Environmental Fines and Corporate Sustainability: The Moderating Role of Governance, Firm Size, and Institutional Ownership

Abstract

Environmental fines compel corporations to strengthen compliance, adopt sustainable practices, and integrate eco-innovation. This enhances legitimacy, reduces risks, and supports long-term sustainable performance across industries. Despite this importance, its effect on corporate sustainability performance (CSP) and the moderating roles of corporate governance quality, firm size, and institutional ownership remain underexplored, creating significant knowledge gaps. This study applied stakeholder and institutional theory to address these gaps, using data from 187 non-financial firms listed on the Frankfurt Stock Exchange between 2006 and 2024, obtained from Thomson Reuters Eikon DataStream. Three advanced estimation models—augmented mean group (AMG), common correlated effects mean group (CCEMG), and generalized method of moments (GMM)—were employed. Findings indicate that environmental fines have a positive and significant effect on CSP. Moreover, the moderating effects of governance quality, firm size, and institutional ownership also positively and significantly influence CSP. Strong governance enables firms to transform fines into strategic opportunities, driving sustainability investments, improving risk management, and fostering accountability that aligns operations with regulatory and stakeholder expectations.

1. Introduction

Corporate sustainable performance (CSP), which evaluates a company’s financial outcomes alongside its social and environmental impacts, has transitioned from a voluntary initiative to a mandatory obligation for all enterprises [1]. In a rapidly evolving market characterized by elevated customer expectations, organizations are increasingly evaluated on their ability to reconcile profitability with social and environmental responsibility [2]. An effective CSP demonstrates a company’s commitment to ethical practices, fosters trust among stakeholders, and enhances the organization’s long-term competitiveness. It safeguards their brand and legal standing while fostering innovation, enhancing operational efficiency, and promoting long-term market growth [3]. CSP has transitioned from an alternative to a requisite for enterprises to maintain relevance in the future.

Environmental fines have emerged as a significant mechanism for regulating corporate behavior and promoting more environmental accountability [4]. They provide economic signals that compel enterprises to understand the consequences of environmental degradation and adjust their behavior to take greater responsibility for their actions. Fines impact a company’s financial standing, regulatory compliance, and reputation while simultaneously enhancing accountability and fostering trust among stakeholders [5]. Companies perceive fines as burdensome; nonetheless, they can effectively stimulate innovation, enhance operational efficiency, and promote sustainable technology, hence increasing firm competitiveness [6].

A significant correlation exists between environmental fines and CSP. Fines compel corporations to adhere to regulations and motivate them to include sustainability in their long-term strategies [7]. They advocate for the prudent utilization of resources, risk mitigation, and investment in sustainable production. Sanctions can damage a company’s reputation, diminish investor confidence, and complicate collaboration with stakeholders. Fines should not merely be regarded as punitive measures, but also as incentives for commendable conduct and advantages over time (Uhlmann, 2014) [8].

Notwithstanding, numerous enterprises continue to struggle with reconciling profitability and environmental responsibility [2,9]. Certain groups continue to harm ecosystems, contaminate the environment, and overexploit resources (Patil et al., 2024) [10]. Fines are intended to deter such behaviors; however, they often fail as some organizations perceive them merely as an additional operational expense rather than as a means to modify behavior [11]. This issue is significant: whereas fines are intended to promote sustainability, their impact on CSP remains unclear.

Fines aim to enhance compliance with regulations [12], although there is a scarcity of studies examining their direct impact on CSP. Prior studies have concentrated on related areas, such as corporate compliance, environmental disclosure, and financial performance [13,14,15], thereby neglecting a direct assessment of environmental fines and CSP.

The impact of organizational characteristics—such as corporate governance quality, firm size, and institutional ownership—on moderating the relationship between fines and CSP has not been thoroughly examined. These attributes influence how enterprises respond to external pressures. For example, governance enhances corporate accountability [16], larger corporations are subject to greater scrutiny from regulators and the public [17], and institutional ownership impacts strategic decision-making [18]. Nonetheless, the influence of these characteristics on the efficacy of environmental fines on CSP remains insufficiently understood. Filling these gaps is essential to elucidating the relationship between regulation and sustainability.

