Investigating the effect of esg performance and emission level on financial flexibility: is being green worth it?

Abstract

In the context of integration and globalization, an economy always faces financial uncertainty caused by unpredictable factors, namely trade conflict, economic depression, COVID 19 and especially climate change. Being highly aware of the importance of financial flexibility, firms have taken urgent actions to increase their capability to deal with such financial constraints and maintain their economically stable conditions. Therefore, investors and firms’ managers have started a tendency to consider elements related to ESG (Environmental, Social and Governance) when talking of financial flexibility. This paper is written to explore the relationship between ESG performance, GHG (Greenhouse gas) emission and financial flexibility. We will discuss about the question “Is being green worth it?” by testing whether ESG-related actions can bring much benefits to enhance firm’s value. We carried out FGLS (Feasible General Least Squared) method to test for the hypotheses and investigate variables’ connections. The result shows that, with positive association between ESG performance, which is parallel to the connection of E (Environment) performance, and financial flexibility. Furthermore, we saw that ESG actions can also help reducing the impact of Emission, which may lead to Carbon risk or even business risks to the firm. By utilizing the research result, firms’ managers can give out optimal decision to overcome such challenges