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Environmental, social and Firms’ ESG-

oriented
governance (ESG) - augmented investments in
innovation
investments in innovation and
firms’ value: a fixed-effects panel
regression of Asian economies Received 14 May 2022
Revised 3 August 2022
12 September 2022
Muhammad Azhar Khalil Accepted 15 September 2022
Department of Finance, Martin de Tours School of Management and Economics,
Assumption University, Bangkok, Thailand, and
Rashid Khalil and Muhammad Khuram Khalil
Department of Management Studies, Middle East College, Muscat, Oman

Abstract
Purpose – Historically, investments in innovation are perceived as one of the paramount decisions businesses
opt to thrive and the impact of such investments on businesses’ market performance is well documented in the
literature. However, the environmental aspects of making such investments are yet to be addressed by the
firms, which in turn, present considerable damage to the environment. Coupling with the natural resource-
based view (NRBV) and the stakeholder theory of the firm, this research builds on an earlier work of Khalil and
Nimmanunta (2021) in an attempt to examine the link between innovation and firms’ environmental and
financial value. The authors extend their analysis and document a more consistent approach to measuring
environmental innovation which allows the authors to investigate the firms from three additional economies
with respect to firms’ investments in both traditional and environmental innovations.
Design/methodology/approach – The underlying models are tested using the time fixed-effects panel
regression by utilizing information from publicly traded companies of ten Asian economies, including Japan,
Hong Kong, Taiwan, Thailand, Turkey, Malaysia, Singapore, India, Indonesia, and Saudi Arabia. The reported
sample covers annual firm-level ESG data obtained from Thomson Reuters’ Datastream and Refinitiv Eikon
during the 2015–2019 period.
Findings – This research offers support to the conventional wisdom that innovation is advantageous to the
firms’ market value. The authors further decompose innovation into traditional innovation and environmental
innovation. The findings of this research suggest that traditional innovation is favorable only for the firms’
market valuation and traditional innovation is strongly ineffectual for the environment – traditional innovation
produces sizeable environmental distress by contributing substantially to carbon emissions. In contrast, the
resultant effects of investments in environmental innovation are evident to be instrumental for both firms’
financial performance and the environment.
Research limitations/implications – This research has primarily focused on only two components of a
company’s environmental performance: reduction in carbon emissions (CO2) and corporate social
responsibility (CSR). Given the complexity of firms’ environmental strategies and the multidimensionality of
the variable, which encompasses a wide range of corporate behavior in terms of relationships with
communities, suppliers, consumers, and broader environmental responsibilities broadening the scope of the
study by including other important aspects of environmental sustainability is, therefore, critical.
Practical implications – The findings of this research signify environmental innovation as one of the vital
investment approaches as firms can exploit benefits related to the market from firms’ sustainable practices,
developing eco-friendly processes by introducing steady yet systematic chains of green products and services.
Such products and services may have a feature of enhanced functionality with a better layout in terms of
improved product life with better recycling options, and lower consumption and exploitation of energy and
natural resources. These sustainable practices would be advantageous for the firms regarding the possibility of

The authors are grateful to Editor Wenfeng Wu, Guest Editor Xinjie Wang, and two anonymous referees
China Finance Review
for detailed comments and facilitating the review process. The authors are indebted to Dr. Kridsda International
Nimmanunta (NIDA Business School, Thailand) for helpful comments on an earlier version of this © Emerald Publishing Limited
2044-1398
manuscript. DOI 10.1108/CFRI-05-2022-0067
CFRI setting prices above the standard level through establishing green brands and gaining market share of
environmentally anxious consumers. For those companies that are striving to take the leading role in the green
industry and longing to seek superior returns on the companies’ environmental investments, these benefits, in
particular, are exceptionally critical to them.
Originality/value – The linkage between firms’ financial and environmental performance in the context of
simultaneous inclusion of both green and traditional innovations remains unclear and is yet to be investigated
by researchers. Thus, this research shed light on the role of environmental innovation and traditional
innovation on firms’ environmental performance and financial performance. The authors utilize a novel dataset
with a clear indication of measuring different elements of innovation that allows us to develop a more robust
approach to corporates’ environmental, social and governance (ESG) performance metrics having the slightest
biases related to transparency and firm size.
Keywords Sustainable investments, Impact investing, Environmental innovation, R&D, Carbon emission,
ESG, Firm performance
Paper type Research paper

