The Impact of Environmental Innovations on Financial Performance: Examining the Influential Factors
Anastasia Semenova, Konstantin Semenov. Higher School of Economics, St. Petersburg, 194100, Russia. Peter the Great St.Petersburg Polytechnic University, St.Petersburg, 195251, RussiaAuthors' contact: [email protected], [email protected]
Abstract. Despite being extremely relevant and widely discussed, the question of how environmental innovations affect firms’
financial performance remains controversial. The available literature on the topic shows ambiguous results: while some studies
provide empirical evidence for the positive impact of green innovations on financial performance, others reveal a negligible or
negative relationship between green innovations and financial performance. We performed the meta-analysis of the 29 selected
studies covering the period from 1999 to 2017. It was found that there are no sufficient grounds to consider that the location of a
firm substantially affects the possibility of the positive impact of environmental innovations on the financial performance. The
likelihood of positive impact of green innovations on financial performance innovations is related to the probability p≈(0.7÷0.9)
under some general assumptions. Usage of the qualitative methods of research tends to provide a more positive assessment of the
impact of environmental innovation on financial performance in comparison to quantitative methods.
The growing ecological awareness of consumers, the increase in the significance of corporate social responsibility,
the proenvironmental transformation of the legal environment spur companies regardless of their size to environmental
innovation  as it becomes crucially important for their development, growth and competitiveness .
Firms are often considered to be particularly successful in innovating and are usually regarded as one of the main
contributors to “greener societies” . So, environmental innovation is becoming a common environmental strategy
adopted by many firms that helps to achieve superior environmental and economic performance simultaneously [4,5].
The following numbers speak for themselves: for the period ranging from 2000-2011, in BRICS environmental
technology patents applications increased by 528% while all patents applications grew by 362.7%. In Canada, the
same indicator increased by 16% while all patent applications grew by minus 1.1% (“Green Growth Indicators” ).
Still, it is vitally important to attract more firms in environmental innovation activities, and awareness of how firms’
environmental innovations impact their financial performance helps to contribute to healthier possible expectations.
The available literature on how environmental innovations impact financial performance shows ambivalent results:
while some studies provided empirical evidence for the positive impact of eco-innovations on financial performance,
others reported an insignificant or negative link between them . This paper sets out to address this ambiguity by
examining the influential factors that affect the impact of environmental innovations on financial performance by
analyzing the results of the 29 selected studies from different perspectives. In particular, our findings provide an
overview and meta-analysis of the studies in the context of the methodology used, context, location of the firms, and
the conclusions the studies come to.
The initial search of relevant papers that was conducted with the focus on the articles that analyzed the environmental
innovations and financial performance relationship. According to [8, 9], we reduced the initial number of articles
selecting the domain and field-specific documents thus aiming to focus more specifically on economic and financial
performance-related documents. The articles obtained were further subjected to another filtration that used different
ranking metrics such as SJR, SNIP, and Citation scores in the Scopus database. Based on the findings from Citation
count, we identified the five journals that seem to have high citation growth: Journal of Cleaner Production,
Sustainability, Business Strategy and the Environment, IEEE Transactions on Engineering Management, International
Journal of Environmental Research and Public Health. Thus, we identified a total of 29 documents for analysis.
To be able to compare different studies it was necessary to focus on certain factors. We decided to focus on the
location factor – where the studied firms were located, the number of firms studied, methodology that was used in the
studies, and the conclusion – negative or positive – about how environmental innovations affect financial performance.
The following research questions were set forth.
1. How does the firm’s location influence the environmental innovations and financial performance relationship?
2. What is the probability of a positive impact of environmental innovations on financial performance?
3. Does the number of firms selected in the studies’ samples impact the studies’ results?
The answer to the first question helps to reconcile the potentially inconsistent data of the studies reviewed. To
perform relevant analysis to get the answers to questions 1 and 2 the following general assumptions were applied:
– all the collected data can be treated as homogeneous in the sense of estimating the probability of a random firm
to show the positive impact of environmental innovations on financial performance – neither the taken time period
nor other factors affect the conclusions about impact of environmental innovations on the financial performance.
– Firms were selected randomly for the reviewed studies.
– We assume that the authors of reviewed studies interpret the impact of environmental innovations on financial
performance as positive or negative in full accordance with the typical five-level Likert scale: the effect is considered
positive or negative if not less than 80% of firms reveal positive or negative impact correspondingly; in the case of an
ambiguous impact, we have from 40% to 60% of firms that reveal positive or negative impact.
The relevant papers selected for the research do not seem to provide an explicit consensus on how environmental
innovations affect financial performance. The following three directions can be specified. The first direction declares
the positive impact of environmental innovations on financial performance [3, 10-21]. These studies show that
environmental innovation has a robustly positive effect on firm performance dimensions – environmental, operational,
financial . Environmental innovation is also found to be the mediator that transforms the benefits of environmental
performance into financial performance .
The second direction is identified with the negative impact of environmental innovations on financial performance
[28-30]. The studies state that the efforts in green innovation do not reflect positively on their financial performance
[28, 30]. Too much concentration on green innovation has a negative influence on both accounting and stock market
The third direction comprises the studies that do not provide a clear and precise assessment of how environmental
innovations affect financial performance. These studies demonstrate dual results, i.e. having a positive impact on some
of the financial indicators, environmental innovations weaken others [31-37]. Environmental innovations are
characterized by higher returns on assets and equity and, at the same time, lower earnings retention . The impact
of environmental innovations on financial performance can be positive at first but weakens during some time .
