Environmental-Practices, Digitalization and Financial Performance: Evidence from Industrial Firms in Eastern and Western Europe

This study analyzes how sustainability practices and digitalization jointly influence the financial performance of European industrial firms, emphasizing differences between Western and Eastern Europe. The empirical analysis relies on a large multi-country panel dataset and employs fixed effects regression models with robust standard errors to account for unobserved firm-specific heterogeneity and common time shocks. Environmental sustainability is captured by the environmental component of ESG scores, digitalization is measured by digital investment intensity, and financial performance is proxied by return on equity (ROE). The findings indicate that stronger environmental practices are positively associated with profitability across the full sample. Digital investment intensity also has a positive and statistically significant effect on ROE. Importantly, the interaction term between environmental performance and digitalization is positive and significant for Western European firms but not for the full sample, suggesting that the relationship between environmental practices and financial performance may vary with the level of digital investment under specific regional conditions. However, the results reveal substantial regional heterogeneity. The positive effects of environmental practices, digitalization, and their interaction are primarily driven by firms in Western Europe, whereas the relationships are weaker and statistically insignificant in Eastern Europe. These findings underline the complementary role of digital transformation and the importance of institutional and technological readiness.