Impact of Sustainable Finance on Business Financial Performance: Insight from London Stock Exchange Firms

Abstract

The United Kingdom has enacted rules to support green investment, enhancing the financial sustainability of enterprises adopting sustainable practices. These enactments offer financial incentives to enterprises that invest in sustainable initiatives. Companies that do not adopt sustainable practices face increasing operating expenses, a declining market share, and diminished investor trust. This study leveraged the stakeholder theory to examine the impact of sustainable finance on business financial performance. The study focused on 143 non-financial companies listed on the London Stock Exchange, using 17 years of data between 2008 and 2024 obtained from Thomson Reuters Eikon DataStream. The data were analyzed using the two-step Generalized Method of Estimation (GMM) due to endogeneity identified in the data. The study discovered that green financing initiatives, policies for emission reduction, and sustainable product initiatives had a positive and significant impact on business financial performance. The study also revealed that environmental investment initiatives negatively and significantly impacted business financial performance. Investing in green finance and sustainable products enhances financial performance by fostering investor trust and bolstering corporate reputation, fortifying firms. Adhering to international sustainability standards promotes long-term value creation and market alignment. To mitigate financial strain, environmental investments necessitate stringent cost management. An equitable strategy ensures that, by mitigating risks, sustainability measures enhance profitability. By meticulously integrating these projects, companies can achieve environmental and financial benefits while sustaining a competitive advantage in a rapidly evolving corporate landscape.

1. Introduction

Sustainable finance, a catalyst for innovative financial solutions, offers various benefits that address environmental, social, and governance (ESG) issues [1]. These solutions enhance operational and reputational stability and secure enduring growth and profitability. By integrating sustainability into organizations’ financial strategies, it is possible to attract capital from socially responsible investors, thereby reaping the rewards of sustainable finance [1]. Recent scientific contributions affirm that this approach also aids in achieving global sustainability goals by minimizing expenses, improving resource allocation, enhancing risk management, and facilitating adaptation to changing environmental and economic circumstances [2].

Meanwhile, research acknowledges that financial performance is the key determinant of a corporation’s ability to sustain operations, pursue growth initiatives, and satisfy stakeholders [3]. Given that sustainable practices significantly bolster financial performance, these practices are crucial in generating long-term value, as organizations with an outstanding financial performance demonstrate that they bolster resilience to economic volatility, foster stakeholder trust, and preserve market relevance [4].

The broader literature reveals that sustainable financing enhances business financial performance by mitigating operating risks and facilitating cost savings [5]. Companies can significantly reduce operational costs by investing in sustainability-focused activities like energy efficiency and waste management. Moreover, companies adopting sustainable financing practices attract more socially responsible investors, increasing their capital [2]. Research maintains that sustainable finance guarantees enduring profitability and reduces risks such as resource depletion, non-compliance, and shifting consumer preferences [6]. It is widely acknowledged that, when companies position themselves as industry leaders, it signifies the incorporation of sustainability into their operations, enhancing their financial performance through ethical practices [6].

Aside from these points, it is worth mentioning that scientific studies acknowledge that the financial performance of enterprises that do not incorporate sustainable practices into their operations is erratic due to variations in consumer demand, reliance on resources, and government policies [7]. These companies’ profitability diminished as customers chose environmentally sustainable alternatives. Similar scientific contributions report that companies that do not adopt sustainable practices face increasing operating expenses, a declining market share, and diminished investor trust [8]. These highlight the imperative of adopting sustainable practices to guarantee enduring profitability, survival, and resilience against environmental and financial adversities.

Meanwhile, while there are laudable studies on some aspects of this domain, the literature has not extensively explored how sustainable finance impacts business financial performance. While researchers have made several attempts to explore the impacts of sustainable finance on various key performance indicators, the focus on business financial performance is underexplored. Neglecting these understudied areas leaves gaps in the scientific literature that necessitate further studies.

For example, Ziolo [9] explored the role of sustainable finance in achieving sustainable development goals. The study discovered a strong link between the sustainable finance model and social, environmental, and economic sustainability. Similarly, a study by Hussain [10] investigated the drivers of sustainable growth, exploring the link between financial innovation, green finance, and sustainability performance in the banking sector. The study discovered that green finance positively and significantly impacted sustainable performance. The study additionally reported that financial innovation partially mediated the relationship between green finance and sustainable performance. Equally, Muhmad [11] systematically reviewed the relationship between sustainable business practices and financial performance during pre- and post-SDG adoption periods. They concluded that 96% of publications (papers used for the study) reported a positive relationship between sustainability practices and company financial performance.

An exegesis of the above literature unveiled that the influence of sustainable finance on business financial performance is yet to be extensively explored, and the lack of extensive research on this topic creates a significant knowledge gap. A study is urgently needed to fill this gap, and this study’s purpose is to address this identified gap in the literature. This study addresses the following question: What is the impact of sustainable finance (policies for emission reduction, green financing initiatives, sustainable product initiatives, and environmental investment initiatives) on financial performance? Providing answers to this research question contributes empirically and practically to the literature review.

First, this study contributes to the literature by examining the influence of policies for emission reduction on business financial performance. This is essential, as research contends that companies should adopt sustainable practices due to increased market and legal pressures [12]. Understanding this relationship enables companies to reconcile environmental accountability with profitability, informing strategic choices. Policymakers and investors require empirical evidence to ascertain whether such policies enhance or diminish financial resilience or induce financial hardship. Addressing this gap elucidates the impact of environmental policies on long-term financial stability, competitiveness, and shareholder value, thereby enriching discussions on sustainable finance.

Secondly, this research contributes to the literature by investigating the influence of green financing initiatives on business financial performance. This is crucial, as corporations are increasingly adopting sustainable investing strategies. Recent scientific contributions affirm that understanding this relationship helps to determine if green finance enhances capital accessibility, mitigates financial risks, or boosts profitability [13]. Policymakers, investors, and enterprises require empirical evidence to assess the financial viability of green financing and its role in long-term sustainability. Addressing this gap elucidates the impact of ecologically sustainable financial decisions on corporate growth, stability, and competitive advantage, thereby enriching discussions on sustainable finance.

Thirdly, the study contributes to the literature by assessing the influence of sustainable product initiatives on business financial performance. This is essential, as many companies integrate sustainability into their product offerings. Research has documented that understanding this contribution aids in determining if the utilization of eco-friendly products enhances customer loyalty, market share, or profitability [14]. Policymakers and enterprises require empirical evidence to assess the economic benefits of sustainability-driven innovation. Addressing this gap elucidates the impact of environmentally sensitive product strategies on long-term financial stability, competitiveness, and value creation within a dynamic global market, enriching the literature on sustainable finance.

Altogether, this study contributes to the literature by probing into the influence of environmental investment initiatives on business financial performance. This is crucial when enterprises finance environmental initiatives. Understanding this contribution enables assessing whether investments in renewable energy, environmental management, and resource efficiency yield financial advantages [15]. Policymakers and corporations require empirical evidence to justify whether capital expenditures are driven by environmental sustainability. Examining the impact of proactive environmental investments on profitability, risk management, and long-term value creation within a competitive and regulated global economy enhances the discourse on sustainable finance.

This research is driven by the urgent need to understand the impact of sustainability-oriented practices on business financial performance. As businesses face increasing pressure to adopt environmentally friendly measures, it becomes crucial to assess their financial sustainability. The findings of this research will provide companies with valuable insights into balancing profitability and sustainability, guiding their investment decisions. The evidence-based findings from this research will assist practitioners in integrating green projects into their financial planning. Furthermore, the findings are instrumental for legislators formulating regulations and incentives that promote sustainable investments while ensuring economic growth. This research contributes significantly to the broader discourse on the impact of environmental factors on financially robust and competitive enterprises.

The rest of this study is structured as a literature review (theoretical perspective and hypothesis), materials and methods, data analysis and discussions, conclusion, and managerial implications.

2. Literature Review

2.1. Theoretical Background of the Study

Stakeholder theory, which emphasizes long-term performance and considers the interests of all stakeholders, not just owners [16], is a suitable theoretical framework for this study. It helps us to understand how sustainable finance practices can impact business financial performance by meeting the expectations of key stakeholder groups, including investors, regulators, customers, employees, and society.

