The paradox of increased carbon emissions and firm performance

As one of society’s grand challenges, climate change increasingly presents unprecedented consequences for businesses. Despite assumptions on the effects of climate change, the relationship between carbon emissions and the strength of a firm’s performance is unclear, subject to enduring debate, with mixed outcomes. This article provides a critical view of this relationship, focusing directly on firm growth, market value, and climate change effects. It considers the performance paradox—a contradiction between a course of action and an inability or unwillingness to manage, alter, or problem solve this awareness—derived from increased carbon emissions, and incorporates the effects of industry clockspeed and open innovation. Observing a sample of 640 high-tech manufacturing firms over a 7-year period, producing 4480 firm-year observations, and applying two-stage least squares (2SLS) panel regression modeling, we find that better firm growth generates more carbon emissions that impact negatively on market value of the firm. The study indicates that the positive relationship between prior growth and carbon emissions is more pronounced in high clockspeed industries, while firms that actively collaborate with partners to innovate weaken the negative relationship between carbon emissions and market performance. These findings help explain why despite increased attention on climate change strategies, firms do not (or cannot) actively reduce their carbon emissions while they are profitable. Implications of findings provide a pragmatic avenue to avoid this performance paradox.

JEL Classification: M14, Q54