The Impact of Sustainability Practices on Firm Financial Performance and Market Valuation: Evidence From a Global Panel Data Analysis

ABSTRACT This study examines the relationship between three prominent sustainability practices, namely green innovation, emission reduction, and energy efficiency, and their influence on firms' accounting profitability and market valuation. The analysis uses a global dataset comprising 12,144 firm‐year observations across 1518 firms. By employing fixed effects panel models alongside dynamic panel data estimators, the study identifies a clear short‐term pattern. Green innovation demonstrates, at most, a weak and statistically unstable connection with profitability and valuation, indicating that its potential benefits are neither immediately reflected in financial statements nor consistently recognized by investors. In contrast, emission reduction and energy efficiency are regularly linked with lower contemporaneous profitability, which reflects the immediate investment costs and frictions associated with transitions. The dynamic specifications indicate that these adverse impacts on accounting performance persist over multiple years. Market valuation remains largely neutral in the near term and shows only a modest negative response with a lag for intensive efforts related to emission reduction and energy efficiency. These findings remain robust when considering alternative performance measures and vary across industries, market structures, and regulatory environments. The evidence highlights a temporal trade‐off in which sustainability initiatives often entail short to medium term financial costs, even though their strategic and valuation benefits are likely to emerge only over longer periods.