The empirical findings showed a positive relationship between the environmental pillar score and financial performance in Brazil, Mexico, and Chile.

Los hallazgos empíricos revelaron una relación positiva entre la calificación del pilar ambiental y el desempeño financiero en Brasil, México y Chile.

During the decade spanning from 2010 to 2019, the world witnessed high levels of climate change, with global temperatures being the warmest ever recorded (United Nations, 2019). Also, the concentrations of carbon dioxide (CO2) and other greenhouse gases in the atmosphere reached new heights, particularly in 2019 (Yang et al., 2020). Given that climate change affects everyone, there has been a shift towards new economic models based on environmental standards (Seyfang, 2010; Chang & Zhu, 2022). For instance, the Paris Agreement, which came into effect in 2015, attempts to counter the threat of climate change by limiting global temperature increases to less than 2°C (Höhne et al., 2017) above pre-industrial levels (Alcamo et al., 2020).

In this regard, core business strategies should incorporate environmental concerns (Johannsdottir & McInerney, 2018), such as pollution, global warming, overpopulation, waste disposal, biodiversity loss, deforestation, ozone layer depletion, and acid rain (Refinitiv, 2022). To gain a better understanding of these issues, corporate management has introduced new aspects, including Environmental, Social, and Governance (ESG) scores, designed to provide insights into sustainability and business practices (Kumar & Dua, 2021; Zhang, Malik et al., 2022). Additionally, countries have prioritized environmental issues, such as global warming, in their political agendas (United Nations, 2019; Gürlük et al., 2015). From a business perspective, the environmental component (E) evaluates how firms take actions to protect the environment and minimize damage. It encompasses issues related to climate change, natural resource management, pollution, waste disposal, and environmental opportunities (Lee & Suh, 2022). This is supported by Korobeinikova et al. (2021) and Sarfraz et al. (2023), who indicate that environmental performance, along with financial performance, is a key objective in the realm of sustainable development, shaping the modern definition of firms’ sustainable development. Therefore, addressing environmental concerns opens doors to capture economic benefits by curbing environmentally damaging practices (Dean & McMullen, 2007).

Furthermore, the growing sustainability mindset has led businesses to follow a positive trend that not only concentrates on economics but also on ESG matters (Neori et al., 2004; Sharma et al., 2021). In this regard, addressing environmental issues contributes to preventing temperature increases while also yielding profits. However, a significant challenge remains: incorporating climate risk from an investment perspective and building investable portfolios (Bender et al., 2019). For example, Cortez et al. (2022) showed that, in recent years, green energy portfolios have performed better than their non-green counterparts. This underscores the essential role of financial performance in business models, where an inclination toward climate-resilient activities significantly impacts capital flows. Considering that preserving environmental resources is one of the best ways to improve corporate financial performance (World Economic Forum, 2018; Nuzula, 2019), Latin American firms have been implementing environmental strategies as the focal point of their operations in recent decades (Alt et al., 2015).

Firms can create shared value in several ways, including reducing raw material costs and minimizing natural resource depletion (Alt et al., 2015). Moreover, logistics is strongly correlated with environmental and financial performance. According to Rintala et al. (2022), combining different logistics orientations can help firms meet stakeholder expectations and transform resources into enhanced environmental and financial performance. Thus, incorporating the sustainability concept into the core business strategies is crucial (Ferrat, 2021; Mejia-Escobar et al., 2020). Ultimately, what matters the most is firms’ financial performance with implications in ESG considerations, particularly in the environmental ones (Nollet et al., 2016). All of these aspects have a profound connection with the Sustainable Development Goals (SDGs), particularly Goals 3, 6, 7, 11, 12, and 13. In fact, one of the primary objectives of these goals is to facilitate the establishment of mechanisms aimed at enhancing the capacity for effective climate change-related planning and management in the least developed countries and small developing nations (United Nations, 2019).

