Impact of financial performance on environmental sustainability in the presence of credit constraints: evidence from Indian manufacturing firms

ABSTRACT

The purpose of the study is to examine the relationship between corporate environmental sustainability through the lens of energy intensity and the financial performance of firms in the presence of credit constraints. Employing panel data on Indian manufacturing firms, the study found an inverted U-shaped relationship between energy intensity and financial performance. While, credit-constraints act as an impediment towards achieving reduced energy intensities, an improvement in financial performance lessens the inimical impact of credit constraints on corporate environmental sustainability. Our findings might help policy formulation in achieving the Mission 2070 Net Zero Emission goal as recently pledged by India.

KEYWORDS:

• Environmental sustainability
• energy intensities
• financial performance
• firms
• credit constraints

JEL CLASSIFICATIONS:

• D22
• C33

Acknowledgements

All the authors contributed equally to this research. All the authors read and approved the final manuscript.

Disclosure statement

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

Data availability statement

The data for this study is extracted from the Centre for Monitoring Indian Economy (CMIE) Prowess database.

Notes

1 The Economic Times, November 11, 2021.

2 The quadratic term confirms the possibility of the existence of a non-linear relationship between environmental sustainability and the financial performance of firms.

3 See Kostka, Moslener, and Andreas (2013) for similar arguments.

4 The profit level is calculated using the average value of sales in the expression, $\mathrm{RO}{\mathrm{S}}^{\ast }=\mathrm{TP}={\displaystyle \frac{\mathrm{Profit}}{\mathrm{Sales}}}$.

5 Domestic production that is exported accounts for 13% of India’s production emissions (Karstensen et al. 2020).

6 For instance, Naoto and Hiroaki (2015) observed that firms in the iron and steel industry in Japan mainly export raw iron or steel, production of which involves a huge amount of energy consumption and CO₂ emission. Hence, exporting worsens the environmental performance of these firms.

7 A similar conclusion was reached by Zheng, Qi, and Chen (2011) for the industrial sector in China.