The impact of Green House Gas emission on firm's performance in Japan

Abstract

This study investigates the impact of greenhouse gas (GHG) emissions on corporate financial performance in Japan, with a particular focus on the role of environmental regulations. We hypothesize that while lower GHG emissions generally enhance financial performance, the benefits diminish beyond a certain point. Additionally, we examine how stringent environmental regulations influence this relationship. We use total GHG emissions and total GHG emissions per company’s enterprise value including cash (EVIC) as the proxies. The results indicate that GHG emissions negatively impact corporate financial performance, as measured by ROA and Tobin's Q. However, the regulatory environment, whether stringent or not, does not significantly alter this relationship. These findings suggest that while regulatory measures might have short-term profitability implications, they do not necessarily negatively impact long-term firm valuations. Furthermore, the study reveals that companies with lower emissions may incur fewer long-term costs highlighting the financial benefits of effective pollution management, particularly in the context of strict environmental regulations. Also, the study provides valuable implications for policymakers and businesses, highlighting the complex interplay between environmental responsibility, regulatory frameworks, and financial performance.