GHG and Carbon Emission Intensity: Examining Their Impact on Financial Performance

Abstract

Governments worldwide have implemented various strategies to reduce carbon emissions, with policies targeting high-emission industries such as energy, transportation, and manufacturing. However, developing Southeast Asian countries, including Malaysia, face challenges in balancing economic growth with emission reduction efforts due to financial constraints. Despite these challenges, Malaysia has made notable progress through its National Policy on Climate Change, pledging to reduce carbon intensity by 45% by 2030. In response to growing stakeholder demands for sustainability, companies are increasingly adopting sustainable practices to improve their environmental performance, often measured by Carbon Emission Intensity (CEI). CEI is a crucial indicator that offers a relative measure of environmental impact, considering a company’s economic output. The focus on Environmental, Social, and Governance (ESG) criteria has heightened the importance of CEI, particularly as companies with lower CEIs are viewed more favourably by investors. However, the relationship between carbon reduction efforts and financial performance remains inconclusive. This study examines the impact of carbon reduction efforts on the financial performance of Malaysian companies from 2019 to 2023. Using two widely recognized financial performance measures, Return on Assets (ROA) and Tobin’s Q, the study investigates the influence of Greenhouse Gas (GHG) emissions and Carbon Disclosure Project (CDP) participation on these metrics. The study utilizes panel data analysis on 1087 listed companies and applies multiple regression analysis using the STATA software package. The findings reveal a positive correlation between GHG emissions and ROA and Tobin’s Q, suggesting that companies not actively reducing emissions may still experience short-term financial gains. Conversely, CDP participation negatively impacts both financial indicators, likely due to the increased compliance costs associated with sustainability initiatives. The results underscore the need for a balanced approach that aligns environmental responsibilities with financial performance as Malaysia transitions to a low-carbon economy.