Enterprises that implement policies for emission reduction align with public concerns about environmental sustainability and regulatory compliance. Stakeholder theory posits that firms must manage their engagements with external stakeholders, including governmental and environmental advocacy organizations, to maintain their reputation and avoid penalties [17]. Companies that violate regulations may incur fines, face litigation, or experience reputational harm as regulatory bodies implement increasingly stringent environmental standards. Conversely, corporations engaged in emission reduction measures receive favorable media coverage, attract environmentally conscious investors, and cultivate ties with lawmakers, all enhancing financial performance [18].

Meeting the expectations of lenders, socially responsible investors, and other financial stakeholders mainly relies on green financing initiatives. Stakeholder theory posits that enterprises prioritizing financial institutions and investors, particularly for ESG criteria, will likely secure superior funding sources [19]. Institutions incorporate ESG considerations into their investment decisions by providing green bonds and sustainability-linked loans at reduced interest rates. Companies that actively pursue green financing enhance their capital structure and foster confidence among financial stakeholders, thereby fostering long-term financial stability and profitability [6].

Sustainable product initiatives align with the expectations and purchasing behaviors of ethical consumers. Stakeholder theory posits that organizations must engage with customers as the primary stakeholders to ensure their survival [20]. Consumers increasingly demand socially responsible and environmentally sustainable products, and companies that fulfill these requirements benefit from increased sales, enhanced pricing, and brand loyalty. Businesses that include sustainability in their product creation can mitigate supply chain risks and enhance operational efficiency, improving their financial performance [21]. Disregarding these alterations may result in diminished sales, reputational harm, and a reduced market share.

According to the stakeholder theory, environmental investment initiatives underscore corporate accountability’s importance in maintaining stakeholder trust. Companies that engage in environmental sustainability, such as waste management systems or renewable energy initiatives, facilitate societal advancement and garner approval from local legislators and authorities [22]. Governments provide subsidies, tax incentives, and other benefits to enterprises engaged in sustainable initiatives, enhancing a company’s reputation and fostering sustainable economic development.

Stakeholder theory posits that employing sustainable financial practices can benefit organizations’ owners and internal and external stakeholders. By addressing stakeholders’ concerns, organizations can mitigate financial risks, enhance their brand, and ensure a sustained financial performance in an increasingly ecologically friendly economy [23].

2.2. Hypothesis Development

The relationship between the dependent, independent, and control variables is presented in Figure 1.

2.2.1. The Influence of Green Financing Initiatives on Business Financial Performance

Green finance initiatives significantly boost corporate financial performance by providing businesses with access to sustainable financing sources, mitigating financial risks, and improving market competitiveness [24]. Investments in environmentally advantageous initiatives, sustainability-linked loans, and green bonds enable corporations to align with global sustainability objectives and provide financial stability. Empirical studies indicate that enhanced financing circumstances and increased investor confidence lead enterprises to utilize green finance strategies to demonstrate a superior financial performance [25,26]. Flammer [27] indicated that companies issuing green bonds significantly reduce their financing costs and increase their stock returns, suggesting that green financing attracts ethical investors and enhances a company’s valuation.

Moreover, enhancing operational performance and cost efficiency through green financing initiatives positively impacts financial outcomes. Companies that invest in sustainable supply chains, energy-efficient technologies, and green funding for renewable energy sources will significantly reduce their operational costs [28]. Wang [29] discovered that companies utilizing green financing for energy-efficient investments saw reduced utility and maintenance costs, hence enhancing their profit margins. Industries characterized by substantial energy use rely on this cost-saving attribute, as sustainable investments directly reduce long-term operational expenses, improving financial performance.

Green finance enhances consumer loyalty and brand reputation, generating additional revenue streams [30]. Companies engaged in sustainability financing attract environmentally conscious consumers seeking alignment with ethical and ecological standards. Empirical evidence from Taghizadeh-Hesary [31] reported that firms utilizing green financing for investments in sustainable products and services experienced increased customer retention rates and a distinct boost in income. These findings underscore the potential of green finance to enhance brand equity, which yields financial gains through an increased market share and competitive advantages.

Green financing ultimately mitigates legal and regulatory risks, ensuring compliance with evolving environmental laws and regulations and enhancing financial performance [32]. Governments and financial institutions penalize corporations that do not meet environmental standards while incentivizing sustainable business practices. A study by Myronchuk [33] demonstrated that enterprises utilizing sustainability-linked finance, where the terms were directly linked to a company’s sustainability performance, benefited from tax advantages and incurred fewer regulatory penalties, consequently enhancing their financial condition. By investing in proactive green projects, corporations mitigate environmental risks, thus assuring long-term financial stability and fostering investor confidence. Based on these discussions, the study proposes the following:

Hypothesis (H1). 

Green financing initiatives positively and significantly influence business financial performance.

2.2.2. The Influence of Policies for Emission Reduction on Business Financial Performance

Policies for emission reduction can bolster a company’s financial performance by optimizing operational efficiencies, decreasing costs, and increasing market competitiveness [34]. The potential for long-term cost savings is significant, as sustainable technology, enhanced energy efficiency, and waste minimization can be implemented through a proactive strategy for emission reduction. Chen [35] revealed that companies adopting pollution-reducing measures saw increased profitability due to lower energy costs. Moreover, these strategies often conform to international regulatory trends, enhancing financial performance by diminishing the probability of penalties or sanctions.

Policies that mitigate emissions affect financial performance, resulting in cost savings and improving a company’s reputation [36]. Firms acknowledged as sustainability pioneers may draw a larger pool of socially conscious investors and consumers, whose support is crucial for heightened market demand and elevated stock prices. Gunningham [37] indicated that enterprises benefit more when they adopt stringent environmental regulations, since investors prefer entities that proactively address environmental risks. This promotes partnerships and collaborations, enhancing a business’s financial performance and creating new revenue streams.

Emission reduction policies play a crucial role in helping companies mitigate risks related to climate change. These risks include supply chain disruptions and physical asset damage. Organizations that reduce their carbon footprint will likely be better prepared to manage the impending rules and upheavals related to climate change. Weinhofer [38] revealed that enterprises adopting comprehensive emission reduction strategies are more proficient in mitigating the financial risks of climate change. Understanding risk management can enhance resilience and lead to more stable long-term financial results.

The financial consequences of emission reduction policies may vary depending on the company and the investments required. Sectors such as manufacturing or energy may initially face higher costs due to adopting new technology or optimizing processes [39]. However, these investments could yield significant returns in the future. For instance, the renewable energy sector can generate revenue when enterprises comply with emission reduction standards, as the demand for sustainable energy solutions is generally rising [40]. Industries requiring substantial capital investment may experience delayed financial returns if the changes necessitate significant infrastructural improvements. The study proposes the following:

Hypothesis (H2). 

Policies for emission reduction positively and significantly influence business financial performance.

2.2.3. The Influence of Sustainable Product Initiatives on Business Financial Performance

Sustainable product initiatives play a pivotal role in enhancing corporate financial performance. They achieve this through market differentiation, heightened consumer loyalty, and assurances of enduring profitability [41]. Enterprises that provide sustainable products—such as renewable materials, energy-efficient appliances, and eco-friendly packaging—stand out in the market, attracting consumers with environmental concerns and increasing demand and revenue. Chang [42] indicated that companies offering sustainable products experienced enhanced customer retention and increased willingness to pay, thereby enhancing profit margins. This underscores that sustainability-driven innovation is not just a possibility, but necessary for achieving a strong financial performance and competitive advantage in evolving consumer markets.

Furthermore, sustainable products enhance cost efficiency and resource utilization and significantly boost financial performance [8]. Enterprises that adopt circular economy principles—such as waste reduction, recycling, and material repurposing—benefit from reduced manufacturing expenses and a diminished dependence on finite resources. Eltayeb [43] indicated that organizations incorporating sustainability into their design immediately save on manufacturing costs and enhance their financial performance. These savings enable organizations to reinvest in innovation and expansion, enhancing their long-term financial stability. This underscores the significant financial benefits of adopting sustainable practices, motivating the industry to follow suit.

Projects focused on sustainable products that enhance brand reputation and investment attractiveness contribute to superior financial outcomes. Investors prioritize environmental, social, and governance (ESG) factors in their financial assessments, favoring companies with higher sustainability levels [44]. Empirical findings from Esty [45] indicated that firms with established sustainable product lines experienced superior stock prices and diminished capital expenditures, as they were perceived as lower-risk, future-oriented investments. This emphasizes the significant financial advantages of integrating sustainability into organizational frameworks, as it not only enhances capital accessibility and investor confidence, but also motivates the entire industry to adopt these practices.

