Green to Gold? An Empirical Study of the Relationship between Firm Environmental and Financial Performance

Previous empirical work suggests that poor firm environmental performance is negatively associated with firm financial performance. A common measure of firm environmental performance is emissions of toxic chemicals, typically taken from the EPA’s Toxic Release Inventory (TRI). However, TRI emissions do not accurately represent the actual health risks posed by these emissions as they do not take into account factors such as chemical toxicity and exposure. Therefore, the relationship between risk-adjusted emissions and firm financial performance is unknown. To explore this issue and others, this paper analyzes 148 US manufacturing firms over the time period 2000 – 2003. Once I control for time-consistent firm-level features, I find evidence of a negative association between risk-adjusted emissions and firm financial performance across a variety of specifications. More generally, I provide consistent statistical evidence that environmental performance does impact firm financial performance.