Recent literature in the field has explored how investors are looking for firms capable of developing mitigation, adaptation, and climate risk strategies (Bender et al., 2019; Ren et al., 2022; Wu et al., 2022). In addition, the number of studies into the relationship between environmental and financial performance is growing (Barcellos de Paula et al., 2020; Kumar & Dua, 2021; Tao et al., 2022; Zhang, Wang et al., 2022). Nonetheless, to the best of our knowledge, no elements in the current literature have determined whether there is a relationship between environmental and financial performance, measured by Return on Assets (ROA), in Latin American firms. This paucity of studies stresses the need for research that enhances the understanding of ESG issues and financial performance. Moreover, Latin America plays a pivotal role in the climate and research agenda, and new research might be suitable for firms seeking new SDG strategies. Therefore, to bridge this knowledge gap, this study analyzes the relationship between environmental and financial performance in Latin American firms using a panel data model that includes 1,708 observations pertaining to information about 372 Latin American firms collected from 2015 to 2020.

This study makes two-fold contributions to the field. First, to provide a better understanding of the relationship between financial and environmental performance, it offers an in-depth scientometric analysis that identifies research areas in the field and its evolution. Second, it provides new evidence and insights into the relationship between financial and environmental performance in Latin America, where research in this area is scarce. This highlights the growing importance of environmental issues within the core operations of Latin American firms. Also, the findings might inspire researchers and professionals to broaden their knowledge on sustainable development and criteria involving the environment as the center topic and its parameters. In addition, the findings could spur further studies focused on sustainability matters and financial performance, with an emphasis on Latin America, where research on this topic has not yet been conducted. Such new studies could also lay out roadmaps for improving the understanding of the relationship between ESG scores and firms’ performance.

This study conducted a scientometric review of the existing theoretical and empirical literature on the relationship between financial and environmental performance. By employing social network analysis, it was possible to identify specific research trends in the field. To source research papers, the Scopus database was used given its solid reputation (Maditati et al., 2018). Moreover, VOSviewer software version 1.6.18 was used to construct networks based on author citations. This tool has been successfully applied in several studies to identify the most relevant research trends across various financial domains (Marquez-Cardenas et al., 2022; Mejia-Escobar et al., 2020; Ramirez et al., 2022). The following was the search question employed in this study: (“financial performance” and “environmental performance” or environmental).

Based on the review, two clearly discernible research trends were identified and subjected to analysis. Figure 1 illustrates the interconnections among the most prominent studies into environmental and financial performance (upper part), as well as the trajectories of research in this domain (bottom part).

The first research trend revolves around the singularities of environmental performance and its impact on firms’ financial performance. In this context, the effects of a firm’s green spending have been found to be consistent and positively associated with carbon emissions and environmental performance. Furthermore, Neori et al. (2004) discovered that an Environmental Management System (EMS) indirectly impacts a firm’s design, recycling, and waste management activities. According to their findings, as firms engage in EMS activities, the link between this system and environmental practices strengthens. Likewise, in a study conducted on Chinese firms, Kaakeh and Gokmenoglu (2022) found that, although there is weak evidence that improved environmental performance increases firms’ financial performance, the relationship between both becomes positive during economic distress periods, such as the COVID-19 pandemic. This implies that, given their impacts, firms should continue investing in environmentally ethical and sustainable projects during crises. Also, regarding voluntary and mandatory environmental disclosure, Wu et al. (2022) found that, in Chinese firms, there is a positive relationship between these two (voluntary and mandatory environmental disclosure) and financial performance.

In this same vein, Wamba (2022) demonstrated, in a study conducted with European firms, that engaging in environmental protection actions increases stock exchange performance. This result suggests that ecosystem protection by firms leads to a paradigm that can form the basis of a model for responsible governance, whose goal is to create value while respecting environmental issues. Nobanee and Ellili (2017), for their part, found no significant effects of sustainability disclosure on the banking performance of banks in the United Arab Emirates. These studies, therefore, help analyze the actions related to firms’ dynamics and firms’ positive, negative, or not relevant environmental practices.