Sustainable product initiatives enhance financial performance and play a crucial role in mitigating regulatory risks and ensuring incentives for enterprises. Governments worldwide enforce strict environmental regulations and offer subsidies or financial incentives to enterprises employing sustainable practices [46]. Aliano [4] indicated that enterprises with sustainability-focused product lines benefit from advantageous financing options and incur lower compliance costs. By aligning their long-term financial sustainability with environmental standards and regulatory requirements, firms not only evade legal penalties, but also enhance their long-term survival. This reassures stakeholders about the long-term viability of their enterprises, thereby motivating them to integrate sustainability into their organizational frameworks. This study proposes the following:

Hypothesis (H3). 

Sustainable product initiatives positively and significantly influence business financial performance.

2.2.4. The Influence of Environmental Investment Initiatives on Business Financial Performance

Environmental investment initiatives are crucial in reducing operational costs and significantly enhancing a company’s financial performance [47]. Organizations that allocate resources to environmental initiatives, including waste minimization, renewable energy, and sustainable technologies, can substantially reduce costs due to enhanced operational efficiency. Sustainable energy projects can lead to long-term energy cost savings, while waste reduction activities can improve resource efficiency and lower disposal expenses [48]. This emphasis on cost reduction can reassure organizations that environmental sustainability initiatives can lead to lower operational costs, thereby enhancing profitability [49].

Environmental investment initiatives not only improve a business’s financial performance, but also its appeal to socially responsible investors. Companies engaged in these initiatives are more likely to attract income, as customers and investors increasingly value organizations committed to sustainability [50]. Gómez-Bezares [51] suggested that firms with strong environmental policies often achieve superior stock returns, since investors regard them as less risky and more forward-thinking. This trend is particularly pronounced in sectors like manufacturing and energy, where investors and customers often prioritize companies with stringent environmental standards and scrutinize their ecological impacts.

Moreover, investments that improve market prospects and competitiveness are classified as environmental investments. Companies can leverage the growing market for environmentally sustainable products by integrating eco-friendly methods into their offerings [52]. A corporation can achieve a competitive advantage by providing energy-efficient products or employing sustainable materials in manufacturing. Wong [53] asserted that organizations can improve their financial performance, market share, and sales by integrating environmental technologies.

Governments and financial institutions increasingly offer tax refunds, green finance, and reduced borrowing rates to corporations that endorse environmental initiatives. These incentives improve enterprises’ financial performance by decreasing capital expenditures and increasing the potential for improved access to capital markets. Chen [54] and Taghizadeh-Hesary [31] discovered that companies that promote green investment programs and other environmentally sustainable initiatives benefit from lower financing costs and improved access to capital markets due to their reduced risk and positive long-term prospects. This potential for improved access to capital markets can be a source of encouragement for companies considering environmental initiatives. Based on these discussions, the study hypothesizes the following:

Hypothesis (H4). 

Environmental investment initiatives negatively and significantly influence business financial performance.

3. Materials and Methods

3.1. Sample and Data

The United Kingdom serves as an exemplary country for assessing the influence of sustainable financing on financial performance due to its rigorous regulatory framework, which includes the adoption of the Green Financing Strategy and the national goal of attaining net-zero emissions [55]. The United Kingdom has enacted rules to support green investment, enhancing the financial sustainability of enterprises adopting sustainable practices. These enactments offer financial incentives to enterprises that invest in sustainable initiatives or low-carbon technologies. The stringent ESG disclosure laws in the United Kingdom mandate that companies furnish transparent and accurate information about their environmental effects [56], making the country suitable for this study. The United Kingdom hosts a highly developed and competitive financial environment where firms face significant investor and market pressure to integrate sustainability into their core strategies. The country’s leadership in global sustainability discourse also influences firm behavior beyond compliance.

Non-financial companies listed on the London Stock Exchange (LSE) are not just meeting regulatory requirements, but actively embracing sustainable financing and reaping its benefits. Sustainability is not a burden, but a strategic advantage progressively integrated into the financial strategies of companies listed on the LSE, especially in non-financial sectors [57]. Many of these companies see tangible advantages from their environmentally sustainable investments, using sustainable financing to enhance production, reduce risks, and open up new revenue sources. This shift towards sustainability is not just a regulatory necessity, but a promising trend for the future of finance. LSE-listed firms are typically large, diverse, and multinational, making them ideal for this study across sectors and geographies. Their scale and exposure to global capital markets encourage the integration of sustainability as a strategic rather than purely regulatory priority.

This study utilizes inclusion and exclusion criteria to select non-financial companies. These include the following: (1) they must adopt sustainable finance practices, including issuing green bonds or adhering to the principles of ESG; (2) excluding companies in the financial sector; and (3) excluding those with missing or incomplete data. The study focuses on firms that actively engage in sustainable finance practices. The selected companies implement a range of initiatives, including but not limited to issuing green bonds and sustainability-linked loans, adopting renewable energy solutions, enhancing energy efficiency, implementing carbon offset programs, developing eco-friendly products, promoting responsible sourcing, and investing in sustainable infrastructure and waste reduction efforts. These diverse practices reflect a strong commitment to sustainability and align with the objectives of our research. Through purposive sampling, the Thomson Reuters Eikon Datastream was used to extract 17 years of data from 143 non-financial firms between 2008 and 2024.

3.2. Dependent, Independent, and Control Variables

3.2.1. Dependent Variables

The study’s dependent variable was business financial performance, which was measured using return on assets (ROA). ROA indicates a company’s efficiency in generating profit from its assets, reflecting its overall financial condition [58,59]. This metric uniquely evaluates a company’s financial performance by assessing how companies utilize assets to generate profit. ROA is calculated by dividing net income by average total assets, offering insights into management efficiency and operational performance, making it an ideal metric for evaluating the impacts of sustainable finance initiatives [60].

3.2.2. Independent Variables

The independent variable for this study was sustainable finance, which is defined as integrating ESG factors into financial decision making to tackle global sustainability issues and improve long-term value creation [61]. Sustainable finance guarantees financial returns while promoting investments in environmentally and socially responsible ventures. The sustainable finance of the selected companies was gauged using green financing initiatives, policies for emission reduction, sustainable product initiatives, and environmental investment initiatives.

Green financing initiatives facilitate low-carbon technologies, enhance energy efficiency, and advance renewable energy projects, fostering environmental sustainability [62]. These initiatives are suitable for evaluating sustainable finance, as they directly contribute to environmental protection while fostering economic growth. This study assessed green financing initiatives using a dummy variable, where “1” represented the years in which companies actively participated in green financing projects and “0” denoted the years in which they were not involved in such activities. This strategy enhances the impact of green funding on company practices and environmental policy.

Policies for emission reduction are designed to decrease carbon emissions, including carbon taxes, emission trading schemes, and reduction objectives [63]. These policies are significant indicators of sustainable finance, since they influence operating expenses, investments, and corporate strategy. Policies for emission reduction were evaluated using a dummy variable, where “1” represented the years in which companies implemented emission reduction policies and “0” indicated the years they did not implement such policies. This enables an assessment of the impacts of emission control measures on financial performance.

Sustainable product initiatives, which emphasize sustainability, energy efficiency, and ethical sourcing by developing and promoting environmentally friendly products [64], have the potential to significantly influence a company’s long-term viability, profitability, and market condition. These initiatives, suitable for evaluating sustainable finance, were assessed using a dummy variable, where “1” represented the years that enterprises produced sustainable products and “0” indicated the years they were not engaged in such practices. This measurement enables an analysis of the financial implications of employing sustainable product strategies.

Environmental investment initiatives promote environmental sustainability, specifically in waste management, conservation, and renewable energy infrastructure, constituting environmental investment programs [65]. These initiatives are essential for sustainable finance, as they align long-term environmental objectives with financial practices. The study assessed environmental investment initiatives using a dummy variable, where “1” represented the years that companies supported ecologically focused projects and “0” indicated the years they did not engage in such investments. These provide insight into how environmental investments impact a business’s financial performance and commitment to sustainability.

