Impact of Corporate Governance Mechanisms and a Firm’s Financial Performance: The Mediating Role of Leverage in Carbon-Intensive Firms in South Africa

This study seeks to establish how financial leverage mediates the relationship between corporate governance and the financial performance of 58 carbon-intensive firms listed on the Johannesburg Stock Exchange over the period 2015–2023. This study employed the two-step system generalised method of moments to address endogeneity issues. The results indicate that leverage negatively impacts a firm’s financial performance, but leverage does not mediate the relationship between corporate governance and a firm’s financial performance in carbon-intensive firms. The results of the study also reveal that board remuneration negatively influences a firm’s financial performance, yet board independence has an insignificant impact on firm performance. These results underscore the need for carbon-intensive companies to reassess their remuneration policies to ensure alignment with short-term financial benefits and long-term sustainability initiatives. The findings also suggest that sustainability projects financed predominantly by debt may negatively impact short-term financial performance, indicating the importance of a balanced capital structure during the decarbonisation process.