Figure 1

Figura 1. Relación entre los autores más influyentes

This study focused on firms headquartered in Latin America, particularly those that provided information on financial and environmental factors to the Eikon Refinitiv Thomson Reuters database for the years 2015 to 2020. Specifically, this data includes the Environmental Pillar Score (EPS), Return on Assets (ROA), total assets, country of headquarters, and the ESG score.

The Eikon Refinitiv Thomson Reuters database has been previously used in relevant research on ESG matters (Marquez-Cardenas et al., 2022; Mejia-Escobar et al., 2020; Ramirez et al., 2022). In this study, the employed dataset comprises panel data with 1 708 observations pertaining to information from 372 firms headquartered in Argentina (57), Brazil (142), Chile (46), Colombia (24), Mexico (60), Panama (3), Peru (34), Puerto Rico (5), and Uruguay (1). These firms operate across different industries, as shown in Table 1.

Table 1

Tabla 1. Participación de las empresas en las diferentes industrias

In light of the identified knowledge gap, the following research question was formulated: How is the EPS related to the financial performance of firms in Latin America? Given the lack of consensus in the existing literature regarding a statistically significant inverse effect of the EPS on financial performance, the following null hypothesis (H0) and alternative hypothesis (H1) were proposed to address the research question:

Null hypothesis (H0): The EPS does not significantly affect the ROA of firms in Latin America.

Alternative hypothesis (H1): The EPS does have a significant effect on the ROA of firms in Latin America.

Although there is evidence of the positive effects on firm performance resulting from improved environmental performance (Farza et al., 2021), a regression analysis was performed in this study to better understand this relationship. Furthermore, it has also been proven that there is a connection between green bond issuances and improvements in firms’ ROA and EPS (Mejia-Escobar et al., 2020). Thus, a regression analysis was carried out here to better understand this relationship. In addition, various tests were conducted to select the best model and assess robustness.

As shown in Table 5, the results of the multicollinearity test using the Variance Inflation Factor (VIF) indicate that none of the variables exhibited a VIF value higher than 10. This means there is no problem in employing these variables in the regression models. The resulting VIF values can thus be interpreted as suggesting a moderate correlation between the variables. According to the R documentation, taking the square root of the VIF reveals how big the standard error of the estimated coefficient is when the predictor is independent of the other variables (RDocumentation, 2022).

Table 5

Tabla 5. Prueba de multicolinealidad

To test Model 1 and Model 2, a fixed-effects regression (within model) and a multiple linear regression (MLR) were performed to control the unobservable heterogeneity. Notably, multiple regression showed better performance in Model 1, where the country of headquarters variable was not included. For its part, fixed-effects regression, with the year factor as the fixed effect, showed better results in Model 2, which incorporated the country of headquarters variable. As can be seen in Table 6, the p-value was below 0.05, leading to the rejection of H0. In addition, the results demonstrate the superiority of the fixed-effects regression.

Table 6

Tabla 6. Selección del mejor modelo

As observed in Table 7, the findings underscore the significance of Brazil, Chile, and Mexico in the analysis, with estimators demonstrating a remarkable degree of consistency, even when incorporating the year as a fixed effect. Focusing on firm performance, regression model 2 remains relevant. However, it is crucial to note that the ESG score did not yield a statistically significant impact on firm performance. This implies that an increase in the ESG score does not unequivocally translate into enhanced effectiveness for Latin American firms or improved overall firm performance. As reported by González-Ruiz et al. (2023) and Mejia-Escobar (2020), Brazil, Chile, and Mexico possess some of the most developed capital markets in the region and offer incentives and have regulations that allow firms to invest in environmental performance. As a result, these countries lead the green bond market in the region (Mejía-Escobar et al., 2021).

Table 7

Tabla 7. Análisis de regresión del modelo 1 y del modelo 2

Moreover, the results of regression model 2 suggest that there is no significant relationship between the EPS and firm performance for Latin American firms based on the analyzed data. Nonetheless, there was a slight increase in the ROA of the three countries under study as the years passed by. Importantly, ROA and the EPS in the correlation matrix were lower than those in regression model 2. Furthermore, as mentioned by Farza et al. (2021), there is no clear-cut relationship indicating that the EPS directly increases or decreases ROA in firms. What is important is that banks and insurance companies are now evaluating the environmental performance of their clients and adjusting lending conditions accordingly.