Answering the first research question, we see that a large part of the data belongs to Chinese firms (9 out of 29
studies). So, we split the data into two groups based on firms’ location: China and the rest of the world. All the nine
studies related to Chinese firms recognize the impact of environmental innovations on financial performance as
positive and only 10 out of 20 studies that refer to other parts of the world claim a positive impact as well. At a first
glance, the location factor’s influence seems to be substantial, but a more sophisticated analysis does not confirm this.
The studies included in this review apply various approaches and regression models using different sets of control
variables to analyze the impact of green innovations on financial performance. The results obtained by the authors of
these studies have different levels of statistical significance (from 0.01 to 0.10) and statistical error (usually expressed
as a standard deviation or statistics of the Student's test for checking the significance of the regression coefficient).
These circumstances, together with a significant weight of regression residuals in the total variability of the
analyzed data, reduce the possibility of quantifying the probability of an increase in the financial performance as a
result of "green" innovations. This prompts us to use partly qualitative approaches in our rationale of the location as
one of the influential factors. For that, the Likert scale is used to assess the proportion of firms that demonstrated the
increase in financial performance as a result of environmental innovation activities. Thus, our research partly follows
the papers  and  by applying the Likert scale, and the paper  using Cronbach's alpha for latent variables.
The five-level Likert scale fully complies with the Chaddock scale in the part dedicated to the close and strong
correlation and is consistent with the generally accepted interpretation of Cronbach's alpha values greater than 0.8.
Several studies demonstrate the positive effect of environmental innovations on financial performance. This effect is
of a statistical nature and does not mean that all firms that implement eco-innovations would necessarily increase their
financial performance due to their environmental activities. In fact, the financial performance would be increased on
average and obviously, some firms would observe a decline in their financial performance.
To assess the ratio of such firms in the total number of companies selected for the study, we apply the Likert scale.
According to it, the statement that eco-innovations positively impact financial performance will be considered true if
at least 80% of selected firms observe an increase in financial performance. Applying the Clopper-Pearson 95% onesided confidence interval for probability, we can estimate the statistical error for the probability of positive impact of
environmental innovations on financial performance for the case of China and for all other countries separately:
|where ni is the number of reviewed firms in i-th corresponding study|
The obtained intervals are in sufficient compliance as they have non-zero interaction. So, despite the seeming
discrepancy, there are no sufficient grounds to consider the intervals discrepant. Consequently, the meta-analysis of
the Chinese firms against the rest of the world does not support the hypothesis of the location factor influence on the
positive financial impact of implementing environmental innovations.
To answer the second research question, we handle all the data collected using the same scheme described above.
Considering the statistical uncertainty with the Clopper-Pearson confidence interval, the ratio of firms observing the
positive impact of environmental innovations on financial performance is roughly [0.71; 0.92] ≈ (0.7; 0.9).
To answer the third research question, let us consider the studies with positive, negative, or ambiguous impacts of
environmental innovations on financial performance separately. If the number of firms is considered as a random
variable in each study, we can calculate the cumulative distribution functions (see Fig.1) for the first (marked as
«positive affect» and green curve) and the second mentioned groups («negative or ambiguous effect» and red curve).
We see that these two mentioned distributions of the number of firms differ significantly. To prove this statement, we
compared these two sets of firms’ samples sizes using the following statistical methods (for significance level =0.10).
– Student t-test for comparing mathematical expectations values of these distributions (using Cramer-Welch
modification for estimating the critical value for t-test statistics) provides the statistic value t=1.94 bigger than the
critical one tcrit=1.72. So, the null hypothesis on the equality of the mathematical expectations is rejected.
– Mann-Whitney U test for comparing the medians of the analyzed distributions brings us to the statistic value
U=1.65 bigger than the critical one Ucrit=1.64. So, the null hypothesis on the equality of the medians is rejected, too.
These results vividly illustrate that the studies, that interpreted the impact of environmental innovations on financial
performance negatively or ambiguously, systematically worked with smaller samples of firms rather than the studies
that stated the positive impact of environmental innovations. The reason for this might be the following. Relatively
small samples of the selected firms vindicate certain challenges in data collection in a particular study: the obtained
data was supposedly exposed to filtration and, therefore, biased as not all types of companies are obliged to make their
financial reports public. When the sample size is sufficiently big, the abovementioned effects are mitigated. This
context can also be treated as a remarkable manifestation of Simpson’s reversal paradox.
This analysis brings us to one more interesting conclusion. The qualitative methods are prone to demonstrate the
positive impact of environmental innovations on financial performance. In fact, all the reviewed studies with
qualitative methods applied conclude positive financial impact caused by environmental innovations (see [12, 14, 15,
22, 23, 27, 38]). Apparently, at the moment we do not have sufficient reasons to consider this result does not depend
on the geography of the study or other variables. This effect can be possibly explained by the tendency of the managers
to somehow exaggerate their companies’ success. So, we believe that there are grounds not to recommend using
qualitative methods in assessing the impact of eco-innovations on financial performance.
This study contributes to the literature dedicated to the relationship between environmental innovations and financial
performance by providing a comparative review of current directions of assessing this relationship as well as the metaanalysis of the 29 selected studies related to the topic. The meta-analysis brought us to the following findings.
1. The approximate analysis of the data selected for the current research does not suggest that the location factor
significantly affects the relationship between environmental innovations and financial performance.
2. The likelihood of the positive impact of environmental innovations on financial performance is related to the
probability p≈(0.7¸0.9) under some general assumptions.
3. The small number of firms in the sample increases the chance of considering the impact of environmental
innovations on the financial performance as negative or ambiguous, when in fact it might be not.
4. The qualitative methods of assessing the relationship between environmental innovations and financial
performance tend to show the positive impact of eco-innovations on financial performance.
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