This study examined the effect of environmental fines on CSP and investigated the moderating roles of corporate governance quality, firm size, and institutional ownership. It advances our understanding of how regulatory regimes interact with organizational characteristics to shape sustainable outcomes. Specifically, it addresses two research questions: (1) What is the effect of environmental fines on CSP? and (2) How do governance quality, firm size, and institutional ownership moderate this relationship?

This study makes a significant contribution to the literature in four key ways. First, it highlights how environmental fines affect CSP, showing that perceiving fines as more than penalties underscores their role in corporate responsibility, innovation, and resilience. Second, it assesses governance quality as a moderator, emphasizing its role in strengthening accountability, transparency, and strategic planning, thereby turning penalties into sustainable outcomes. Third, it examines the moderating effect of firm size, noting that larger corporations face stronger regulatory and stakeholder pressures, thereby amplifying the impact of fines. Fourth, it examines the moderating effect of institutional ownership, demonstrating how different ownership structures impact corporate objectives, risk tolerance, and accountability, ultimately determining whether fines drive compliance alone or broader sustainability measures.

This study is motivated by growing global concerns about corporate accountability in addressing environmental challenges. As regulatory demands and stakeholder expectations escalate, understanding the role of fines in shaping sustainable practices is essential. The study clarifies how organizational traits influence corporate responses to legislation, providing valuable insights for legislators, investors, and corporate leaders seeking to balance profitability with environmental and ethical norms.

2. Literature Review

2.1. Theoretical Background of the Study

This study employed stakeholder theory and institutional theory as its principal theoretical frameworks to examine the effect of environmental penalties on CSP and the moderating role of organizational characteristics. Stakeholder theory posits that companies must balance the interests of various stakeholders, including regulators, investors, consumers, employees, and communities, to achieve sustainable outcomes [19]. Engaging in ecologically beneficial actions fosters trust, competition, and legitimacy. Conversely, institutional theory examines the influence of conventions, traditions, and social factors on corporate performance [20]. It asserts that organizations comply with institutional standards, such as environmental regulations, labor laws, and ethical practices, not solely to avoid fines but also to achieve legitimacy, stability, and sustainable performance. These theories jointly provide a robust theoretical foundation for this study.

In this framework, environmental fines are regarded as indicators for stakeholders and guidelines for institutions [21]. From the stakeholders’ perspective, sanctions indicate dissatisfaction among significant groups, thereby exerting pressure on enterprises to adopt more environmentally sustainable technologies, enhance accountability, and improve risk management to regain trust and maintain competitiveness. From an institutional perspective, fines serve as coercive instruments, compelling enterprises to adhere to regulatory standards and align with societal norms [22]. Thus, fines function not merely as punitive actions but also as mechanisms to guide company behavior toward sustainable profitability.

Stakeholder theory posits that effective governance enables enterprises to manage stakeholder issues proactively, thereby preventing them from developing into significant difficulties [23]. Institutional theory emphasizes the structural potential for integrating sustainability into legal frameworks [24]. The firm’s size is significant, as larger organizations are scrutinized more rigorously by stakeholders and institutions, resulting in fines that have a greater impact on sustainability initiatives. Institutional ownership is significant as it influences whether compliance is merely a matter of adhering to regulations or if it results in substantial long-term advantages. Investors ensure that companies adhere to their business plans in alignment with their long-term corporate social responsibility (CSR) objectives [25].

This study examined the stakeholder-driven and institutionally required dimensions of sustainability by integrating stakeholder and institutional perspectives. This dual theory enhances our understanding of the interaction between environmental fines, corporate governance quality, firm size, and institutional ownership in influencing CSP, thereby providing a clearer view of the regulatory–sustainability relationship.

2.2. Hypothesis Development

2.2.1. The Influence of Environmental Fines on CSP

Environmental fines are sanctions designed to compel enterprises to adhere to sustainability regulations [26]. Institutional theory posits that these sanctions are external influences that impact organizational operations. Bu and Shi [27] found that enterprises subjected to substantial fines implemented more stringent environmental protocols to prevent future legal violations. Utilizing this strategy, corporations avoid the risk of incurring fines while simultaneously enhancing their CSP.