1. Introduction
The basic environment of this research is similar to that in Khalil and Nimmanunta (2021).
Therefore, their notations are utilized as much as possible. We extend their work in two
different ways. First, we utilize a more consistent approach of measuring Environmental
Innovation – their work uses Environmental Innovation Scores (EIS) as a proxy for
environmental innovation. However, when linking it to their measure of traditional
innovation which was R&D investments, it might not be a compatible measure in terms of its
relation to the R&D-related activities of the firms since the key aspect of innovation is being
addressed here is the R&D augmented innovation. Thus, we could explicitly obtain and
utilize a more consistent proxy for environmental innovation, which is Environmental R&D
(Datastream symbol: ENPIDP023) firms disclose in their ESG metrics. Second, we extend the
sample size by including the companies from three additional countries, which allows us to
examine the impact of both traditional innovation and environmental innovation on firms’
market performance and environmental performance to a total of ten Asian economies. We
perform several tests to confirm the findings reported earlier by Khalil and Nimmanunta
(2021) and verify the robustness of their results.
The elements of environmental, social, and [corporate] governance (ESG) has started to be
documented around the globe, particularly in Asia, and considered as the major drivers in
determining potential risks, firm value, and being opted by the companies in response to the
obligatory requirements defined by the regulatory bodies. Nowadays investment managers
often include ESG principles amid assets allocation process by following a more inclusive
approach together with potential other emerging investment tools that attracts investors who
have particular investment agendas (Fatemi et al., 2018; Wong et al., 2021). In particular,
according to data provider Morningstar, ESG-augmented assets’ funds grew around 53%
year on year and estimated to be $2.7 trillion in 2021. This trend reflects that the awareness of
environmental and societal issues is increasingly spreading, and businesses are devoting
significant efforts and resources to cope with such environmental challenges. Such exertions
tend to have tremendous influence on the steady surge in the universal attention paid to
sustainable tags over the last decade, which signifies a noticeable growth in the demand of
what we considered as environmental, sustainable, or impact investments. Managing
investments, for decades, focused on value creation has been primed, discussions concerning
ESG investing has become prevalent between investment managers and their clients
(Collins and Sullivan, 2020; Wong et al., 2021). Even though with the substantial adoption
from varied investment groups, the divergent strategies to the ESG integration by regulatory
bodies, investors, managers, and investment management companies highlight the potential
opportunities of incorporating ESG principles have yet to be discovered.
 Companies that are seeking to be competitive in the globalized and dynamically changing Firms’ ESG-
business environment often invest in new knowledge generation activities such as innovation oriented
(Aldieri, 2013; Schreiber et al., 2016b). Environmental impacts of considering such
investments by the companies, however, remained unfocused and does not take into
investments in
account its possible aftereffects, resulting in a sizable degradation of the environment. innovation
Broadly, there are two different facets of innovation, first, traditional innovation – which is
also refers to as conventional innovation, and second, environmental innovation – which is
also regarded as eco-innovation, sustainable innovation, or green innovation. Traditional
innovation is basically a direct application of methods to renew the existing or coming up
with the new procedures of developing new services, processes, or products in an attempt to
improve performance and operational efficiencies without considering its potential impact on
the affiliated society and the environment (Lev and Sougiannis, 1996; Cui and Mak, 2002). The
idea of environmental innovation on the other hand has begun to be recognized during 1990s
as a source to deter environmental deprivation, since innovation of such kind is tend to
lowering down the existing level of waste, material resources and pollution (Yurdakul and
Kazan, 2020).
Nearly 84% executives of the S&P-500 companies consider that innovation is the key
success element for their businesses according to a survey conducted by McKinsey &
Company (2020). In theory, innovation either environmental or traditional helps in cost
reduction, enhance productivity and efficiency, resulting into improved financial
performance (Yang et al., 2011). Innovation can stimulate the technological resources’
competitiveness through enriching the efficiency of production processes or by lowering the
cost of acquiring raw materials and other required resources. However, certain traditional
innovations might translate into greater utilization of non-renewable materials that stimulate
global warming by causing greater pollution, which would not be valued by environmentally
conscious customers (Yang et al., 2011). Conventionally, management often consider the
environmental investments as additional distress and heavy financial burden for their
businesses in their attempts to lessen further environmental deprivation, and this belief
seems to take over in various business sectors (Lee et al., 2015a). However, some prominent
corporations like Apple, Google, and even Accenture have begun to practice and execute
environmentally proactive strategies (Guenther and Hoppe, 2014). The motivation is that
such leading businesses can set a good example of reducing carbon-related risks that other
companies would follow and search for potential new prospects, and spur their long-term
investments (Paramati et al., 2020) that eventually leads to improved financial and
environmental outcomes (Lee and Wu, 2014).
The current level of climate change appears to have heightened substantially; in the light
of that, there is still a lot more to examine regarding how firms improve the relationship
between their environmental and financial performance. This relationship has been identified
in some earlier research offered a series of contextual factors and firm-specific components
that can help building this association even more vigorously (Clarkson et al., 2011; Lins et al.,
2017). At one hand, Lee et al. (2015a, b) describe that carbon emission lowers firm value
significantly. Lee et al. (2015b) argue that environmentally oriented initiatives positively
impact companies’ financial performance. On the other hand, however, a negative
relationship between corporate green performance and financial performance has been
documented by several authors (Cordeiro and Sarkis, 1997; Rassier and Earnhart, 2010).
Additionally, in some other studies, the researchers does not found any link between firms’
environmental and financial performance (Wagner and Schaltegger, 2004; Iwata and Okada,
2011). As the findings of the earlier studies are not in the similar direction and does not offer
any conclusive results, it is, therefore, essential to understand this relationship by covering
most of innovation aspects in the analysis.
CFRI 1.1 Research objectives
The role of both environmental and traditional innovation in determining the link between
firms’ environmental and financial performance remains unclear and could not obtain
necessary attention of the researchers. There are very few studies that have analyzed the
linkage between financial and environmental performance in the context of simultaneous
inclusion of both environmental and traditional innovation with limited focus and
inconsistent findings (Khalil and Nimmanunta, 2021; Munodawafa and Johl, 2019). Thus,
the objective of this research is to shed light on the role of environmental innovation and
traditional innovation on firms’ environmental performance and financial performance. We
obtained a dataset to measure different elements of innovation that allowed us to develop a
more robust approach of corporates’ ESG performance metrics. Firms’ investment in research
and development (R&D) is the traditional aspect of innovation, whereas environmental
innovation is what firms focuses on implementing sustainable innovation practices.
Integrating the innovation by considering these two perspectives through which
simultaneous investments are made by firms, we develop a model to examine the impact
of environmental innovation and traditional innovation on corporates’ environmental and
financial performance of firms from selected Asian economies, including Japan, Hong Kong,
Taiwan, Thailand, Singapore, India, Turkey, Indonesia, Saudi Arabia, and Malaysia for the
period of 2015–2019. The results of this study demonstrate that a decrease in the level of
carbon emission CO2 (environmental performance) has a significant positive impact on firms’
financial performance. Further evaluation concerning innovation variable reflects that both
traditional innovations and environmental innovations positively contributes to the financial
performance. Nevertheless, traditional innovation has a detrimental impact on firms’
environmental performance, whereas environmental innovation is advantageous for both
firms’ financial and environmental performance. This research offers several salient policy
and managerial implications along with the direction for future research.
Following are the contributions of this study to the domain of green finance, environmental
management, and innovation literature. First, previous studies were conducted by
administrating the surveys on a particular set of companies, sectors, groups, or a country
(Lee et al., 2015a; Zhang et al., 2017; Yurdakul and Kazan, 2020). However, firm-level evidence
concerning the environmental and financial impact of innovation is scant, perhaps because of
data unavailability concerns. Several Asian countries depict substantial performance evaluated
based on the pace of growth but reflect inefficiencies when compared with other regions in
curing environmental degradation (Howes and Wyrwoll, 2012; Ong et al., 2019). Therefore, we
focused on such Asian countries and believe that after the analysis of this relationship
conducted by Khalil and Nimmanunta (2021), this is the first comprehensive study of its kind
that integrate ESG data to reveal these present challenges across firms from various industries
from different economies. Second, the major focus of the previous studies was only on the wider
facets of innovation in an attempt to measure the firm performance of a particular kind
(Schreiber et al., 2016a, b; Awaworyi Churchill et al., 2019; Al-Ahdal et al., 2020). In this research,
we, however, covered this gap by employing innovation in its decomposed form: environmental
innovation, and traditional innovation, and jointly examine their link to different performance
outcomes. Third, this study provides decisive insights on the adoption of environmental
strategies and highlighted the importance of capitalizing on environmental innovation with a
clear indication that moving towards restructuring the production processes such that the
environment and the society are no more at stake via engaging in eco-friendly products and
services, least usage of energy and toxic materials, and better recycling procedures would result
in improved firms’ productivity. Such improvements in the productivity of resources may
enable firms to enjoy greater financial benefits with superior environmental quality. Moreover,
production activities with a green orientation are proven to be crucial in sustaining competitive
advantage to attain superior environmental and financial outcomes.
 Lastly, the findings of this research signify environmental innovation as one of the vital Firms’ ESG-
investment approaches as firms can exploit benefits related to the market from their oriented
sustainable practices, developing eco-friendly processes by introducing steady yet
systematic chains of green products and services. Such products and services would have
investments in
features of enhanced functionality with a better layout in terms of improved product life with innovation
better recycling options, and lower consumption and exploitation of energy and natural
resources. These sustainable practices would be advantageous for the firms regarding the
possibility of setting prices above the standard level through establishing green brands and
gaining the market share of environmentally concerned customers. For those companies that
are striving to take the leading role in the green industry and longing to seek superior returns
on their environmental investments, these benefits, in particular, are very critical to them.
The rest of the paper is organized as follows. Section 2 provide detailed theoretical
background followed by hypotheses development. Subsequently, details about sample data,
methods, and a brief description of variables are presented in Section 3. Results are reported
with the detailed discussion in Section 4. Finally, Section 5 consist of conclusion,
contributions, research implications, and the direction for future research.

2. Theoretical framework
Companies are finding it difficult to manage the environment since the statutory
requirements for making environmental investments are seen as extremely expensive by
the businesses (Hsu and Wang, 2013; Hojnik and Ruzzier, 2016). Environmental innovations
often make it simple to turn these costs into a competitive advantage and a substantial source
to achieve improved performance (Munodawafa and Johl, 2019; Khalil and Muneenam, 2021).
As a result, environmental innovation delivers solutions to improve resource productivity
and assist enterprises in considerable cost reductions (Pujari, 2006) associated with
environmental investments, influencing both market and environmental performance
(Eltayeb et al., 2011). While carrying out extensive production-related activities,
environmental quality is likely to be disregarded (Adebayo et al., 2021). All carbon
footprints from producing goods and services locally or internationally are included in
producing emissions since innovation is often not directed towards cleaner technologies and
does not help to decrease emissions, therefore, green technology is being encouraged around
the production facilities (Shahbaz et al., 2018). Despite conjectures from the technological
effects of the Environmental Kuznets Curve – EKC model (Carraro et al., 2010; Bekun et al.,
2021), relatively not much is known about the relationship between innovation,
environmental, and financial performance across countries, regions, sectors, and companies.
According to the stakeholder theory (Jones, 1995; Friedman, 2007), expenditures in
environmental practices that benefit external stakeholders at the expense of shareholders are
likely to lower business value and revenues. Improved environmental outcomes are
associated with better financial performance when they are accompanied by effective
stakeholder relationship management. However, if the extent and scope of a firm’s
environmental responsiveness extends beyond stakeholder management to address
environmental concerns that have little or no connection to the firm’s relationship with
stakeholders, then environmental practices will result into poorer results (Bigliardi et al.,
2012). According to the natural resource-based view (NRBV) of the firm (Hart, 1995),
environmental investments facilitate the development of competitive advantage, and such
competitive advantages, according to stakeholder theory can translate into improved
financial performance if effective relationship management with key stakeholders is in place
(Khalil et al., 2021).
To explore the influence of innovation on environmental quality, there exist two literature
strands. On one hand, the supporters of the first strand used integrated assessment
CFRI approaches such as R&DICE (Nordhaus, 2002), ENTICE (Grimaud et al., 2011; Chemmanur
et al., 2014), WITCH (Ghisetti and Rennings, 2014; Marangoni and Tavoni, 2014), and CIECIA
(Gu and Wang, 2018; Awaworyi Churchill et al., 2019). In general, these studies have shown
that R&D investments would reduce CO2 emissions. While merely investing in R&D would
be insufficient, while enhancing the performance of existing technology is crucial. Since
integrated assessment approaches have been shown to be effective in environmental policy
(Zhang et al., 2017), one of the potential disadvantages is that the outcomes are extremely
dependent on and sensitive to the specific model assumptions (Darnall et al., 2012). According
to Weyant (2017), the mitigation expense estimation in integrated assessment methodologies
is very sensitive to assumptions made about the specific strategies utilized to achieve desired
emission reductions and how such strategies are implemented. The integrated assessment
approaches are also criticized for problems related to model design choices, which are caused
by data limitations or a lack of understanding of the potential socioeconomic and physical
relationships that can be used to assess the effects of emission mitigation and climate change
policies (Tol and Fankhauser, 1998; Cheng and Shiu, 2012; Pindyck, 2017).
On the other hand, the second strand of literature looked into the link between innovation
and environmental performance across enterprises and industries, generally utilizing the
survey methods (Carraro et al., 2010). Schreiber et al. (2016b) for example, explore the
environmental impact of innovation in a group of chemical companies in Brazil. Using a
sample of industrial enterprises in Japan, Lee and Byung (2015) investigate the impact of
environmental innovation on CO2 emissions. In Belgium, the United States, and Canada,
Asiedu et al. (2021) investigated the relationship between economic and environmental
performance. Ong et al. (2019) studied the relationship between Malaysian manufacturing
enterprises’ environmental innovation, environmental performance, and financial
performance. Yurdakul and Kazan (2020) uses a survey of Turkish manufacturing
companies to investigate the impact of eco-innovation on environmental and financial
performance. In India, Udemba et al. (2021) investigated the link between economic outcomes
and CO2 emissions in the context of environmental performance. Zhang et al. (2017) collected
data from 30 Chinese provinces to investigate the influence of innovation on CO2 emissions.
The implications of innovation spending on environmental performance in France are
investigated by Shahbaz et al. (2018). These studies, to most extent, tend to show a negative
association between traditional innovation and CO2 emissions — a measure of environmental
performance. However, the majority of these research were based on survey data collected
from a limited number of companies focuses on a particular country or sector. Fewer studies
(Long et al., 2017; Fern
andez et al., 2018; Petrovi
c and Lobanov, 2020) have attempted to
quantify the impact of either traditional or environmental innovation on environmental and
financial performance at the national level using publicly available data with limited focus
and inconsistent findings. There are essentially no studies in our chosen region that primarily
focus on micro-level publicly available data from a variety of industries to assess the impact
of both traditional innovation and environmental innovation on enterprises’ financial and
environmental performance. As a result, this study aims to fill this gap by developing an
empirical model to investigate the impact of both traditional and environmental innovation
on financial and environmental performance, as well as how environmental performance
affects the financial landscape of Asian firms that invest in both traditional and
environmental innovation at the same time.