Just as with the Model 1, a test was carried out for the models that incorporated the total assets variable. According to the results, which are presented in Table 8, Model 4 was the best performing model.

Table 8

Tabla 8. Pruebas para el mejor modelo

Table 9 shows that the inclusion of the total assets variable did not yield any significant coefficients. However, slight but still statistically significant changes were observed in Brazil, Chile, and Mexico, even though the coefficients seem less negative. This means that the null hypothesis (H0) was supported by Model 4 and not by Model 2, which serves as a reminder that the financial performance of firms is not directly influenced, positively or negatively, by their EPS. Consequently, it becomes evident that there is no moderating variable affecting the relationship between ROA and the EPS for the Latin American firms in the sample.

Table 9

Tabla 9. Modelos que incluyen la variable de activos totales

To gain a more accurate insight into the models’ performance, heteroskedastic robust standard errors were estimated. This was carried out for the models that showed better performance, namely Model 2 and Model 4, resulting in the creation of Model 5 and Model 6. However, as indicated in Table 10, no significant differences were observed. This suggests that the null hypothesis (H0) was not rejected for Brazil, Chile, Colombia, and Mexico, with a 90% confidence level. For a clearer overview, Table 11 provides a summary of the best models’ performance. Likewise, the robustness test altered the standard deviations with the strongest weighting.

Table 10

Tabla 10. Modelos 5 y 6

Table 11

Tabla 11. Resumen del desempeño de los mejores modelos

The fixed-effects model was compared with Ordinary Least Squares (OLS) models using the Hausman test, as shown in Table 12. When the null hypothesis was not rejected, the model errors were homoscedastic and there was no endogeneity in the explanatory variables. In the case of Model 1 versus Model 2, the null hypothesis was rejected because the p-value obtained ranged between 0.05 and 0.01. These results suggest that one of the models is inconsistent and that there could be endogeneity in the explanatory variables. Conversely, when comparing Model 3 and Model 4, the null hypothesis was not rejected, suggesting that the two estimators may be considered consistent and efficient under the specified model conditions.

Table 12

Tabla 12. Test de Hausman

According to the results of the Breusch–Pagan heteroscedasticity test shown in Table 13 (where the null hypothesis suggests homoscedasticity), the p-value of Model 1 and Model 3 was greater than 0.05; therefore, the null hypothesis was not rejected.

Table 13

Table 13. Test de Breusch-Pagan

Based on the results of the endogeneity and heteroscedasticity tests presented in Tables 12 and 13, respectively, Model 1 and Model 3—which followed the OLS method—were found to be the most appropriate ones. Model 1 explained 60.25% of the variation in the dependent variable ROA. Model 3, in turn, accounted for 65.75% of the variation and raised the adjusted R-squared value to 64.3%. These results indicate that the ESG score is a statistically significant predictor of the dependent variable ROA.

In summary, the analysis of Model 1 and Model 3 demonstrates that the ESG score emerges as a highly relevant predictor of the dependent variable. Nevertheless, it is worth noting that Model 3 explained a greater proportion of the variation in the dependent variable and presented a higher adjusted R-squared value compared to that of Model 1.

This paper examined the relationship between ROA and the EPS for firms headquartered in Latin America. Empirical evidence suggests that environmental performance had minimal impact on firms’ financial performance for the six years under analysis. In addition, this study found that although Latin American firms and countries have reached an agreement on environmental practices, their strategies still fall short when it comes to funding projects that prioritize environmental performance with profitable results.

However, positive results were observed in Brazil, Mexico, and Chile, which may be explained by three main factors: First, the EPS of firms in each country exhibited low variability, making it difficult to assess its effect on ROA. Second, the potential for firms to increase profitability by implementing environmental practices, and the positive relationship between environmental and financial performance are not considered when evaluating firms’ performance. Third, these countries have superior business development in comparison to other Latin American countries, as evidenced by the results of all the models. Therefore, these three countries are setting a new standard for environmental and financial performance, paving the way for other firms in Latin America. As a result, firms can improve their environmental performance while increasing or maintaining their profitability.