Stakeholder theory posits that environmental fines indicate a company’s neglect of its primary stakeholders including its consumers, investors, and communities [28]. Environmental violations can damage a company’s reputation and erode shareholder confidence. Shahab et al. [29] demonstrated that enterprises penalized for environmental infractions experienced significant depreciation due to diminished stakeholder trust. To restore trust, enterprises enhance their environmental practices.

Environmental penalties compel businesses to innovate by necessitating the adoption of more sustainable practices [30]. Institutional theory posits that firms subject to regulatory oversight allocate resources toward cleaner technologies and enhance operational efficiency. Heidenreich et al. [31] observed that stricter environmental regulations lead to increased investment in environmentally beneficial technology, thereby enhancing sustainable performance. In this setting, fines serve not merely as punishments but also facilitate the acceleration of long-term transformations within the organization.

From the stakeholders’ perspective, fines have an impact that extends beyond the entity being punished. Alharbi et al. [32] found that when firms within a sector faced penalties, their competitors enhanced their compliance initiatives to align with stakeholder expectations and protect their reputations. Consequently, environmental fines contribute to the overall sustainability of businesses, fostering trust among stakeholders, and fulfilling societal expectations for corporate responsibility [33]. Based on these insights, this study proposes the following hypothesis:

Hypothesis (H1).

Environmental fines positively and significantly influence CSP.

2.2.2. The Moderating Role of Corporate Governance Quality in the Relationship Between Environmental Fines and CSP

Effective corporate governance enables enterprises to manage environmental fines and maintain their performance over time [34]. Institutional theory posits that robust governance frameworks facilitate compliance and the implementation of sustainable initiatives, thereby mitigating the need for coercive actions such as fines (Griffith, 2015) [35]. Li [36] found that firms with superior governance were more adept at integrating environmental considerations into their business strategies, hence amplifying the impact of regulatory enforcement on sustainability outcomes.

Stakeholder theory emphasizes the necessity of governance in meeting stakeholder expectations following environmental sanctions. Transparent and accountable boards are more inclined to implement measures for environmental protection and restore trust following sanctions [37]. Gnan et al. [38] demonstrated that firms with robust governance frameworks solicit feedback from a broader spectrum of stakeholders, ensuring that responses to environmental fines are constructive and result in tangible advancements in sustainability.

Robust governance increases the likelihood that enterprises perceive fines as long-term investments rather than immediate expenses. Well-managed organizations are more adept at acquiring the necessary resources for environmental innovation and sustained projects [39,40]. Khan et al. [41] established that governance systems with diverse and independent boards boost social and environmental accountability, suggesting that strong governance increases the effectiveness of fines in promoting sustainable performance.

Poor governance may weaken the relationship between fines and CSP. Ineffective boards may minimize penalties or implement symbolic solutions that do not address core issues, thereby undermining the significance of institutional and stakeholder expectations [42]. Haque and Ntim [43] emphasized the importance of governance quality in assessing the legitimacy of sustainability outcomes derived from external sanctions. The extent of governance significantly influences how corporations manage fines for violating environmental regulations. Based on these discussions, this study proposes the following hypothesis:

Hypothesis (H2).

Corporate governance quality positively and significantly moderates the relationship between environmental fines and CSP.

2.2.3. The Moderating Role of Firm Size in the Relationship Between Environmental Fines and CSP

The size of a firm influences its response to environmental fines and the subsequent impact of those fines on its sustainable performance [44]. When large corporations face fines, they are more inclined to implement significant alterations to their sustainability practices due to heightened scrutiny from institutions and the public. Institutional theory posits that organizations must react to coercive circumstances because of their impact on visibility and reputation [45]. Loucks et al. [46] found that larger corporations tend to excel in integrating sustainability when faced with external challenges. This indicates that size is a crucial factor influencing sustainability outcomes.

Larger enterprises must manage a diverse array of stakeholders, whose expectations intensify following environmental fines [47]. Stakeholder theory posits that sanctions may incentivize these organizations to adopt more comprehensive sustainability activities to save their reputation. Gomez-Trujillo et al. [48] demonstrated that large corporations are susceptible to environmental issues due to their reliance on reputational capital, rendering sustainability a vital strategic necessity. As a corporation increases in size, the correlation between fines and sustainability performance intensifies.