3.2.3. Control Variables

Firm size was used as a control variable, as larger organizations typically possess superior market positioning, enhanced access to financial resources, and larger client bases, all of which can positively influence their financial performance [66]. Large corporations may benefit from risk diversification, cost reduction, and economies of scale. Firm size was measured by applying a log to total assets, as these metrics elucidate the extent of a company’s operations. By controlling for firm size, the study accounts for these significant factors that may influence the relationship between sustainable finance initiatives and business financial performance, ensuring more accurate results [67].

R&D intensity was used as a control variable, as a company’s long-term competitiveness and profitability can significantly affect its R&D expenditures [68]. Companies that invest substantially in R&D are more inclined to be innovative, introduce new products, and enhance their efficiency—attributes that improve their financial performance. The ratio of R&D to total sales reflects the level of R&D intensity, signifying the proportion of revenue allocated to innovation [69]. Controlling for R&D intensity allows the study to account for its potential impact on performance, isolating the effects of sustainable finance initiatives on business outcomes.

Capital intensity assesses the needed capital for income generation, impacting a company’s financial condition [70]. Industries characterized by a high capital intensity typically include substantial fixed asset investments, encompassing structures, machinery, and equipment. These assets can influence cash flow and profitability based on their substantial capital expenditures and operational costs. The ratio obtained by dividing a company’s total fixed assets by its total sales indicates the capital required for operations, hence assessing capital intensity. By controlling for capital intensity, the study isolates the impact of sustainable finance initiatives on financial performance while accounting for industry-specific capital requirements [71].

Table 1. Dependent, independent and control variables.

S/N	Dependent Variable	Abbreviations	Formulas
1	ROA	ROA	${\displaystyle \frac{Net income after interest and tax}{Average total assets }}\times 100$
	Independent variables
1	Green financing initiatives	GFI	A dummy variable, where “1” represented companies actively participating in green financing projects and “0” denoted those not involved in such activities.
2	Policies for emission reduction	PER	A dummy variable was applied, where “1” represented the years companies implemented emission reduction policies and “0” denoted the years such policies were not in place.
3	Sustainable product initiatives	SPI	A dummy variable was used, where “1” indicated the years enterprises produced sustainable products and “0” denoted years without such practices.
4	Environmental investment initiatives	EII	A dummy variable was applied, where “1” represented the years companies supported ecologically focused projects and “0” indicated years without such environmental investments.
	Control variables
1	Firm size	FIZ	Log (total assets)
2	R&D intensity	RDI	${\displaystyle \frac{Research and development }{Total Sales or revenue }}$
3	Capital intensity	CPI	${\displaystyle \frac{Total assets}{Total Sales or revenue }}$

presents the dependent, independent, and control variables. It shows their operationalization.

3.3. Pre-Estimation Tests

The study carried out the following three pre-estimation tests: panel unit root tests, cointegration, and endogeneity tests. The unit root of the panel data variables was evaluated utilizing the Levin, Lin, and Chu (LLC) and Im, Pesaran, and Shin (IPS) tests. Unit root tests on panel data are essential to ensure the reliability of regression estimates [72]. The IPS test allows for separate unit root processes among panels, while the LLC test presumes a common unit root process across all panels. In all tests, the null hypothesis posits that all panels possess a unit root, while the alternative hypothesis asserts that the panels are stationary. The test results supported the alternative hypothesis, confirming that the variables were stationary at both levels and first differences, as indicated by the analyses conducted at both levels and first differences presented in

Table 2. Panel unit root tests.

Variable	Levin, Lin, and Chu (LLC)		Im, Pesaran, and Shin
	Levels	1st Difference	Levels	1st Difference
ROA	−7.539 ***	−19.796 ***	−9.054 ***	−25.295 ***
Green financing initiatives	−7.822 ***	−34.942 ***	−6.066 ***	−28.043 ***
Policy for emission reduction	−7.255 ***	−10.101 ***	−5.293 ***	−8.653 ***
Sustainable product initiatives	−5.986 ***	−13.493 ***	−4.883 ***	−17. 364 ***
Environmental investments initiatives	−6.392 ***	−3.780 ***	−4.298 ***	−3.525 ***
Size of the firm	−7.433 ***	−28.368 ***	−7.002 ***	−17.776 ***
R&D intensity	−5.282 ***	−21.689 ***	−5.574 ***	−19.457 ***
Capital intensity	−4.572 ***	−19.805 ***	−6.107 ***	−18.496 ***

*** p < 0.01.

. This ensures that non-stationary data did not affect the regression analysis results by verifying that the variables were suitable for such analysis.

Cointegration is a relationship in which two or more non-stationary variables exhibit synchronized movement across time, indicating a long-term equilibrium link despite temporary fluctuations [73]. Cointegration is essential in research to ensure that the relationships among variables are not spurious and persist throughout time.

This study assessed cointegration by using the Westerlund test. The alternative hypothesis suggests the presence of cointegration among the variables, while the null hypothesis of the Westerlund test asserts its absence. The results presented in

Table 3. Cointegration and endogeneity tests.

Test	ROA
Cointegration tests
Westerlund test	−6.054 ***
Endogeneity tests
Durbin–Wu–Hausman (DWH) test	−13.832 ***

*** p < 0.01.

indicate evidence of cointegration among the variables. Cointegration substantiates the long-term relationship between corporate financial performance and sustainable finance initiatives. This ensures that alterations in independent variables, such as green finance and emission reduction rules, exert enduring impacts on financial performance rather than ephemeral fluctuations, enhancing the significance of the findings for decision making.

Endogeneity occurs when an independent variable is correlated with the error term, resulting in biased and inconsistent outcomes [74]. Resolving endogeneity necessitates ensuring causal inferences’ validity and enhancing empirical findings’ reliability. Reverse causality arises when the direction of the relationship between variables is unclear. For instance, firms with a strong financial performance may be more likely to pursue sustainable finance rather than those with a weaker performance, resulting in sustainable finance driving performance. The Durbin–Wu–Hausman (DWH) test was employed to test for this. The alternative hypothesis suggests the presence of endogeneity, meaning the independent variables are exogenous, while the null hypothesis of the DWH test asserts that there is no endogeneity. The results presented in Table 3 indicate the presence of endogeneity in the model.

3.4. The Choice of Regression Model

The results presented in Table 3 indicate the presence of endogeneity in the model, necessitating robust estimation techniques to provide unbiased and reliable results. The Generalized Method of Moments (GMM) is an estimation technique employed in this study to deal with endogeneity and reverse causality. It addresses endogeneity and reverse causality by incorporating instrumental variables and mitigating biases arising from measurement errors, simultaneity, or omitted variables [75]. In dynamic panel data models, the GMM is particularly advantageous, since it employs internal instruments derived from lagged values of the explanatory variables [67,74]. It mitigates the danger of correlation between the error term and the regressors, ensuring more precise coefficient estimations.

Due to the limitations of conventional approaches, this study selected the GMM estimation model over fixed effects and random effects models. While accounting for unobserved variability, the fixed effects approach inadequately addresses endogeneity arising from measurement errors and simultaneity. It also discards time-invariant variables, which may possess significant explanatory value. In contrast, the random effects model assumes—often violated in empirical studies—that the unobserved effects are independent of the regressors, resulting in biased outcomes.

Through appropriate instrumentation, managing dynamic interactions, and addressing heteroscedasticity and autocorrelation in panel data, the GMM surmounts these limitations and facilitates endogeneity correction [58]. It is more suitable for this study, as it can produce consistent and efficient estimations despite endogenous regressors.

The study employed the two-step GMM estimation technique rather than the two-step system GMM. This decision was made because the two-step GMM is better suited to addressing the potential endogeneity issues in our model. Additionally, it provides more consistent and efficient estimates when there is a concern about instrument validity and overfitting, particularly in smaller samples. Furthermore, the two-step GMM allows for a more robust treatment of autocorrelation and heteroscedasticity in error terms, ensuring the reliability of our results. It is presented as follows:

$${\theta }^{GMM}=argmin\theta \left\{\left({\displaystyle \frac{1}{N}} {\sum }_{i-1}^N\mathrm{g}(\mathrm{y}\mathrm{i},\mathrm{x}\mathrm{i},\mathrm{Z}\mathrm{i})\right) W\left({\displaystyle \frac{1}{N}} {\sum }_{i-1}^N\mathrm{g}(\mathrm{y}\mathrm{i},\mathrm{x}\mathrm{i},\mathrm{Z}\mathrm{i})\right)\right\}$$

where:

• $\widehat{\theta }$ GMM is the two-step GMM estimator of the parameter vector θ.
• W is a weighting matrix that optimizes the efficiency of the estimator.

