This article has been reviewed according to Science X's editorial process and policies. Editors have highlighted the following attributes while ensuring the content's credibility: Consumers are increasingly choosing products from companies that demonstrate genuine environmental responsibility. While many studies have linked environmental, social and governance (ESG) performance with stronger financial results, exactly how environmental responsibility translates into higher profits has remained unclear.
A new study suggests that sustainability improves corporate financial performance indirectly by increasing sales. Now, a study led by professor Sang-Ho Lee of the Department of Economics at Chonnam National University in South Korea, in collaboration with professor Arturo Garcia of Universidad Autónoma de Nuevo León in Mexico, has identified sales as the key mechanism linking environmental responsibility with financial performance. Their study was published in the journal Corporate Social Responsibility and Environmental Management.
Growing concern about climate change has encouraged companies across industries to reduce emissions, adopt greener technologies and strengthen their environmental practices. At the same time, consumers have become more conscious of the environmental impact of their purchasing decisions, increasing pressure on businesses to demonstrate credible sustainability efforts. As consumers have become increasingly conscious of the environmental impact of their purchasing decisions, environmental responsibility has become an important factor influencing buying behavior.
"As green consumerism is increasing, the escalating global concern over climate change has compelled firms across numerous industries to integrate eco-friendly practices, such as greenhouse gas reduction and the adoption of green technologies, into their core operations," Lee explained. To understand how environmental responsibility affects financial performance, the researchers analyzed ESG ratings from the Korea Corporate Governance Service and financial data from the KIS Value database for 579 publicly listed Korean companies, representing 2,316 firm-year observations between 2019 and 2022. Using mediation and moderated mediation analyses, they investigated whether sales explain the relationship between environmental responsibility and financial performance and whether this relationship varies by firm type and before and after the COVID-19 pandemic.
The analysis showed that environmental responsibility did not directly improve financial performance. Instead, companies with stronger environmental performance generated higher sales, leading to improved returns on assets and equity. This indirect relationship was significant for large Chaebol firms but not for non-Chaebol firms, suggesting that larger companies are better able to convert environmental initiatives into stronger consumer demand through greater visibility and reputation.
The sales-mediated effect also became significantly stronger after the COVID-19 pandemic, reflecting increased consumer and stakeholder sensitivity toward sustainability. The findings highlight sales as the pathway through which environmental responsibility creates economic value. "This approach can potentially be applied to other countries that have different business styles and different degree of green consumerism," added Lee.
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