2.1 Hypothesis development

2.1.1 Environmental and financial performance. The NRBV (Hart, 1995) asserts that the firms’
major success drivers are their technological and non-technological resources and
capabilities. Firms that execute strategies for developing capabilities have a higher rate of
success (Aldieri, 2013; Khalil et al., 2019). As a result, the NRBV promotes environmental Firms’ ESG-
policies to play a significant part in enterprises’ competitive landscapes, emphasizing their oriented
importance in producing capabilities that support economic activities based on a sustainable
environment. According to the NRBV (Hart, 1995), environmental-friendly policies can help
investments in
cut operating costs and increase productivity due to efficient technologies employed to innovation
safeguard the environment, resulting in superior financial performance (Ghisetti and
Rennings, 2014). Several empirical research have found a positive relationship between
corporate environmental performance and business performance (Figge and Hahn, 2012;
Cheng et al., 2014; Hatzikian, 2015). Similarly, several longitudinal studies have found a
positive relationship between a company’s environmental performance and financial
performance (Munodawafa and Johl, 2019; Ong et al., 2019). According to Lee and Byung
(2015), carbon emissions have a significant negative impact on the firms’ market value. There
is a positive influence of environmental practices on corporate financial performance
(Rabad
an et al., 2019).
Numerous studies, on the other hand, have demonstrated a negative association between
environmental performance and financial performance (Wagner et al., 2002; Bigliardi et al.,
2012). Furthermore, some empirical investigations have revealed no link between
environmental performance and financial performance (Iwata and Okada, 2011; Cheng
et al., 2014). Thus, despite the fact that there exist fewer research studies that show the
negative results, several studies have found a positive relationship between companies’
environmental performance and financial performance. As a result, this study hypothesizes
that indicators of firm environmental performance, such as ESG score, CSR score, and
reduction in the level of CO2, are positively associated with financial performance. We
suggest that a company’s strategy of building capabilities from the usage of sustainable
natural resources help improve its environmental performance (lower CO2 emission) which is
likely to increase financial performance. Therefore, we developed the first hypothesis
suggesting that:
H1. Firms’ environmental performance has a positive impact on their financial
performance.
2.1.2 Traditional innovation and firms’ financial performance. Several studies have sought to
determine whether traditional innovation intensity (TII) – R&D spending, serve as a driver
for inducing companies’ value. The findings in support of this relationship are contradictory.
Investments in innovation are viewed as a firm’s growth option value according to the real
options theory (Orlando, 2004; Oriani and Sobrero, 2008; Kraft et al., 2018). R&D investments
have a positive impact on the value of a firm’s growth option (Tong and Reuer, 2004; Kraft
et al., 2018), because of the increased volatility in the projected returns in making R&D
investments is coupled with higher market value (Rao et al., 2013). According to the resource-
based view, firms get a competitive advantage from their unique resources (Lee et al., 2015b;
Khalil et al., 2021) where traditional innovation might be positively associated to firm value.
Other research has discovered a link between TII and corporate financial performance
(Hall and Oriani, 2003; Rao et al., 2013). According to Eberhart et al. (2004), firms in the U.S.
reflects better performance after a sudden surge in traditional innovation. Firms’ R&D
investments boost profitability and have a significant impact on their overall financial
performance (Nordhaus, 2002). Alternatively, Blundell et al. (1999) found that firms spending
on R&D is associated with positive financial performance; however, the effect becomes
smaller and diminishes over time. Other research has found that information asymmetry
between managers and investors is substantial in organizations with high levels of
innovation intensity, significantly impacting financial performance (Honor
e et al., 2015;
Paramati et al., 2020). Given the arguments stated above, it can be determined that the
beneficial impact of TII on firms’ financial performance is more well documented than the
CFRI negative impact. Accordingly, we infer that TII has a positive impact on financial
performance. Therefore, we stated our second hypothesis as:
H2. Firms’ investments in traditional innovation have a positive impact on their financial
performance.
2.1.3 Environmental innovation and financial performance. Most empirical research on
innovation have found that spending on environmental innovation is a significant predictor
of financial performance (Bigliardi et al., 2012; Long et al., 2017; Khalil and Muneenam, 2021).
According to the stakeholder theory, environmental investments that imply stakeholder
transparency and engagement lead to greater access to capital for firms, especially during
times when firms have lack of capital or during times of crisis, where trust and social capital
are critical antecedents that translate into improved financial benefits (Munodawafa and Johl,
2019). There are two main ways through which environmental innovation helps to boost
financial performance. First, companies with a higher level of green innovation obtain
competitive advantages, which include enhanced operational and manufacturing processes,
more innovative products and services, and lower operating costs (Fern
andez et al., 2018).
Second, by distinguishing themselves from possible competitors, these companies can build a
reputation and legitimacy, which leads to increase their revenues and overall market value
(Eltayeb et al., 2011). Several empirical investigations have found a correlation between
environmental innovation and a variety of performance metrics. Zhang et al. (2019) found a
link between environmental innovation and the financial outcomes of listed manufacturing
enterprises in China. A positive link between green innovation and SMEs’ market
performance was also found by Wellalage and Fernandez (2019) in developing countries
and by Setiawan and Aryanto (2019) in Indonesian firms. Environmental innovation has a
greater influence on firm performance than traditional innovation (Bigliardi et al., 2012).
Environmental innovation allows management to make a greater contribution to the financial
and non-financial performance of their companies (Hojnik and Ruzzier, 2016; Aboelmaged,
2018). Firms can save costs, increase sales and profits by investing in environmental
innovations, where collaboration among all members of a firm is vital to improving
performance in developing and implementing environmental innovation (Ong et al., 2019;
Rabad
an et al., 2019). Environmental innovation likely enhances environmental quality along
with improving a company’s financial performance (Fern
andez et al., 2018). Despite the
conclusions of all these studies, there is evidence that environmental innovation has no effect
on the financial outcomes of German companies (Ghisetti and Rennings, 2014). Given mixed
findings documented in the previous studies, this research hypothesized that environmental
innovation proxied by “environmental innovation scores” is positively associated to financial
performance. Hence, we define our third hypothesis as:
H3. Firms’ investments in environmental innovation have a positive impact on their
financial performance.
2.1.4 Traditional innovation and environmental performance. Firms’ investments in R&D
contribute to innovation, which leads to increased production efficiency and more efficient
use of energy and natural resources (Romer, 1990). As a company’s revenue grows, it may
devote a greater amount of its earnings to research and development; as a result, more
efficient technologies can be adopted and deployed. On the one hand, more efficient
technologies help to reduce the use of natural resources by reducing waste and emissions as
by products, leading to a cleaner environment (Delmas et al., 2016). For example, Awaworyi
Churchill et al. (2019) suggest that investing on R&D will certainly improve environmental
quality, but only if sufficient environmental management mechanisms are in place to ensure
proper emission and waste management. The impact of traditional R&D intensive innovation
on environmental outcomes, i.e. carbon emissions, on the other hand, is a priori unknown.
Given the significant positive impact of innovation on profits and firm value (Clarkson et al., Firms’ ESG-
2011; Pons et al., 2018), traditional innovation, which is environmentally sensitive, may have oriented
an adverse effect on environmental quality due to the scale influences of increased production
activities linked with improved environmental quality (Lins et al., 2017; Nazari et al., 2017).
investments in
Although innovation is likely to improve efficiency and financial performance, increased innovation
output from more extensive industrial activities may require more natural resources-related
inputs, thereby increasing CO2 emissions. As a result, innovation may reinforce
environmental performance to have declining returns over time. As the level of current
knowledge grows, it becomes more difficult to produce new inventions over time, resulting in
a lower induced level of R&D-augmented innovation (Lee et al., 2015b). Nonetheless,
corporates’ growth mechanisms continue to necessitate increased natural resource
deployment as an input; therefore, we believe that traditional innovation intensity (TII)
has a negative impact on environmental quality through contributing to CO2 emissions.
Hence, we developed our fourth hypothesis that:
H4. Firms’ investments in traditional innovation have a negative impact on their
environmental performance.
2.1.5 Environmental innovation and environmental performance. Environmental policies
based on the notion of eco-innovation explain environmental measures that pay off in the
form of improved environmental quality, thus linking environmental innovation to the
environmental performance of the companies (Schaltegger and Figge, 2000; Paramati et al.,
2020). To gain eco-efficiency through implementing processes featured by environmental
innovation, firms seeking economic benefits must implement optimal environmental
strategies to achieve eco-efficiencies at the lowest possible cost (Bigliardi et al., 2012).
Environmental innovation has a higher level of eco-efficiency since it represents businesses’
focus on product creation and market demand in accordance with their environmental
management methods, which tend to bring economic benefits (Long et al., 2017). Firms with
higher levels of environmental innovation tend to differentiate themselves in the market by
offering environmental-friendly new products, which translates to more profits and better
environmental effects (Ong et al., 2019; Collins and Sullivan, 2020). Similarly, environmental
innovation may help to reduce waste and emissions from manufacturing processes. As a
result, businesses may need to expand their environmental innovation capacities derived
from environmental activities and procedures in order for themselves and the society to get
benefited from improved environmental performance. Therefore, businesses can improve
their environmental performance by designing and selling eco-products and investing in
environmental innovation. Hence, we came up with the last hypothesis as following:
H5. Firms’ investments in environmental innovation have a positive impact on their
environmental performance.