3.5. Model Specification

This study used one model to examine the impact of sustainable finance on business financial performance. This model is presented below.

$$\begin{gathered} {\mathrm{R}\mathrm{O}\mathrm{A}}_{c,t}=\beta 0{\left(\mathrm{R}\mathrm{O}\mathrm{A}-1\right)}_{nc, t}+B1{\mathrm{G}\mathrm{F}\mathrm{I}}_{nc, t}+B2{\mathrm{P}\mathrm{E}\mathrm{R}}_{nc, t}+B3{\mathrm{S}\mathrm{P}\mathrm{I}}_{nc, t}+B4{\mathrm{E}\mathrm{I}\mathrm{I}}_{nc, t}+B5{\mathrm{F}\mathrm{I}\mathrm{Z}}_{nc, t}+B6{\mathrm{R}\mathrm{D}\mathrm{I}}_{nc, t} \\ +B7{\mathrm{C}\mathrm{P}\mathrm{I}}_{nc, t}+U \end{gathered}$$

(1)

NB: The table defines the abbreviations used in the model, with the exception of “NC,” which denotes non-financial companies. “t” denotes the years of the data used, and “U” denotes the error term. (ROA − 1) are the dependent variables treated as dynamic panel independent variables.

4. Results

4.1. Descriptive and Variance Inflation Analysis

Table 4. Descriptive statistics.

Variable	Obs	Mean	Std. Dev.	Min	Max	VIF	1/VIF
ROA (%)	2431	3.478	3.299	−23.34	65.87	-	-
Green financing initiatives	2431	0.981	0.135	0	1	1.003	0.997
Policies for emission reduction	2431	0.967	0.18	0	1	1.761	0.568
Sustainable product initiatives	2431	0.98	0.139	0	1	2.551	0.392
Environmental investments initiatives	2431	0.969	0.174	0	1	2.028	0.493
Size of the firm	2431	4.919	2.429	0.534	8.929	1.011	0.989
R&D intensity	2431	1.948	1.105	0.41	15.33	1.017	0.984
Capital intensity	2431	1.903	1.005	0.41	8.67	1.014	0.986

presents the descriptive statistics of the sustainable finance and business financial performance variables. The average ROA indicates that the companies have a satisfactory return on assets. This indicates that the companies achieve equitable asset returns due to operational efficiency and resource utilization. This implies that the companies manage their assets effectively and use them to generate profitability for shareholders.

The average for green financing initiatives indicates that most companies participate in green financing activities. This indicates that most companies recognize the need for sustainable finance and are fully committed or engaged in all green financing practices, which further indicates an acceptance of green finance practices and enhances environmental and financial outcomes.

The average policies for emission reduction indicate that numerous companies have adopted efforts to mitigate emissions. This indicates that firms increasingly recognize the necessity of mitigating their environmental impact. The stringent adoption and enforcement of emission reduction policies would yield financial and environmental advantages.

The average for sustainable product initiatives indicates that most companies selected for this study have implemented sustainable product strategies, demonstrating an increasing trend toward sustainability in product offerings. Sustainable product initiatives are increasingly integrated into business strategy, allowing organizations to achieve environmental objectives while potentially enhancing market appeal and profitability concurrently.

The average for environmental investment initiatives indicates most of the companies’ engagement in environmental investments. These companies allocate resources to environmental sustainability, but additional investment could enhance their long-term financial success and environmental impact.

The average firm size shows that the firms selected for this study possess a very moderate operational capacity and resource availability. This moderate size reflects a balance between being large enough to ensure operational efficiency and small enough to avoid overextension. It also indicates that the firms are not operating on a scale that would enable them to leverage extensive resources or rapidly expand. Instead, their operations are likely constrained by resource limitations, affecting their ability to pursue large-scale projects or diversify extensively. Consequently, larger corporations may possess greater resources to engage in sustainable practices and may experience increased benefits from these investments.

The average R&D intensity indicates that corporations allocate a substantial amount of their revenue to research and development. This indicates that most companies are investing in innovation, which will enhance their performance and competitiveness over time. The consequence is that sustained R&D investment may facilitate the company’s introduction of innovative, eco-friendly products or enhance operational efficiency.

The average capital intensity indicates that firms typically require a substantial amount of capital to generate their revenue. This indicates that the companies operate in capital-intensive industries, necessitating more asset investments. These indicate that capital-intensive firms may incur higher operational costs, impacting their financial performance, and they may benefit from long-term financial returns and economies of scale.

Multicollinearity in the regression model was evaluated using the Variance Inflation Factor (VIF). A VIF exceeding five signifies a high multicollinearity, while values ranging from one to five are accepted thresholds [58]. This study’s multicollinearity was absent, since all the variables exhibited VIF values below five.

4.2. Matrix Correlation Analysis

Matrix correlation analysis was employed to investigate multicollinearity among the independent variables, and the results are presented in

Table 5. Matrix of correlations.

Variables	−1	−2	−3	−4	−5	−6	−7	−8
(1) ROA	1
(2) Green financing initiatives	−0.015 ***	1
(3) Policies for emission reduction	−0.031 ***	0.026 ***	1
(4) Sustainable product initiatives	0.006 ***	0.046 ***	0.649 ***	1
(5) Environmental investments initiatives	−0.009 ***	0.045 ***	0.520 ***	0.605 ***	1
(6) Size of the firm	0.061 ***	0.002 ***	−0.037 ***	−0.008 ***	−0.020 ***	1
(7) R&D intensity	−0.014 ***	0.015 ***	0.057 ***	0.034 ***	0.038 ***	0.091 ***	1
(8) Capital intensity	0.020 ***	0.006 ***	−0.063 ***	−0.036 ***	−0.082 ***	−0.022 ***	−0.069 ***	1

*** p < 0.01.

. When independent variables are highly correlated, multicollinearity leads to inaccurate estimations and complicates the assessment of individual variable effects [73]. Multicollinearity exists when a correlation coefficient between two independent variables in the matrix correlation analysis is more significant than 0.70 [74]. The findings indicated the absence of multicollinearity, as all correlation coefficients between the independent variables were below 0.70. This indicates that each independent variable can distinctly elucidate the fluctuations in the dependent variable. These results support the VIF findings presented in Table 4, affirming the absence of multicollinearity.

4.3. Dealing with Endogeneity Issues and Validating the GMM Model Fitness

The results presented in Table 3 show the presence of endogeneity. The regression estimates would be biased if endogeneity is not accounted for. Three steps were taken to surmount this issue. The first step included the independent variable being lagged and treated as a dynamic independent variable, contributing to mitigating the endogeneity issue. The second step involved lagging all independent variables and using internal instrumental variables to effectively address endogeneity issues. The third step incorporated external instrumental variables to ensure that the instruments were uncorrelated with the error term. These implemented steps yielded validated results, and three indices were used to evaluate the validity of the GMM results, providing a strong foundation for the reliability of our findings.

The statistical insignificance results of the Arellano–Bond test (AR(2)) and the statistical significance of the AR(1) test affirm the model’s validity and robustness [67]. The AR(2) results further confirm the absence of autocorrelation. The Sargan test indicates that the internal and external instruments were exogenous, as evidenced by their statistically insignificant p-values. The Hansen test results, which varied from 0.10 to 0.30, further confirm that the instruments exhibited no association with the error term. These results affirm that endogeneity has been effectively addressed, confirming the reliability and validity of the GMM model results.

4.4. Testing of Hypothesis

Table 6. The results of the two-step GMM (difference GMM).

Variables	ROA
	β	SE	t-Test
ROA (−1)	0.186 ***	0.005	37.200
Green financing initiatives	0.127 ***	0.017	7.470
Policies for emission reduction	0.105 ***	0.044	2.386
Sustainable product initiatives	0.356 ***	0.055	6.472
Environmental investments initiatives	−0.448 ***	0.054	−8.296
Size of the firm	0.126 ***	0.018	7.000
R&D intensity	0.473 ***	0.078	6.064
Capital intensity	0.672 ***	0.101	6.653
Observation	2044
AR (1)	0.013
AR (2)	0.783
Sargen test	0.388
Hansen test	0.167

*** p < 0.01.

presents the results of the two-step difference GMM. The study discovered that green financing initiatives positively and significantly impacted ROA (β = 0.186, t = 37.200, p < 0.001). These findings support the hypothesis (H1), and it was accepted.

