Can ESG and green innovation investments contribute to reach carbon emission efficiency and enhance sustainable firm valuation

Purpose The objective of this study is to measure the impact of environmental, social and governance (ESG) disclosure and green innovation initiatives on carbon emission efficiency (CEE) and firm valuation among companies operating in energy-intensive and heavy polluting industries. Design/methodology/approach The sample comprised ESG reporting data disclosed to London Stock Exchange Group Asset 4 Database (previously Refinitiv). Our final sample included 326 companies and comprised 3,260 firm-year observations. Feasible generalised least squares (FGLS) and Driscoll–Kraay standard errors techniques were utilised. All analyses were conducted using Stata 17. Findings The results confirm that companies integrating ESG initiatives to business models enhanced their CEE. Green innovation initiatives did not have significant impact on CEE performance. On the contrary of ESG literature, the results suggest that ESG investments and green innovation initiatives have significant but negative impact on firm valuation. Overall, this study underlines the significant role of ESG investments in energy-intensive heavy polluting industries in enhancing CEE performance and reaching global carbon goals on a micro level; it further pinpoints the relevance for the construction of strategic regulatory adaptation of risk mitigation initiatives and financial incentives on an industry basis. Originality/value The results imply that the long-term nature of sustainability projects and high financial costs force companies to use external financial leverage which added to sector-specific mandatory governance requirements that act as a financial burden for companies operating in energy-intensive sectors prolonging the positive effect on the valuation of firms.