3. Data, variables and research methods

3.1 Sample
Firms level evidence regarding environmental and financial impacts of innovation are scant,
perhaps because of data unavailability concerns. Several Asian countries illustrates
substantial performance when evaluated based on the pace of growth, but reflect
inefficiencies when compared with other regions in curing environmental degradation
(Howes and Wyrwoll, 2012; Ong et al., 2019). To reveal this present challenge across firms
affiliated with various industries from different economies, this study uses data of publicly
traded companies from ten Asian economies, including Japan, Hong Kong, Taiwan, Thailand,
Turkey, Malaysia, Singapore, India, Indonesia, and Saudi Arabia. Since these economies are
CFRI dealing with serious environmental issues that threaten future economic growth, natural
resources’ security, and regional stability. The information included in the sample includes
annual firm-level data obtained from Thomson Reuters Datastream and Refinitiv Eikon for the
five years from 2015 to 2019. Thomson Reuter specifically provides information on the set of
Environmental, Social, and Governance - ESG, which is of special significance to this research.
The Thomson Reuter’s Datastream reported ESG scores are intended to objectively and
openly measure a firm’s ESG performance based on and across ten broader categories, such as
emissions, innovation, CSR strategy, resource use, human rights, and so on. We initially picked
cross-economies data for 9045 firms, after which we eliminated firms from a number of
idiosyncratic sectors, including media, equity investments, insurance, financial services,
retailing, real estate, and tobacco (Denicolai et al., 2014; Heras-saizarbitoria et al., 2014). We
ended up with a sample of 701 firms to include in our final panel of analysis for the period
2015–2019 based on the data that these firms supplied on our desired variables. Companies
from telecommunications, beverages, household products, electricity, oil, gas, and water,
personal goods, and support services are included in the “others” group, as shown in Table 1.

3.2 Models of the study

To test our hypothesis, we develop the following models (excluding industry and country
dummy variables):
Qi t ¼ β1 þ β2 SIZEi t þ β3 AGEit þ β4 TATit þ β5 ESGi t þ β6 CGi t þ β7 CO2it þ β8 TIit
(1)
þ β9 EIit þ εi t
CO2it ¼ β1 þ β2 SIZi t þ β3 AGEit þ β4 TATit þ β5 ESGi t þ β6 CGi t þ β7 TIit þ β8 EIit þ εi t (2)

Where Q is Tobin’s q representing firms’ financial performance followed by certain firm-specific

control variables, i.e. SIZE and AGE indicate firms’ sizes and their ages, respectively, and TAT is
the firms’ total assets turnover. ESG is the firms’ environmental, social, and governance-related
measures, CG is corporate governance scores, CO2 is the carbon emission produced by the firms,
TI and EI reflect firms’ investments in traditional innovation and environmental innovation,
respectively. We classified a company’s performance into two categories: financial and
environmental performance. To begin, we look at Tobin’s q as an indicator of firms’ financial
performance. For a robustness check, we used net profit margin (NPM) as an alternative for

Country
Hong Saudi
Sector Japan Kong Taiwan India Turkey Indonesia Malaysia Arabia Singapore Thailand Total

Technological 53 21 26 14 10 13 08 06 09 03 163
sector (TECH)
Industrial 55 13 17 11 12 05 13 04 05 09 144
goods/services
sector (IG/S)
Health care 39 19 09 14 11 08 03 12 08 04 127
sector (HC)
Chemical’s 41 15 16 09 06 09 05 08 03 01 113
sector (CH)
Food sector 28 17 15 06 03 05 07 04 02 02 89
(FD)
Table 1. Travel and 08 08 07 03 03 02 03 01 06 05 46
Classification of leisure sector
sample firms according (T/L)
to their countries and Others 06 04 01 02 01 01 01 01 01 01 19
industries Total 230 97 91 59 46 43 40 36 34 25 701
financial performance to assure its reliability. Since investing in innovation, in particular, green Firms’ ESG-
innovation is a costly activity for most of companies as it requires restructuring and redesigning oriented
of the existing processes, firms may initially have to look for additional funds to take on the cost
of such innovation. This would signify the need of having an analysis of firms’ financial
investments in
performance from the cost-benefit perspective; therefore, using NPM should be the next best innovation
choice as it allows us to determine how the companies can better capture the benefits of investing
in innovation after incurring such significant costs. Furthermore, we used CSR strategy scores
given in companies’ ESG metrics as an additional measure of corporates’ environmental
performance. A detailed explanation of the variables used in this study is provided in Table 2
including the definitions, scale, and Datastream codes that were applied to extract the necessary
information for each variable used in the analysis.