Policies for emission reduction were observed to have a positive and significant impact on ROA (β = 0.127, t = 7.470, p < 0.001). Hypothesis (H2) was accepted because it supports the results.

The study found that sustainable product initiatives positively and significantly impacted ROA (β = 0.105, t = 2.386, p < 0.001). Therefore, hypothesis (H3) was confirmed, as it supports the results.

This investigation revealed that environmental investment initiatives negatively and significantly impacted ROA (β = −0.448, t = −8.296, p < 0.001). These findings support the hypothesis (H4), and it was confirmed.

Lagged independent variables, considered to be endogenous in GMM estimation, reduce the number of observations from 2431 to 2044. Lagging the variables results in absent data for the initial periods, as the values for the lagged variables are unavailable for the first few observations. This reduces the number of valid observations utilized in the investigation.

4.5. Robustness Testing

ROA is substituted in robustness testing with the alternative metric return on operating assets. Robustness testing, a crucial process in research, confirms that the results remain valid when an alternative financial performance measure is utilized. This is conducted by testing the results against various scenarios and ensuring that the conclusions are consistent and reliable, bolstering the veracity of the obtained conclusions.

Return on operating assets is an effective alternative to ROA, as it omits non-operational revenue and financing influences, focusing specifically on the profitability of a company’s core operations [60]. Compared to ROA, which considers total assets, this precision in assessment provides a more detailed and accurate understanding of a company’s efficiency in utilizing its operational assets to generate returns.

Employing return on operating assets as an alternative metric ensures that financial performance outcomes rely on return on operating assets and maintain consistency from an operational efficiency perspective [3]. This enhancement of credibility validates the research and elevates confidence in its conclusions.

The results obtained from Table 6 show the robustness of the findings presented in

Table 7. Robustness testing.

Variables	Return on Operating Asset
	β	SE	t-Test
Return on operating assets (−1)	0.454 ***	0.014	32.429
Green financing initiative	0.740 *	0.371	1.995
Policies for emission reduction	0.261 ***	0.061	4.279
Sustainable product initiatives	0.179 *	0.101	1.722
Environmental investments initiatives	−0.252 ***	0.085	−2.964
Size of the firm	0.129 ***	0.026	4.962
R&D intensity	0.418 ***	0.138	3.029
Capital intensity	0.324 ***	0.106	3.057
Observation	2044
AR (1)	0.000
AR (2)	0.823
Sargen test	0.492
Hansen test	0.178

*** p < 0.01, * p < 0.1.

, despite the difference in their coefficient estimation. However, their positive and significant relationship results remain the same, indicating the robustness of the financial performance indicator (ROA) to the return on net operating assets.

4.6. Sensitivity Analysis

Sensitivity analysis is a robustness assessment employed to see whether a study’s results are consistent when more variables are incorporated into the model [76]. The primary objective is to assess the stability of coefficient estimates and examine whether alterations in the model specification significantly affect the initial findings’ direction, magnitude, or significance.

Table 8. Sensitivity analysis.

Variables	ROA
	β	SE	t-Test
ROA (−1)	0.179 ***	0.004	44.75
Green financing initiatives	0.122 ***	0.013	9.385
Policy for emission reduction	0.145 ***	0.047	3.085
Sustainable product initiatives	0.326 ***	0.061	5.344
Environmental investments initiatives	−0.489 ***	0.057	−8.579
Size of the firm	0.122 ***	0.014	8.714
R&D intensity	0.462 ***	0.074	6.243
Capital intensity	0.642 ***	0.053	12.11
2008 financial crisis	−0.102 ***	0.032	−3.188
GDP growth	0.834 ***	0.375	2.224
Interest rate	−0.043 ***	0.006	−7.167
Regulatory quality	0.284 **	0.069	4.116
Observation	2044
AR (1)	0.023
AR (2)	0.402
Sargen test	0.623
Hansen test	0.154
Hansen test	0.178

*** p < 0.01, ** p < 0.05.

presents the sensitivity analysis results by incorporating additional control factors such as the 2008 financial crisis, GDP growth, interest rates, and regulatory quality. The most significant difference observed compared to the original results in Table 6 is in the magnitude of the coefficient estimations. The direction of the significant relationship—whether positive or negative—remains consistent. This indicates that while the inclusion of more variables slightly alters the strength of the associations, the overall conclusions of the study remain robust. The results in Table 8, therefore, validate the sensitivity and reliability of the findings presented in Table 6.

The study discovers that GDP growth and regulatory quality have a positive and significant impact on ROA. In contrast, the 2008 financial crisis and interest rates have a negative and significant impact on ROA.

5. Discussion of the Findings

5.1. The Impact of Sustainable Finance on ROA

After careful analysis, the following findings emerged: the study discovered that green financing initiatives positively and significantly impacted ROA. Green financing involves investments in sustainable initiatives, enhancing a corporation’s long-term financial health [77]. Stakeholder theory posits that firms must consider the interests of all stakeholders, including investors, consumers, employees, and the environment [78]. By prioritizing green financing, organizations align their operations with the increasing environmental and social concerns of stakeholders, enhancing investor confidence, brand reputation, and customer loyalty [79].

Numerous factors contribute to the positive impacts of green financing initiatives on ROA. First, enterprises utilizing green finance tend to attract environmentally conscious clientele [80], which increases their revenue. Second, government subsidies, tax reductions, and incentives that these enterprises may receive could assist in reducing costs and enhancing financial performance. Third, sustainability initiatives can yield operational advantages such as reduced waste or energy use and improved profitability [81].

These findings support the stakeholder theory by demonstrating how organizations with environmental policies can enhance stakeholder value through sustainable growth and improved financial performance. This indicates to investors that companies prioritizing environmental initiatives are more likely to yield stable earnings. For management, it underscores the necessity of integrating sustainability into strategic decisions to improve financial performance and attract long-term investors. These findings underline economic advantages like improved profitability, cost-effectiveness, and ongoing financial stability. Emphasizing the financial feasibility of sustainable investments, they urge companies and governments to prioritize green finance for improved economic resilience and a competitive edge and strengthen investor trust in sustainable business practices.

Policies for emission reduction were observed to have a positive and significant impact on ROA. Businesses implementing initiatives to reduce emissions address the increasing concerns of the public, investors, and regulatory authorities. Companies that proactively adopt emission reduction initiatives may evade potential fines and regulatory costs as environmental regulations intensify [82], enhancing their financial performance.

The probable cause of the positive result was that emission reduction policies allow enterprises to minimize waste, enhance energy efficiency, and bolster their reputation among environmentally conscious consumers [83]. Enterprises prioritizing sustainability also benefit from governmental subsidies, which reduce operational costs and enhance profitability. These policies promote operational efficiency and inventiveness, leading to financial benefits, including improved asset use.

These findings align with stakeholder theory, demonstrating how addressing environmental concerns can benefit a business and its employees. This indicates to investors that firms committed to reducing emissions are more likely to exhibit stability and profitability in the long run. It underscores the strategic necessity for management to adopt sustainable practices to meet stakeholder expectations and improve their financial performance. The findings suggest that enhancing efficiency, resolving regulatory challenges, and attracting sustainable investments contribute to economic stability through carbon reduction strategies. They encourage enterprises to adopt ecologically sustainable policies, leading to long-term cost savings, enhanced market competitiveness, and increased investor trust in eco-friendly initiatives.

The study found that sustainable product initiatives positively and significantly impacted ROA. Addressing the requirements and anticipations of many stakeholders—including consumers, investors, and regulatory bodies—highlights the necessity of stakeholder theory. Companies can address the increasing demand for environmentally sustainable and socially responsible products by introducing eco-friendly products, enhancing their brand, and cultivating stronger connections with like-minded consumers [84]. This can enhance market share and sales, increase revenues, and improve financial performance.

The probable cause of the positive impact was that sustainable product initiatives attract environmentally conscious consumers and generate new business opportunities [85]. Companies that invest in sustainability frequently innovate, improving their products’ quality and production methods. These initiatives also aid companies in mitigating risks associated with changing consumer preferences and environmental regulations [85]. Moreover, sustainable products qualify for government incentives, increasing companies’ profitability.

