When Environmental Performance Drives Financial Performance: The Role of Environmental Products in Engaging Stakeholders as Co‐Creators of Value

ABSTRACT This study investigates when and how environmental performance aligns with a firm's financial performance. Using 911 firm‐year observations from Canadian firms listed on S&P/TSX composite index over the period 2018–2022, our findings indicate that environmental performance may negatively impact financial performance. However, this relationship shifts when firms integrate the development and commercialization of environmental products, also known as eco‐designed products, into their environmental strategies. The interaction between environmental performance and environmental products positively affects financial performance, mitigating and in some cases offsetting the adverse effects of environmental initiatives on financial performance. Our findings suggest that firms can convert environmental performance into economic value more effectively by shifting from broad, firm‐level environmental visions to customer‐oriented and brand‐integrated actions. By offering eco‐designed products, companies can differentiate themselves, send visible and credible signals of their environmental commitment, reduce information asymmetry and align their sustainability efforts with stakeholder expectations. In doing so, firms actively engage consumers in sustainability initiatives, transforming them into co‐creators of economic value while simultaneously contributing to the preservation of a healthy environment.