Abbreviated
Variables by Description Scale

Tobin’s q Q Equity’s market value plus book value of total debt Ratio
minus current assets, scaled by total capital (Khalil and
Nimmanunta, 2021)
Net profit margin NPM Net income divided by total sales Ratio
CO2 equivalents CO2 Carbon dioxide total equivalent emission (in tonnes) Ratio
emission divided by total assets (Lee et al., 2015a)
CSR strategy CSR CSR strategy scores show the companies’ approach to Number
convey that it incorporates the financial, social and
environmental-related parameters into their decision
making practices
Traditional TI Investments in R&D scaled by total assets (Nemlioglu Ratio
innovation and Mallick, 2017)
Environmental EI Firms’ environmental R&D expenditures that are Ratio
innovation targeted to lessen the environmental burdens and costs
for their consumers, thus identifying new opportunities
by environmental-oriented technologies to produce
sustainable products and services
ESG scores ESG ESG scores is the overall firms’ scores obtained in Number
response to self-documented evidence in the social,
environmental, and (corporate) governance pillars
Corporate CG The management-related category scores determine the Number
governance companies’ dedication and efficacy towards adopting
best principles of corporate governance
Firm size SIZ ln (total number of employees in a firm) Number
Total assets turnover TAT Total revenues scaled by average total assets Ratio
Firm age AGE ln (total number of years a firm is operating in the Number
market)
Japan JPN 5 0 if the company is not registered in Japan; 1 Binary
otherwise
Hong-Kong H-K 5 0 if the company is not registered in Hong-Kong; 1 Binary
otherwise
Taiwan TWN 5 0 if the company is not registered in Taiwan; 1 Binary
otherwise
Thailand TH 5 0 if the company is not registered in Thailand; 1 Binary
otherwise
Turkey TR 5 0 if the company is not registered in Turkey; 1 Binary
otherwise
Indonesia INDO 5 0 if the company is not registered in Indonesia; 1 Binary
otherwise Table 2.
Definitions and
(continued ) description of variables
CFRI Abbreviated
Variables by Description Scale

Malaysia MY 5 0 if the company is not registered in Malaysia; 1 Binary

otherwise
Saudi Arabia SA 5 0 if the company is not registered in Saudi Arabia; 1 Binary
otherwise
Singapore SGP 5 0 if company is not registered in Singapore; 1 Binary
otherwise
Industrial goods and IG/S 5 0 if company is not classified in industrial goods/ Binary
services services sector; 1 otherwise
Chemical CH 5 0 if company is not classified in chemical sector; 1 Binary
otherwise
Technology TECH 5 0 if company is not classified in technology sector; 1 Binary
otherwise
Health care HC 5 0 if company is not classified in health care sector; 1 Binary
otherwise
Food FD 5 0 if company is not classified in food sector; 1 Binary
otherwise
Travel and leisure T/L 5 0 if company is not classified in travel/leisure sector; 1 Binary
otherwise
Note(s): The Datastream codes used to extract each of the variables used in this study are following:
Market value of equity 5 WC08001; Debt 5 WC03255; Current assets 5 WC02201; Capital stock 5 WC02999;
Profit Margin 5 DWNM; CO2 and equivalents 5 ENERDP023; Total assets 5 WC02999; CSR
score 5 TRESGCGVSS; R&D expenditures 5 WC01201; Environmental innovation score 5 TRESGENPIS;
ESG score; TRESGS; Management score 5 TRESGCGBDS; number of employees 5 WC07011 and Asset
Table 2. turnover 5 WC08401

The key focus of this research was on firms’ investments in innovations as the explanatory
variable; we divided innovation into two categories: traditional innovation (TI) and
environmental innovation (EI). In the ESG database, companies specifically declare their
investments in innovation (R&D) – Datastream symbol: WC01201, and environmental R&D –
Datastream symbol: ENPIDP023. Khalil and Nimmanunta (2021) uses Environmental
Innovation Scores reported by the companies as a proxy for environmental innovation.
However, when linking it to their measure of traditional innovation, it might not be a compatible
measure in terms of its relation to the R&D-related activities of the firms, since the key aspect of
innovation is being addressed in this research is the R&D augmented innovation. Thus, we
utilize a more consistent proxy for environmental innovation, which is environmental R&D -
Datastream symbol: ENPIDP023, which firms disclose in their ESG metrics. In our analysis,
firms’ investments in general R&D and environmental-R&D are divided by total assets and we
stated these terms as traditional innovation (TI) and environmental innovation (EI), respectively.
We considered number of firm-specific elements, including the firm’s age – AGE, size – SIZ,
management scores relating to the firm’s best implementation of corporate governance pillars –
CG, overall ESG performance score – ESG, and total asset turnover – TAT. Since bigger
companies are likely to exhibit ceteris paribus greater financial performance, therefore, it is
important to control for several sectoral dummies, such as firms in industrial goods and services
sector – IG/S, technology sector – TECH, health care sector – HC, chemical sector – CH, travel
and leisure sector – T/L, food sector – FD, and firms in the others group – control set. Lastly,
because of the skewed distribution of data, we include dummies for each economy used in our
sample, including Japan – JPN, Hong Kong – H-K, Taiwan – TWN, Thailand – TH, Turkey – TR,
Indonesia – INDO, Malaysia – MY, Saudi Arabia – SA, and Singapore – SGP (India is randomly
chosen as a control group in the analysis for the comparison purpose).
 Table 3 provides the summary of descriptive statistics and Table 4 reports pairwise Firms’ ESG-
correlation matrix and values of variance inflation factor (VIF) to analyze the multicollinearity oriented
issue among explanatory variables. For our selected sample firms, the average (median) Tobin’s
q – Q value is 3.14 (2.74). The net profit margin – NPM average (median) value is 6.19 (5.82). The
investments in
ratio of carbon emission – CO2 to total assets’ average (median) value is 1.07 (median) (0.09). The innovation
traditional innovation (TI) ratio of enterprises’ R&D investments to total assets is indicated to
have an average (median) number of 0.07 (0.05). Other environmental variables, such as EI, CSR,
ESG, and CG are reported as performance ratings ranging from 0 to 100 scores. Higher scores
indicate that businesses are doing a better job of adhering to sustainable practices.
Environmental innovation (EI) has an average (median) value of 37.8 (35.29).
Pairwise correlation and VIF between variables is reported in Table 4. Tobin’s q – Q is
correlated with NPM, CSR, ESG, EI, and TI, but not with CO2, SIZ, AGE, TAT, and CG.
Carbon emissions (CO2), at one hand, are negatively associated to ESG, PM, CSR, TAT, CG,
EI, SIZ, and AGE. CO2, on the other hand, is positive related with the TI. The majority of the
correlation coefficients are statistically significant; yet the magnitude is small enough across
all explanatory factors. Similarly, VIFs for all the explanatory variables are below 4.00
demonstrating that the regression results are not prone to the multicollinearity problem.

4. Results and discussion

4.1 Estimation of the models
Given the nature and scope of the data we were required to choose between random-effects
and fixed-effects panel regression to estimate our models. To do so, the ideal approach is to

Variables Mean Std. Dev Median Minimum Maximum

Q 3.14 4.11 2.74 0.69 51.34

NPM 6.19 8.50 5.82 2.87 78.31
CO2 1.07 0.12 0.09 0.00 3.04
CSR 44.51 18.81 43.19 0.00 99.81
TI 0.07 0.14 0.05 0.00 4.23
EI 37.08 28.90 35.29 0.00 99.78
ESG 47.50 17.73 46.11 0.00 95.40
CG 49.36 25.67 48.01 0.00 99.89
SIZ 10.16 1.71 9.92 2.93 14.07
AGE 3.87 1.64 3.41 0.00 7.17 Table 3.
TAT 1.31 0.39 1.19 0.96 6.43 Descriptive statistics