The findings support the stakeholder theory by illustrating how prioritizing sustainability can benefit an organization and its workforce. This underscores the strategic necessity for business management to integrate sustainability into product development strategies. By doing so, they can enhance profitability while simultaneously satisfying stakeholders’ expectations, thereby playing a crucial role in their financial performance. Sustainable product initiatives foster economic growth by stimulating innovation, enhancing client demand, and bolstering brand reputation. They provide equitable advantages, attract ethical investors, and enhance long-term profitability. They also assist enterprises in predicting future market patterns, promoting sustainability, and reducing environmental compliance costs.

This investigation revealed that environmental investment initiatives negatively and significantly impacted ROA. Stakeholder theory emphasizes the alignment between organizational performance and stakeholder needs [86]. The theory suggests that firms must address the interests of various stakeholders, not just shareholders. Environmental investments, while enhancing stakeholder trust and long-term value, may increase short-term costs, reducing ROA in the near term due to resource allocation trade-offs. Environmental investment initiatives for enterprises may necessitate substantial initial expenditures, encompassing costs associated with green technologies, infrastructure, and compliance with environmental regulations. While these costs will ultimately be beneficial, they may initially exert pressure on financial performance by diminishing short-term profitability [87].

This negative impact was due to environmental investments yielding returns over a more extended period [88]. As sustainability objectives become paramount, enterprises may experience financial pressure and diminished short-term revenues. Moreover, the initial costs may outweigh the immediate benefits, particularly if the company is still adapting its operations to new sustainable practices or if the market response to these investments is incremental.

These findings do not fully support stakeholder theory in the short run, as investments, while aligned with long-term stakeholder interests, may not produce immediate financial rewards. This underscores management’s need for strategic planning to oversee environmental investment initiatives. Ensuring that long-term sustainability objectives do not hinder short-term financial performance is crucial, highlighting the importance of management’s role in managing these investments. Firms can balance short-term financial pressures with long-term sustainability goals by integrating sustainability into their core strategies, prioritizing efficient resource use, and adopting phased investment approaches that gradually yield financial returns while enhancing environmental and reputational performance over time. Environmental investment initiatives may induce temporary financial pressures, elevating operational expenses and diminishing immediate profitability. Enterprises may incur legal compliance expenses, substantial capital investments, and extended returns on investment periods. Enhanced efficiency, reduced risk, and bolstered stakeholder confidence may yield long-term economic benefits despite the initial adverse financial impacts.

This research revealed that a firm’s size positively and significantly impacted ROA. The stakeholder theory emphasizes maintaining financial performance while addressing diverse stakeholder interests [78]. Larger organizations with more extensive resources can invest in innovation, enhancing their operational efficiency and contributing to economies of scale [89]. These advantages may result in an enhanced financial performance and increased profitability. Furthermore, large corporations have access to capital markets, facilitating the acquisition of funds at favorable rates, which will improve their financial performance.

Larger companies have more substantial market positions, a more extensive client base, and greater brand recognition [90], which may contribute to this positive impact. These factors ensure stable revenue streams and enhance profitability. Furthermore, larger corporations are better equipped to navigate industry-specific challenges or economic recessions, maintaining financial stability even in adverse conditions.

This result supports the stakeholder theory, as larger companies are better positioned to meet stakeholders’ expectations due to their resources and stability. A firm’s size can serve as an indicator of its financial health and resilience for investors. This underscores the necessity of management leveraging their organizational scale to enhance profitability and deliver value to stakeholders.

The study discovered that R&D intensity had a positive and significant relationship with ROA. The stakeholder theory posits that corporations finance R&D to meet the expectations of key stakeholders, including consumers, investors, and employees [16]. Concentrating on R&D enables companies to generate innovative concepts, improve existing processes, and strengthen their competitive advantage in the marketplace [91]. This improves financial performance, as innovative concepts attract new clients and enhance operational efficiency.

Companies with a higher R&D intensity are generally more innovative, which accounts for this positive effect, resulting in increased sales, an enhanced market share, and cost reductions through process optimization [92]. Investing in R&D allows companies to produce products that satisfy consumer demand, enhancing revenue and profitability. Moreover, firms with substantial R&D capabilities may be perceived by investors as more probable candidates for long-term success, which contributes to enhancing investor confidence and financial performance.

This result supports the stakeholder theory, as R&D intensity reflects a company’s commitment to fulfilling the needs and expectations of various stakeholders. For investors, this indicates that firms with a vigorous R&D intensity might yield substantial returns due to their growth driven by innovation. The outcome emphasizes the need for management to maintain continuous R&D investment to meet stakeholder expectations and drive long-term financial performance.

The study found that capital intensity had a positive and significant relationship with ROA. These findings suggest that corporations enhancing their fixed asset and infrastructure investments yield superior financial returns. Stakeholder theory posits that organizations must balance the interests of various stakeholders—such as investors, employees, and customers—by making strategic investments that enhance long-term value [16]. A higher capital intensity enhances operational efficiency, increases production capacity, and expands economies of scale, bolstering profitability. This result indicates that well-managed capital investments benefit shareholders and other stakeholders through enhanced financial stability and growth.

The potential reason for these results is the enhanced utilization of assets, in which corporations efficiently utilize resources to maximize output and revenue. Capital-intensive organizations occasionally gain competitive advantages through infrastructure and technological advancements, leading to reduced costs and increased profitability.

These results underscore investors’ need to employ capital investing strategies to achieve financial outcomes. Efficient resource allocation by firms facilitates sustainable profitability, enhancing their attractiveness as investment options. This underscores management’s need to optimize capital expenditure by aligning long-term investments with short-term financial outcomes. Ensuring that capital-intensive activities align with stakeholder interests will enhance return on assets and bolster firm sustainability and competitive positioning.

5.2. Robustness Testing (The Impact of Sustainable Finance on Return on Net Operating Assets)

This study discovered that green financing initiatives positively and significantly impacted the return on net operating assets. These findings suggest that organizations incorporating sustainable finance exhibit an enhanced operational efficiency and profitability. Stakeholder theory emphasizes that corporations must fulfill the expectations of various stakeholders, including investors, consumers, and regulatory bodies, by adopting ecologically sustainable financial practices [16]. Green financing enables organizations to invest in environmentally sustainable innovations, infrastructure, and energy-efficient technology while enhancing their operational performance and financial returns [93]. This result supports the stakeholder theory, as firms prioritizing sustainability generate long-term value for their stakeholders and enhance financial resilience.

Cost reductions from decreased energy consumption, enhanced access to green financing at reduced interest rates, and a more substantial brand reputation contribute to these positive outcomes [94]. Enterprises using green finance may optimize asset performance, mitigate operational risks, and achieve enduring financial stability.

These results underscore the financial viability of green investments for investors, enhancing confidence in enterprises with ecologically sustainable financing strategies. Business management must comprehend the strategic significance of integrating green financing into business decision making. This will assist organizations in securing long-term competitiveness and stakeholder confidence by enhancing asset efficiency, having a good financial return, and aligning with global sustainability trends.

Policies for emission reduction were observed to have a positive and significant impact on the return on net operating assets. These findings suggest that financial efficiency is enhanced with environmental accountability. Stakeholder theory posits that corporations should address consumer, investor, and regulators’ concerns, generating long-term value [16]. Companies using emission reduction policies benefit from operational cost reductions, regulatory incentives, and enhanced reputation, hence optimizing assets and profitability. This result supports the stakeholder theory, indicating that organizations aligning with sustainability criteria exhibit financial resilience and competitive advantages.

This positive impact is due to decreased energy expenses, enhanced resource efficiency, and the advantages of regulatory compliance, such as tax rebates and subsidies [95]. Strong emission reduction policies attract environmentally conscious consumers and investors, ultimately fostering long-term financial stability and income enhancement.

These findings emphasize the financial advantages of environmentally responsible enterprises for investors, reinforcing the attractiveness of sustainable investing. Emission reduction policies should be prioritized in business management as a strategic tool for enhancing operational profitability and efficiency. Incorporating sustainable practices enables organizations to mitigate long-term financial risks, enhance asset productivity, and foster stakeholder confidence, thus ensuring sustainable development and market competitiveness in an increasingly environmentally conscious business landscape [50].

