Value Ratio and Excess Valuation to sales ratio). Empirical results suggest a positive impact of environmental management on firm profitability and market valuation. These results are of interest to corporate and policy makers for recognizing the financial implications of corporate environmental management.

Keywords:

• environmental management practices
• dynamic panel data models
• firm valuation
• firm profitability
• large enterprises
• India

Disclosure statement

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

Notes

1 Gross Value Added (GVA) is the rupee value of the amount of goods and services produced in an economy after deducting the cost of inputs and raw materials.

2 Lindenberg and Ross (1981) define Tobin’s q as the ratio of the firm market value to the replacement cost of its assets.

3 MBVR is the ratio of the product of the number of equity shares and the closing price of the share on the last day of the financial year to the book value of equity and reserves while EV/S is defined as the excess of market value of the firm over the book value of assets normalized by sales.

4 CPCB list includes aluminium smelter, caustic soda, cement, copper smelter, distilleries, dyes and dye intermediates, fertilizers, integrated iron and steel, tanneries, pesticides, petrochemicals, drugs, pharmaceuticals, pulp and paper, oil refineries, sugar, thermal power plants and zinc smelter.

5 Energy cost is defined as expenditure on power and fuel.

6 In May 2020, the definition of Micro and Medium enterprises was revised by the Finance Ministry. Large enterprises are units with turnover exceeding 250 crore and asset investment above 20 crore.

7 The words ‘company’, ‘enterprise’ and ‘firm’ are used interchangeably throughout the study.

8 The age of a firm’s assets is proxied by dividing the value of the property, plant, and equipment of the firm (net of accumulated depreciation) by its gross value. This gives us a 0-1 scale for the age of a firm’s assets, with a firm closer to 1 having newer assets.