Variables Q NPM CO2 CSR TI EI ESG CG SIZ AGE TAT VIF

Q 1 -
NPM 0.13* 1 3.38
CO2 0.21* 0.01 1 2.47
CSR 0.08* 0.06* 0.11* 1 0.43
TI 0.19* 0.15* 0.15* 0.09* 1 1.52
EI 0.05* 0.12* 0.12* 0.31* 0.07* 1 0.08
ESG 0.08* 0.00 0.10* 0.27* 0.01 0.39* 1 3.71
CG 0.03 0.04 0.04* 0.21* 0.01 0.05* 0.41* 1 0.34 Table 4.
SIZ 0.11* 0.01 0.09* 0.29* 0.11* 0.22* 0.14* 0.11* 1 3.67 Matrix of pairwise-
AGE 0.17* 0.11* 0.02 0.04* 0.08* 0.09* 0.00 0.00 0.32* 1 1.55 correlations and
TAT 0.14* 0.12* 0.06* 0.00 0.16* 0.01 0.02 0.00 0.15* 0.05* 1 0.83 variance inflation
Note(s): * reflects p-value < 0.05 factor (VIF)
CFRI examine the values derived from Haussmann test. The null hypothesis of Haussmann test is
that the random effects model is appropriate. Based on the results drawn from the
Haussmann test and given its significant probability value, we reject the null hypothesis and
use periods fixed-effects panel regression instead to analyze equations (1) and (2). The fixed
effect model allows for heterogeneity or individuality among countries by allowing to have its
own intercept value. The term fixed effect is due to the fact that although the intercept may
differ across countries, but intercept does not vary over time, that is why it is time invariant.
The regression results on the estimated coefficients indicating both financial and
environmental performance are shown in Table 5. We begin by estimating the financial
performance measure (Q) using just control variables (SIZ, AGE, ESG, CG, and TAT), as well
as country and sectoral dummies – Model-1 documented in Table 5. The explanatory power
of the Model 1 is fairly better with the R2 value 5 0.29. Except for Japan – JPN, all of the
country-related dummies are statistically significant; therefore, all of these dummies must be
kept in the subsequent models’ estimations to capture country-related variations. Similarly,
except for the industrial goods and services – IG/S, technology – TECH and travel and leisure
– T/L sectors, most sectoral dummies are statistically significant. Company age – AGE, size –
SIZ, asset turnover – TAT, adoption of overall environmental, social, and governance
principles – ESG, and corporate governance – CG scores are among the five company-specific
control measures that are also estimated. Notably, the computed coefficients of all these
control variables are statistically significant. Only ESG and CG are, however, are positively
associated with Q; this is consistent with the literature, which suggests that companies’
attempts to adopt CG and ESG practices have a beneficial impact on their financial
performance (Fatemi et al., 2018; Khalil and Nimmanunta, 2021; Wong et al., 2021). Q was
adversely associated to all other control variables. Although some studies have found a
strong positive influence of company age and size on performance (Hatzikian, 2015), our
findings support the negative impact observed by various other authors (Raja and Kumar,
2005). Smaller organizations are more likely to have growth possibilities; this may occur
beyond a certain threshold since the actual link between company age, size, and its
performance has curvilinearity (Dang et al., 2018), which entails a functional form in a
quadratic shape. As a result, when we add a squared these factor – AGE and SIZ, the
coefficients’ signs changed from negative to positive and became statistically significant –
the estimation was not reported for the sake of brevity. Similarly, CG is negatively related to
Q, which is consistent with previous research (Naushad and Malik, 2015; Nasih et al., 2019),
implying that some CG measures, such as boards’ independence, size, or diversity may have a
negative impact on firm performance (Balsmeier et al., 2017). However, we believe that it may
be dependent on a number of elements, including the type of the business, the structure’s
complexity, and the company’s economic goals.
In Model 2 reported in Table 5, we add CO2 to the list of explanatory variables to
investigate the impact of companies’ environmental performance on their financial
performance. As a result, the model’s explanatory power increased considerably with the
R2 value 5 0.32. All of the countries’ dummies, including JPN, which was previously
insignificant in Model 1, have maintained their statistical significance. Similarly, the sectoral
dummies and the set of control variables hold with the same indications and strength as in
Model 1. As expected, the CO2 coefficient is statistically significant, having a negative
coefficient value of 4.464 (p-value < 0.00). This demonstrates that a higher level of CO2 has a
negative influence on firms’ financial performance, in other words, a lower CO2 level – better
environmental outcome, has a positive impact on firm financial performance (Q) – implying
that our hypothesis 1 is strongly supported. According to some earlier studies (Link and
Naveh, 2006; Iwata and Okada, 2011), environmental performance has little or no impact on
firm value. However, the results of this study demonstrate that environmental performance
has a strong positive influence on firm value. Our findings are consistent with previous
 Firms’ environmental
Firms’ ESG-
Firms’ financial performance performance oriented
Model-1 Model-2 Model-3 Model-4 Model-5 investments in
Variables Q Q Q CO2 CO2
innovation
JPN 0.468 1.461** 1.728*** 0.173*** 0.138***
(0.511) (0.619) (0.421) (0.091) (0.009)
H-K 3.145*** 4.032*** 1.961** 0.115*** 0.083***
(0.715) (0.910) (0.721) (0.025) (0.021)
TWN 3.014*** 2.174*** 3.112*** 0.101*** 0.115***
(0.780) (0.444) (0.562) (0.091) (0.057)
TH 0.214 0.212 0.118 0.291** 2.526***
(0.131) (0.209) (0.090) (0.107) (0.151)
TR 0.041*** 0.011*** 0.021** 0.043*** 0.211***
(0.009) (0.007) (0.003) (0.008) (0.019)
INDO 1.918* 3.140*** 3.003*** 0.158*** 0.207***
(1.061) (1.178) (1.171) (0.012) (0.079)
MY 1.139*** 1.117*** 1.311*** 0.014 0.019*
(0.103) (0.132) (0.151) (0.007) (0.009)
SA 3.815*** 3.009*** 2.701*** 0.190*** 0.210***
(0.719) (0.812) (0.561) (0.038) (0.031)
SGP 4.617*** 3.176*** 4.101*** 0.161*** 0.181***
(2.091) (1.280) (1.171) (0.048) (0.042)
IG/S 0.217 0.021 0.071 0.006 0.009
(0.712) (0.261) (0.269) (0.009) (0.010)
TECH 0.434 0.891*** 0.658** 0.035*** 0.046***
(0.694) (0.251) (0.268) (0.009) (0.007)
CH 2.900*** 0.250 0.160 0.020** 3.600***
(0.812) (0.315) (0.315) (0.013) (1.191)
HC 5.619*** 2.350*** 1.681*** 0.035*** 0.003
(0.819) (0.300) (0.329) (0.010) (0.011)
T/L 1.924 1.370*** 1.040** 0.025* 0.040***
(1.257) (0.479) (0.481) (0.014) (0.017)
FD 2.256** 1.066*** 1.230*** 0.010 0.020
(0.946) (0.361) (0.359) (0.011) (0.014)
SIZ 0.234*** 0.412*** 0.340*** 0.006** 0.008**
(0.108) (0.071) (0.074) (0.003) (0.004)
AGE 0.398*** 1.100*** 1.210*** 0.007 0.010*
(0.180) (0.150) (0.151) (0.006) (0.005)
ESG 0.044** 0.023*** 0.016** 0.001 0.011***
(0.017) (0.007) (0.008) (0.001) (0.001)
CG 0.110*** 0.010*** 0.010** 0.010*** 0.017***
(0.010) (0.003) (0.006) (0.005) (0.003)
TAT 3.515*** 0.240 0.390 0.011 0.003
(0.574) (0.213) (0.220) (0.008) (0.008)
CO2 4.464*** 4.102***
(1.018) (0.913)
TI 20.044*** 0.915***
(4.167) (0.081)
EI 2.630** 1.117***
(0.948) (0.041)
Constant 9.332*** 7.021*** 8.170*** 0.241*** 0.261***
(0.966) (0.953) (0.939) (0.030) (0.027)
Observations 3,136 3,136 3,129 3,141 3,136
R2 0.291 0.324 0.346 0.254 0.275
Adj. R2 0.288 0.319 0.335 0.247 0.268
Note(s): This table reports estimation of our models by employing periods fixed-effects panel regression using Table 5.
data from 2015–2019. Tobin’s q (Q) is used to estimate financial performance (Models 1–3), whereas carbon The estimated results
emission (CO2) is used to estimate environmental performance (Models 4–5). Standard errors are reported in of firms’ financial and
parentheses. The symbols ***, ** and * denote that the estimated coefficients are significant at 1%, 5%, and environmental
10% levels, respectively performance
CFRI research (Long et al., 2017; Rabad
an et al., 2019; Hizarci-Payne et al., 2021), implying that
environmental practices concerning the utilization of natural resources and CO2 reduction
initiatives benefit businesses in terms of improved financial performance. Accordingly,
environmental performance is undoubtedly a significant component in boosting the firm
value of environmentally conscious businesses. These companies generate greater revenues
from increasing environmental quality by lowering carbon emissions, eliminating hazardous
materials, and enhancing waste management system implementation. According to the
value-augmented eco-management perspective (Iwata and Okada, 2011; Fijałkowska et al.,
2018; Khalil and Muneenam, 2021), companies with environmental practices are more likely
to receive financial benefits when they can assimilate their environmental and financial
performance, where a continuous effort in increasing environmental quality leads to
enhanced economic benefits. Investments in environmental programs can help businesses
reduce operating costs by increasing efficiency. Given that corporate performance is
dependent on their ability to achieve eco-efficiency, which allows them to obtain both
economic and environmental benefit at the same time.
We next evaluate the impact of traditional innovation (TI) and environmental innovation
(EI) on companies’ financial performance, and we extend our model by introducing these two
factors regarding innovation reported in Model 3 presented in Table 5. The model’s
explanatory power has improved again compared to the model 1 and model 2, indicates the
value of R2 5 0.34. When the two components related to innovation are added, the estimated
coefficients of most of the sectoral and country dummies, including control variables and
carbon emission (CO2) remain significant. Interestingly, both the TI and the EI coefficients
appear to be statistically significant and positive (þ20.044, þ2.630), showing that both
measures of innovation have a positive impact on companies’ financial performance –
hypotheses 2 and 3 are therefore firmly supported. Our findings are in line with the earlier
research (Munodawafa and Johl, 2019; Shashi et al., 2019; Khalil and Nimmanunta, 2021),
implying that the TI and EI have a strong favorable impact on firms’ financial value. The fact
that firms’ R&D intensity helps improve their financial performance has been extensively
demonstrated in the literature (Gunday et al., 2009; Denicolai et al., 2014; Nemlioglu and
Mallick, 2017). Firms who invest in R&D to build new or change existing setups to assure the
efficiency and capabilities of their operational activities have a higher financial value.
Likewise, when it comes to environmental innovation, companies are more likely to reap
financial rewards if they reform or reorganize their operations to achieve better environmental
benefits (Skordoulis et al., 2020). Improved processes may aid in cost reduction and increased
financial gains. Furthermore, environmentally concerned clients are willing to afford an
increase in the prices, and investors are more likely to invest their funds (Lee et al., 2015a, b).
This may lead to increased revenues and other benefits, such as a good reputation, which may
eventually add to the firm’s market value. Furthermore, the benefits may be lost if all
businesses adopt environmental policies. As the benefits would completely be reflected in the
market prices and businesses would be earning economic profits resulting from their efforts to
incorporate environmental strategies. Therefore, this relationship should cautiously be
interpreted since it may no longer provide a competitive advantage. However, businesses that
do not invest in environmental innovation, on the other hand, will be disadvantaged.
In Model 4, shown in Table 5, we next employ carbon emission (CO2) as a dependent
variable to evaluate the firms’ environmental performance by including just control
variables, as well as sectoral and country dummies. The model’s explanatory power was
reported to have value of R2 5 0.254. The estimated coefficients of dummies of most of the
countries were surprisingly shown to have a negative impact on CO2. This reflects the fact
that CO2 in all of these countries is lower than the control group – India. Except for the
industrial goods and services – IG/S and food – FD sectors, the dummies of all other sectors
are statistically significant. The effect of dummies for the CH and HC sectors, in particular, is
significantly positive, meaning that both sectors significantly contribute to CO2 levels, Firms’ ESG-
demonstrating that these sectors positively contribute to carbon emission levels than the oriented
control group – Others. Company size – SIZ and CG were the only firm-specific control
variables that are negatively and positively related to the CO2, respectively, with the
investments in
significant coefficients. The elements of traditional innovation (TI) and environmental innovation
innovation (EI) are then included in the model 5 to examine their impact on firm
environmental outcomes – Table 5. The model’s explanatory power is slightly improved
compared to the Model 4 with the value of R2 5 0.275. As of model 4, most of the sectoral and
country dummies continue to sustain their statistical significance. Besides SIZ and CG, AGE
and ESG turn out to be statistically significant which were insignificant previously in the
Model 4. As expected, the coefficient of TI is statistically significant (p-value <0.00) and
positive (þ0.915). While the coefficient of EI is statistically significant (p-value < 0.00) and
negative (1.117), it is clear that TI adds positively to CO2, whereas EI helps to improve
environmental outcomes by lowering CO2 level – which therefore lead to a strong
confirmation of hypotheses 4 and 5. The evidence of a positive relationship between TI and
CO2 contradicts with some research (Darnall et al., 2012; Hojnik and Ruzzier, 2016; Fern
andez
et al., 2018); however, they are consistent with others (Awaworyi Churchill et al., 2019; Shashi
et al., 2019; Khan et al., 2020; Petrovi
c and Lobanov, 2020), implying that traditional R&D
investments contributes adversely to the environmental quality by increasing the level of
CO2. Concerning the negative impact of EI on CO2, our findings are in line with previous
research (Carri
on-Flores and Innes, 2010; Yurdakul and Kazan, 2020), implying that
environmental innovation is the most suggestive measure for reducing CO2 and is highly
beneficial to firms’ environmental performance. Environmental innovation has the broadest
scope for developing a competitive advantage by redesigning processes to produce the least
amount of emissions, materials and energy, water and solid waste, and allow having reusable
and recyclable parts are most likely way to achieve the underlying change needed to attain
greater environmental performance.

