Environmental responsibility improves financial performance by increasing sales

As consumers increasingly favour environmentally responsible companies, businesses face growing pressure to transform sustainability into a competitive advantage. A new study demonstrates that environmental responsibility indirectly improves financial performance by increasing sales. This identifies a key mechanism that has received little attention until now.

The effect was more pronounced among large conglomerate companies (Chaebol). It became even more significant after the Covid-19 pandemic, highlighting the growing influence of green consumerism on corporate success.

Consumers are increasingly choosing products from companies that demonstrate genuine environmental responsibility. Many studies have linked environmental, social and governance (ESG) performance to stronger financial results. However, the exact way environmental responsibility translates into higher profits has remained unclear. A new study suggests that sustainability indirectly improves corporate financial performance by boosting sales.

Results highlight how sales are the channel through which environmental responsibility creates economic value

The study was led by professor Sang-Ho Lee from the department of economics at Chonnam National University in South Korea, in collaboration with professor Arturo Garcia from the Universidad Autónoma de Nuevo León in Mexico. It identified sales as the key mechanism linking environmental responsibility to financial performance. The research was recently published in the journal Corporate Social Responsibility and Environmental Management.

A statement noted that growing concern about climate change has prompted companies across all sectors to reduce emissions, adopt greener technologies and strengthen their environmental practices. Simultaneously, consumers have become more aware of the environmental impact of their purchasing decisions. This has increased pressure on businesses to demonstrate credible sustainability efforts.

“With the rise of green consumerism, growing global concern about climate change has forced companies in numerous sectors to integrate eco-friendly practices into their core operations, such as reducing greenhouse gases and adopting green technologies,” explained Lee.

To understand how environmental responsibility affects financial performance, the researchers analysed ESG ratings from the Korea Corporate Governance Service. They also examined financial data from the KIS Value database for 579 listed Korean companies, totalling 2,316 firm-year observations between 2019 and 2022. Using mediation and moderated mediation analyses, they investigated whether sales could explain the relationship between environmental responsibility and financial performance. They also explored if this relationship varied by company type and before or after the Covid-19 pandemic.

Strategies that strengthen both environmental responsibility and consumer trust must be encouraged

Companies with better environmental performance generated higher sales, leading to improved return on assets (ROA) and return on equity (ROE). This indirect relationship was significant for large Chaebols but not for non-Chaebol firms. This suggests that larger companies are better able to convert environmental initiatives into greater consumer demand due to their superior visibility and reputation. The sales-mediated effect also became significantly stronger after the Covid-19 pandemic, reflecting increased consumer and stakeholder sensitivity towards sustainability.

The results highlight that sales are the channel through which environmental responsibility creates economic value. “This approach can potentially be applied to other countries characterised by different business styles and varying levels of green consumerism,” Lee added.

The note states that the researchers believe their findings can help businesses, investors and policymakers better understand the economic benefits of sustainability. This understanding encourages strategies that strengthen both environmental responsibility and consumer trust.