Environmental corporate social responsibility and financial performance: Disentangling direct and indirect effects

This paper assesses the impact of environmental corporate social responsibility (ECSR) on Corporate Financial Performance (CFP) measured by ROA and Tobin's Q. We show that the relationship between firms' return on assets (ROA) and ECSR, strengths and concerns, is negative and statistically significant. We also show that firms' Tobin Q and ECSR, strengths and concerns, are negatively correlated in a statistically significant way. However, accounting for the interaction between firms' environmental efforts and R&D yields a different perspective: while the direct impact of ECSR on CFP is still negative, the interaction of ECSR and R&D has a positive and significant impact on it. ECSR strengths and concerns harm CFP since they are perceived as a potential cost. However, this CSR activity fosters R & D efforts of firms which generates additional value (indirect effect).

► This paper assesses the impact of environmental corporate social responsibility (ECSR) on financial performance (CFP). ► The relationship between CFP and ECSR, strengths and concerns, is negative and statistically significant. ► The interaction of ECSR and R&D has a positive and significant impact on CFP. This captures the indirect effects of ECSR. ► The transmission mechanism: ECSR has a strong positive impact on R & D, which is positively correlated with CFP. ► Direct and indirect effects are economically important.