4.2 Robustness-check
To check the robustness of our earlier estimations, the empirical results provided in Table 6
address different metrics of measuring companies’ financial and environmental performance.
As guided by some researchers (Nemlioglu and Mallick, 2017), we use the net profit margin
(NPM) as an alternative measure of financial performance. Similarly, as recommended by
several researchers (Nazari et al., 2017; Ehsan et al., 2018), we employ the CSR strategy score
reported by the companies in their ESG metrics as an alternative measure of environmental
performance. In Model 6, reported in Table 6, we begin by calculating the influence of
environmental performance measured as reduction in CO2 level on financial performance –
NPM. The model’s explanatory power is shown to be R2 5 0.194. Except for the Indonesia
dummy related to the country dummies and the industrial goods and services – IG/S related
to the sectoral dummies, the coefficients of all other sectoral and countries’ dummies are
statistically significant. The influence of AGE and SIZ on NPM is statistically positive when
looking at the impact of firm-specific control variables. Particularly, total asset turnover –
TAT which was previously not significant in all of the earlier estimations documented in
Table 5 turns out to be negatively associated to the NPM and the relationship is statistically
significant. As expected, the CO2 coefficient is negative (5.437) and highly significant
(p-value < 0.00), implying that greater CO2 levels have a negative influence on firm financial
performance; alternatively, a lower level of CO2 – improved environmental quality, have a
positive impact on firm financial performance. As a result, our hypothesis that environmental
performance has a favorable impact on companies’ financial performance has been
confirmed. When we included TI and EI in the regression of Model 7 reported in Table 6, the
model’s explanatory power increased significantly with the value of R2 5 0.243).
CFRI Firms’ financial performance Firms’ environmental performance
Model-6 Model-7 Model-8 Model-9
Variables PM PM CSR CSR

JPN 4.214*** 3.081* 10.871*** 13.565***

(1.511) (1.591) (3.205) (2.163)
H-K 4.755*** 2.325** 3.176*** 4.074**
(1.104) (1.053) (0.461) (2.001)
TWN 3.431** 6.291*** 12.431*** 14.031***
(1.504) (2.45) (4.043) (3.105)
TH 0.272 0.253** 0.308** 2.661***
(0.263) (0.125) (0.110) (0.173)
TR 0.231*** 0.042** 0.162*** 0.282***
(0.017) (0.019) (0.018) (0.107)
INDO 2.500 1.210 0.672 2.855
(2.840) (2.720) (5.503) (5.541)
MY 3.126*** 2.071*** 0.344** 0.017*
(0.161) (0.253) (0.157) (0.008)
SA 5.101*** 4.011*** 10.191*** 9.983***
(1.310) (1.724) (3.531) (3.381)
SG 7.628*** 5.013** 3.146 3.225
(2.452) (2.011) (6.302) (5.513)
IG/S 0.236 0.330 1.471 1.430
(0.747) (0.716) (1.461) (1.461)
TECH 2.309*** 2.769*** 4.231*** 6.010***
(0.715) (0.690) (1.401) (1.411)
CH 2.401*** 3.562*** 4.812*** 4.280***
(0.850) (0.854) (1.651) (1.603)
HC 5.210*** 5.119*** 7.983*** 8.181***
(0.792) (0.619) (1.453) (1.716)
T/L 2.242*** 2.411*** 0.132 0.171
(0.305) (0.257) (2.540) (2.459)
FD 2.071** 2.184** 8.022*** 8.517***
(0.881) (0.953) (1.941) (1.940)
SIZ 0.320 0.363** 1.131*** 1.093***
(0.145) (0.169) (0.341) (0.348)
AGE 2.012*** 2.388*** 0.801 0.766
(0.371) (0.379) (0.779) (0.773)
ESG 0.432*** 0.041*** 1.301*** 1.281***
(0.038) (0.020) (0.032) (0.037)
CG 0.023** 0.034** 1.244*** 0.256***
(0.010) (0.017) (0.031) (0.035)
TAT 3.191*** 4.011*** 2.170** 0.250
(0.602) (0.581) (1.164) (1.166)
CO2 5.437*** 4.461** 13.131***
(2.034) (1.980) (3.671)
TI 19.471*** 7.997*** 2.532***
(1.250) (2.272) (0.309)
EI 0.021** 0.039* 0.143***
(0.010) (0.020) (0.029)
Constant 12.630*** 10.964*** 6.598*** 5.100**
(2.819) (2.951) (2.186) (2.145)
Observations 3,141 3,136 3,131 3,142
R2 0.194 0.243 0.431 0.526
Adj. R2 0.184 0.237 0.423 0.515
Note(s): This table reports estimation of our models by employing periods fixed-effects panel regression using
data from 2015 to 2019. Net profit margin (NPM) is used to estimate financial performance (Models 6–7),
whereas CSR is used to estimate environmental performance (Models 8–9). Standard errors are reported in
Table 6. parentheses. The symbols ***, ** and * denote that the estimated coefficients are significant at 1%, 5%, and
Robustness-check 10% levels, respectively
As anticipated, the computed TI coefficient reported to have a strong significant (p-value < Firms’ ESG-
0.00) positive (þ19.471) impact on NPM; however, the EI coefficient has an unpredicted oriented
negative (0.021) impact on NPM. This could be due to the fact that businesses may face
costly EI investments that might take longer period to realize the outcomes and contribute to
investments in
their revenues (Ritala et al., 2018). innovation
In Model 8 and Model 9, the robustness of the companies’ environmental performance –
CSR is tested (Table 6). The reported explanatory power of Model 8 (R2 5 0.431) and Model 9
(R2 5 0.526) is much higher than that of all previously calculated models. As expected, the
coefficient of TI is negative (7.997) and highly significant (p-value < 0.00). While the impact
of EI on CSR is positive (0.039), which, however, significant at only 10% level. Thus, our
hypotheses that TI has a negative impact on firms’ environmental performance and that EI
has a positive influence on their environmental performance have been strongly confirmed.
Lastly, we administrate an additional test in Model 9 by incorporating CO2 as an independent
variable in the CSR regression to support our understanding of CO2’s damaging role in
environmental performance. The coefficient of CO2 explained the variation at most in CSR, as
expected; the estimated effect is negative (13.131) and highly significant (p-value < 0.00).
While the TI and EI coefficients are both statistically significant and remained robust on this
additional check. Hence, both CO2 and TI have a negative impact on companies’
environmental performance, whereas EI has the ability to improve both financial and
environmental outcomes. Firms by adopting and maintaining environmental capabilities in
order to achieve superior environmental performance may set marginally higher prices
(Carraro et al., 2010; Clarkson et al., 2011; Ong et al., 2019) by introducing products and
services with more sustainable features, which may result into higher revenues. Similarly,
environmental innovations that improves operations and production processes may assist
cut operating expenses and hence enhance financial performance (Ehsan et al., 2018;
Skordoulis et al., 2020). As a result, businesses should invest in environmental innovations
since it allows them to turn skills associated with environmental performance into financial
performance. Overall, our findings concerning all hypotheses are robustly supported and
insensitive to varied model specifications and empirical settings.

