Linking Environmental Performance and Financial Profitability of Companies under Greenhouse Gas Emissions Trading

Given the current climate crisis, several international measures have been taken to combat air pollution, including the European greenhouse gas emissions trading scheme (EU-ETS). This tool is vital for those organizations forced to participate in the system (because of their sector of activity) since their production could be restrained by the emission limits, or their profitability could be reduced because of the acquisition of emission rights or investments in carbon-reducing policies or technologies. Through an OLS multiple linear regression, this paper analyzes the relationship between three measures of environmental performance and the financial performance of European companies, both belonging to the EuroStoxx600 index and participating in the EU-ETS, in the period 2018–2022. The results show a significant and negative relationship between the company's financial profitability and the level of CO2 emissions, that is, low carbon emitters present higher levels of financial performance. This result implies that, although in the short term, it is possible that investing in carbon-reducing measures impacts firms’ profitability, in the long term, these obstacles are compensated by higher returns for EU-ETS participants.