The study found that sustainable product initiatives positively and significantly impacted return on net operating assets. These results highlight the economic benefits of integrating sustainability into the production of consumer goods. Stakeholder theory posits that organizations should fulfill stakeholder expectations—encompassing consumers, lawmakers, and investors—culminating in long-term value [16]. Companies prioritizing sustainable products gain brand differentiation, consumer loyalty, and regulatory adherence while improving asset utilization and profitability [47]. This outcome aligns with the premise that addressing stakeholder concerns enhances financial performance.

The increasing consumer demand for eco-friendly products, potential for premium pricing, and cost reductions from sustainable production practices may contribute to this positive outcome [96]. Firm sustainability commitments attract impact-focused investors and foster enduring commercial partnerships, enhancing financial stability.

These results suggest to investors that companies involved in sustainable product initiatives might mitigate environmental risks while still achieving favorable financial returns. Perceiving sustainability as a mechanism for value creation, business management should integrate eco-friendly items to enhance operational efficiency and revenue growth. By aligning with market and regulatory advancements, organizations can enhance profitability, optimize asset productivity, and strengthen their market position, ensuring long-term business resilience and sustainability in an evolving global economy.

This investigation revealed that environmental investment initiatives negatively and significantly impacted return on net operating assets. This indicates that while these expenditures align with environmental goals, they may not yield immediate financial returns. Stakeholder theory emphasizes reconciling the interests of various stakeholders, including communities, politicians, and investors [16]. Conversely, substantial initial costs associated with environmental investments—such as waste management systems or renewable energy—may hinder short-term profitability, diminishing returns on operational assets [97].

Significant capital expenditures, more extended payback periods, and regulatory compliance costs—which may temporarily surpass financial benefits—are potential factors for this negative impact [98]. Moreover, firms in industries with substantial operational requirements may struggle to recuperate investments, swiftly diminishing short-term asset utilization efficiency. These findings illustrate the importance of investors adopting a long-term perspective when evaluating companies with substantial environmental credentials. Corporate management should employ strategic planning to equilibrate environmental investments with financial performance, yielding long-term competitive advantages. By effectively utilizing government incentives and resource allocation, corporations can gradually transform these investments into value-generating assets, enhancing financial sustainability and meeting stakeholder expectations in the evolving corporate landscape.

This research revealed that a firm’s size positively and significantly impacted return on net operating assets. Larger organizations benefit from operational efficiency, resource availability, and economies of scale, enhancing profitability [89]. According to stakeholder theory, larger companies more effectively meet stakeholder expectations by utilizing resources. Their varied income streams, established market presence, and access to finance enable them to optimize asset use and improve financial performance.

Augmented negotiation power with suppliers, savings in production costs, and heightened brand recognition are the reasons for this positive impact, contributing to greater returns. Enhancing operational efficiency is occasionally facilitated by more intricate risk management strategies and superior technical access prevalent in larger corporations [99].

These results highlight the financial stability of larger corporations, which attracts investors as a viable investment option. Business management should leverage firm size to enhance operational processes, expand market reach, and foster innovation. However, they must also ensure prudent expansion management to sustain profitability without excessive financial burden. By achieving an equilibrium between fiscal discipline and expansion, organizations can leverage the benefits of their scale while maintaining favorable returns on operational assets.

The findings showed that R&D intensity had a positive and significant relationship with return on net operating assets. Investing in R&D enhances operational profitability and efficiency. Stakeholder theory posits that, by fostering innovation and generating long-term value, organizations investing in R&D fulfill the requirements of several stakeholders, including investors, consumers, and regulatory bodies [16]. The invention of new products, enhancement of processes, and augmentation of efficiency enable organizations to attain a competitive edge, yielding greater financial returns.

Technological advancements that reduce manufacturing expenses, the production of distinctive products with higher pricing, and enhanced operational procedures that optimize asset utilization all contribute to this positive impact. By ensuring adaptability to evolving market demands and regulatory requirements, R&D investments prepare organizations for future growth. These results emphasize the strategic importance of R&D in enhancing investors’ financial performance, generating investment opportunities for companies with greater R&D intensity. R&D must remain paramount for business management to ensure expenditures align with market demands and profitability objectives while fostering innovation-driven growth. Organizations must integrate R&D expenditure with fiscal prudence to optimize returns while conserving resources. Practical research and development projects will enhance financial performance and bolster long-term sustainability.

The study found that capital intensity had a positive and significant relationship with return on net operating assets. These findings indicate that firms that invest more in physical assets, specifically equipment and technology, attain a greater profitability and efficiency. Stakeholder theory advocates that organizations should optimize resource allocation to generate long-term value for investors, employees, and consumers [16]. Strategic capital investment optimizes asset utilization, reduces operational costs, and amplifies output, improving financial returns.

Economies of scale, where firms with substantial capital investments benefit from decreased per-unit costs and enhanced production efficiency due to advanced technology and automation, are probable contributors to this advantageous effect. Capital-intensive enterprises that sustain robust market positions facilitate steady income generation and enhanced asset turnover. The results indicate that firms with a greater capital intensity can deliver a sustained financial performance, appealing to investors as a viable investment opportunity. Management’s strategic capital allocation will ensure asset efficiency and long-term profitability while mitigating excessive fixed costs that could jeopardize financial flexibility. Preserving competitive advantage and maximizing returns rely on the suitable maintenance and technical enhancements of capital assets. Balancing operational agility and capital investment in competitive markets can foster financial stability and growth.

6. Conclusions, Managerial Implications, Limitations of the Study, and Future Directional Studies

This study examined the impact of sustainable finance on business financial performance. The study focused on 143 non-financial companies listed on the London Stock Exchange using 17 years of data between 2008 and 2024 obtained from Thomson Reuters Eikon DataStream. The data were analyzed using the GMM due to its ability to overcome the endogeneity issues identified in the data. The study discovered that green financing initiatives, policies for emission reduction, and sustainable product initiatives had a positive and significant impact on business financial performance. It was also revealed that environmental investment initiatives negatively and significantly impacted business financial performance.

The results provide companies listed on the LSE with significant insights into operational strategies and the financial implications of sustainable finance. Managers must recognize that investments in sustainable product initiatives, environmental mitigation programs, and green financing endeavors enhance financial performance. These activities enhance investor confidence and corporate reputation through global sustainability requirements. Environmental investment initiatives necessitate meticulous evaluation to avert excessive costs that could hinder profitability.

The influence of corporate characteristics such as size, R&D, and capital intensity demonstrates the significance of resource allocation in enhancing financial performance. Larger organizations benefit from enhanced economies of scale, enabling them to efficiently accommodate investments associated with sustainability. R&D intensity improves innovation capability, positioning organizations for enduring competitiveness in sustainable markets. Capital-intensive firms should enhance asset utilization to optimize returns, ensuring that investments in physical assets yield significant financial growth.

The findings indicate that factors specific to enterprises and sustainable finance initiatives influence financial stability and profitability for investors. Investors can consider these variables, particularly when assessing companies’ commitment to sustainability and financial resilience in their decision-making process. Companies that effectively balance operational efficiency with sustainability may yield greater financial returns, attracting impact and institutional investors.

Authorities and legislators must recognize that financial performance is contingent upon sustainable finance. Support for corporate sustainability through favorable laws, incentives, and reporting systems encourages corporations to adopt ethical business practices. Long-term success and enhancing shareholder value critically rely on integrating sustainability with profitability as LSE-listed companies navigate an evolving financial landscape.

This research is limited by its sample size, which was reduced to 143 non-financial organizations due to excluding companies with incomplete data, as identified in the Thomson Reuters Eikon DataStream. The absence of comprehensive data impeded the inclusion of further companies. Future research should examine the adverse impacts of environmental investment initiatives by considering potential moderating factors, industry-specific dynamics, or long-term financial outcomes. Analyzing how corporations should align their environmental investments with sustainability goals and profitability would elucidate and bolster the growing corpus of green finance research.

Another notable limitation of this study is the exclusion of a control group comprising firms that do not engage in sustainable finance practices. This was primarily due to the lack of available and consistent data on sustainability-related variables for non-adopting firms. Consequently, the study focuses exclusively on firms actively involved in sustainable finance, which may limit the ability to draw comparative insights or generalize the findings to all businesses, especially those not implementing sustainable finance strategies.