5. Conclusion
This research examines the impact of innovation on the financial and environmental
performance of the firms in several Asian economies. Environmental innovation focuses on
the techniques of pursuing enhanced environmental innovation, while traditional innovation
focuses on firms’ spending on R&D. We examine the relationship between CO2 emission and
financial performance by combining these two innovation perspectives on which firms invest
concurrently and identifying environmental innovation as a key firm’s environmental
commitment to entail a firm environmental strategy. We use the novel set of firm-specific
ESG data of ten Asian countries including Japan, Hong Kong, Taiwan, Thailand, Turkey,
Indonesia, Malaysia, Saudi Arabia, and India from 2015 to 2019 to further develop an
empirical model to investigate the impact of both traditional and environmental innovation
on companies’ financial and environmental performance. Our analysis shows that both
traditional and environmental innovation are enablers for better financial performance.
However, traditional innovation alone is less effective in terms of its environmental outcomes
than environmental innovation. Our findings support environmental innovation as a critical
driver that has a significant influence on both financial and environmental prospects for the
companies.
This research contributes to the domain of green finance, environmental management,
and innovation literature in numerous ways. First, firm-level evidence concerning
environmental and financial impact of innovation are scant, perhaps due to the
CFRI information unavailability issues. Several Asian countries depicts substantial performance
evaluated based on the pace of growth, but reflect inefficiencies when compared with other
regions in curing environmental degradation (Howes and Wyrwoll, 2012; Ong et al., 2019).
Therefore, we focused on such Asian countries and extended the analysis of Khalil and
Nimmanunta (2021) by integrating ESG data to reveal this present challenge across firms
from various industries from different economies. Second, the major focus of the previous
studies was only on the wider facets of innovation in an attempt to measure the firm
performance of particular kind (Schreiber et al., 2016a, b; Awaworyi Churchill et al., 2019; Al-
Ahdal et al., 2020). In this research, we, however, covered this gap by employing innovation in
its decomposed form: environmental innovation and traditional innovation, and jointly test
their link to different performance outcomes, including environmental and financial
performance. Third, this study provides decisive insights concerning the adoption of
environmental strategies and highlighted the importance of capitalizing environmental
innovation with a clear indication that moving towards restructuring the production
processes such that environment and the society are no more on stake via engaging in eco-
friendly products and services, least usage of energy and toxic materials, and better recycling
procedures would result in improved firms’ productivity.
Lastly, findings of this research signify environmental innovation as one of the vital
investment approaches as firms can exploit benefits related to the market from their
sustainable practices, developing eco-friendly processes by introducing the steady yet
systematic chains of green products and services. These sustainable practices would be
advantageous for the firms regarding the possibility of setting prices above the standard
level through establishing green brands and gaining market share of environmentally
concerned customers. For those companies that are striving to take the leading role in the
green industry and longing to seek superior returns on their environmental investments,
these benefits, in particular, are very critical to them.

5.1 Managerial implications

The results of this research have some intriguing managerial implications. First, firms must
develop technology, capability, and allocate investments to address climate change concerns.
Though incorporating environmental sustainability decisions often places constraints on
businesses in terms of bearing additional costs, if properly administrated and executed, such
integrations can reveal potential business prospects, which can lead to improved
environmental outcomes and better financial performance. As we observe in this study,
investing in environmental innovation reduces carbon emission level and improves financial
benefits. However, the actual benefits of environmental innovation and improved
environmental outcomes may not become obvious and remains unknown due to a lack of
measurement techniques, or because corporate managers may not have enough information
and often fail to spot possible opportunities that can offer greater returns. Second, firms need
to ensure that the cost and benefit of environmental innovation are quantifiable and
reportable in order to have visible benefits of enhanced financial and environmental
performance. To assist management in making decisions and defining priorities for the long-
term sustainability of environmental and financial performance, necessary tools are required
to practically assess and report financial and environmental outcomes. Lastly, investors and
stakeholders often enforce corporate executives to make short-term investments, mainly in
environmental innovation and green technologies. Short-term investments are unlikely to
result in financial and environmental success since achieving visible environmental and
financial outcomes may take longer than expected; hence, short-term investment decisions
should be discouraged in order to attain successful performance outcomes.
5.2 Policy recommendations Firms’ ESG-
Environmental innovation plays a critical role in increasing a firm’s financial value as well as its oriented
environmental performance, implying that policymakers should prioritize sustainable
investments to improve innovation outcomes in order to achieve superior financial
investments in
performance and attract environmentally mindful stakeholders. Governments are already innovation
making significant progress in promoting environmental innovation at the national and regional
levels; however, their involvement is critical in developing policies for the advancement of
environmental innovation at the firm level, such as policies for the adoption and implementation
of environmental innovation, as well as related tax incentives. Additional policy initiatives could
include somewhat higher tax rebates on money earned from selling environmental and
increased capital allowances for the execution of radical technologies. Special governmental
prizes can be coupled with companies that perform exceptionally well in their ESG principles,
particularly in sustainable innovation, in order to promote management that is involved in
developing environmental initiatives. Government policymakers considering national carbon
emission policies should also incorporate climate change mitigation and adaptation actions in
their environmental planning and protection programs.
Furthermore, climate change mitigation and adaptation policies necessitate the development
and deployment of novel technological solutions, and both require fundings. To properly
implement the government’s climate change plans, policymakers must establish schemes and
include adequate guidance with financial incentives from their budget. The establishment of a
statutory obligation for accounting and reporting greenhouse gas emission by the Japanese
government, for example, has enabled Japanese companies to manage, quantify, and disclose
CO2 in their financial reports (Lee et al., 2015a, b). Similarly, the Korean government imposed a
similar obligation for Korean enterprises to report emissions, with the goal of facilitating
companies’ climate change management by building a collaborative norm between
stakeholders, leading industries, and the government. Finally, firms can better equip
themselves with capabilities and essential technologies allied to climate change by having
well-established institutional procedures to assess and report climate change concerns.

5.3 Limitations and directions for future research

This research has some limitations that might be addressed by future research. Firstly, our
research has primarily focused on only two components of a company’s environmental
performance: carbon emissions (CO2) and corporate social responsibility (CSR). Given the
complexity of firms’ environmental strategies and the multidimensionality of the variable, which
encompasses a wide range of corporate behavior in terms of relationships with communities,
suppliers, consumers, and broader environmental responsibilities, therefore, it is critical to broaden
the scope of the study to include other important aspects of environmental sustainability. Second,
our sample and analysis focused primarily on some Asian economies. Carbon emission perhaps is
one of the most important aspects of environmental performance because of its potential harm to
the environment and the society. As a result, a more comprehensive data on emissions would
undoubtedly help to improve environmental management measurement and performance
indicators. Lastly, we may also benefit from getting environmental management insights once
studies would conduct as regional comparative analysis based on diverse geographical coverage
and data sources. The issue of regional comparability in the light of environmental management
by the businesses is worthy of further investigation.

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Corresponding author
Muhammad Azhar Khalil can be contacted at: [email protected]

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