IS THE TAIL WAGGING THE DOG? AN EMPIRICAL ANALYSIS OF CORPORATE CARBON FOOTPRINTS AND FINANCIAL PERFORMANCE

There is a long-standing debate in the business strategy literature over whether or not firms profit from improving their environmental performance. However, the existing literature has focused mostly on regulated emissions data and few studies have included climate change in this debate or taken a life cycle analysis approach to defining environmental performance. This study investigates the impact of greenhouse gas emissions (GHG) on corporate financial performance, and develops complementary hypotheses based on accounting and market based corporate performance measures to represent a short term and long-term perspective on financial performance. Our study also includes both direct and supply chain GHG emissions in calculating a firm’s carbon footprint. In doing so, this paper addresses important questions concerning the profitability of environmental initiatives within the context of supply chain management. Our empirical analysis is based on a novel longitudinal database including over 1100 US firms across a range of industries for the 2004-2008 period. Our results reveal that increasing carbon emissions positively impact financial performance when using accounting based measures (ROA) while it has a negative impact on market based measures of financial performance (Tobin’s q). Importantly, supply chain carbon emissions are shown to significantly drive these findings.