A study conducted by Filbeck and Gorman (2004) found no clear benefits from taking environmental performance measures. Instead, the results showed a negative relationship between firms’ financial profitability and environmental performance. In contrast, Delmas et al. (2013) obtained positive results; however, they proved that publicity for firms’ environmental performance may not always bring a benefit, as process and outcome are two distinct dimensions. Finally, Telle (2006), using various regression models of Norwegian plants, confirmed the positive impact that environmental performance exerts on the financial performance of firms. However, as mentioned above, the environmental performance of Latin American firms falls short of that in Europe or East Asia. This situation puts the region at a disadvantage in terms of international competitiveness and investment, considering that the banking sector increasingly demands that firms integrate environmental practices into their core businesses. Similarly, Fujii et al. (2012) found a positive correlation between environmental performance and the financial outcomes of Japanese firms. Their study established that these firms’ environmental practices, as measured by the reduction in CO2 emissions, led to an improved ROA.

Although the null hypothesis (H0) was not rejected for most countries, it would be useful to better classify the EPS sub-variables (i.e., emissions, waste, biodiversity, environmental management systems, product innovation, green revenues, use of water resources, energy, sustainable packaging, and environmental supply chain) to identify the leading Latin American firms in terms of environmental practices. Moreover, the evidence shows that the level of the EPS varies between countries, with Brazil leading the way, followed by Mexico and Chile, considering the number of firms in each country.

Contrary to what was expected, the analysis revealed that the region has experienced a slight increase in the EPS. Even though the data demonstrates that the EPS in most countries does not have a positive relationship with firms’ ROA, ROA was not found to be affected by the EPS in Latin American firms. This could be attributed to the fact that the analysis grouped all environmental factors and firms together, without distinguishing between industries or sectors.

This study contributes to a better understanding of the relationship between the environmental and financial performance of Latin American firms. It shows that firms in the region are increasingly adopting environmental practices although, so far, they appear to have no significant impact on profitability. In addition, it is reasonable to consider that the economic benefits from introducing environmental practices may affect Latin American firms’ decision making regarding whether they should follow the example of European or East Asian firms.

In general terms, the evidence is consistent with the current status of the EPS in the region, but highlights the need for further monitoring firms’ future environmental performance and profitability. In this context, the EPS in Latin America does not have a strong positive correlation with firms’ financial performance. Therefore, the control variables included in the model seem insignificant for firms in this region. In addition, the sub-variables composing the EPS were not classified in the database for a thorough analysis of their correlation with ROA. Nonetheless, an important contribution of this study is that it enhanced the understanding of the EPS in a region with enormous resources and economic potential, while also addressing a key matter: In Latin America, environmental regulations are still under development, and firms have not been required to take progressive actions. Consequently, to establish a positive and significant relationship between the EPS and ROA, it is essential to standardize environmental criteria across the region to better interpret the parameters included in the data.

The growth of the green bond market in the region is expected to maximize the impact of environmental performance on financial outcomes. Therefore, similar results to those observed in Brazil, Chile, and Mexico can be anticipated. Despite the valuable contributions of this study, some limitations should be acknowledged. Although efforts have been made to encourage both large and small firms to report their ESG results, it is imperative for more firms to establish disclosure mechanisms as part of their corporate strategy and accountability to stakeholders, especially investors.

Finally, the results of the study reveal a limited data classification, which constitutes a starting point for further research. Thus, to broaden the scope of the present study, data could be grouped by sectors and the EPS sub-variables. Furthermore, future studies should also examine the environmental compensation regulations and practices that Latin American firms need to adopt by country, focusing on how environmental performance can impact a firm’s capital structure. It would also be interesting to analyze the relationship among a firm’s return on equity, ROA, and the EPS. This approach could have great impact on small and medium-sized firms, where research on ESG issues is limited.