Conversely, smaller enterprises may lack the financial resources or expertise to transform fines into sustainable initiatives [49]. Institutional theory asserts that coercive influences affect all organizations; nevertheless, smaller companies often face limitations due to insufficient financial and administrative resources. Degbey et al. [50] found that these organizations employ reactive, compliance-oriented techniques rather than proactive sustainability initiatives. This indicates that the moderating effects are weaker compared with those observed in larger corporations.

Nevertheless, smaller enterprises may exhibit greater adaptability due to their flexibility and expedited decision-making processes. Stakeholder theory posits that small enterprises can enhance their environmental sustainability by robust connections with their local communities, regardless of financial limitations. The evidence is more compelling for large corporations. Wang et al. [51] showed that firm size significantly enhances environmental responsiveness, hence reducing the relationship between fines and sustainable performance. Based on these discussions, this study proposes the following hypothesis:

Hypothesis (H3).

Firm size positively and significantly moderates the relationship between environmental fines and CSP.

2.2.4. The Moderating Role of Institutional Ownership in the Relationship Between Environmental Fines and CSP

Institutional ownership has a significant influence on corporate responses to environmental fines [6]. Following punitive actions, managers experience increased pressure to meet the sustainability objectives when institutional investors hold significant interests. Institutional theory asserts that these investors maintain society norms and expectations to protect long-term wealth. Liu and Wang [52] found that firms with greater institutional ownership demonstrated improved sustainability performance, indicating that institutional investors can amplify the influence of fines on CSP.

From a stakeholder viewpoint, institutional ownership represents the influence of major investors whose objectives shape corporate decision-making and reactions to sanctions [53,54]. Long-term investors, like pension funds, often prioritize reputation and sustainability to maintain stakeholder trust. Campbell [55] observed that enterprises subjected to investor scrutiny were more predisposed to engage in socially responsible efforts when confronted with external pressures. Institutional ownership may utilize fines to finance environmentally beneficial projects.

Conversely, if institutional ownership is minimal or dispersed, corporations may not regard environmental fines with the seriousness they warrant [56]. Institutional theory asserts that fragmented responsibility reduces managerial motivation to convert fines into sustainability-oriented activities. Graafland and Smid (2015) [57] found that stakeholder-driven investors improve CSP, but insufficient institutional monitoring may lead to only transient compliance rather than lasting sustainability progress.

Foreign institutional investors may enhance the CSP relationship by seeking greater accountability to safeguard their global reputations [58]. Stakeholder theory supports the notion that global investors often anticipate firms to adhere to international sustainability standards that exceed the regulations of their home country. Velte and Obermann [59] emphasized that a diverse array of institutional owners globally heightens stakeholder expectations, compelling corporations to implement more robust sustainability practices to evade fines. Institutional ownership enhances managerial accountability and aligns firm strategies with broader sustainability objectives. This reinforces the connection between CSP and environmental fines. Based on these discussions, this study proposes the following hypothesis:

Hypothesis (H4).

Institutional ownership positively and significantly moderates the relationship between environmental fines and CSP.

3. Materials and Methods

3.1. Sample and Data

Germany is recognized for its stringent environmental regulations and robust dedication to sustainable corporate practices [60]. This study was carried out in Germany. Environmental regulations at both the national and European Union levels impose significant pressure on firms to achieve their sustainability objectives. The German Sustainable Finance Strategy and the Corporate Sustainability Reporting Directive (CSRD) are two significant frameworks that emphasize transparency and accountability [61]. Germany’s historic Energiewende initiative prioritizes renewable energy and environmental stewardship [62]. Together, these initiatives establish a robust institutional foundation for this research.

The study focused on non-financial entities listed on the Frankfurt Stock Exchange, a vital component of Germany’s financial market. These enterprises are required to adhere to stringent regulations for sustainability and compliance reporting. Failure to comply may result in severe fines. The exchange facilitates the execution of sustainable finance projects, serving as a significant catalyst for socially and environmentally responsible initiatives. Non-financial corporations, which have a greater environmental impact than banks, were used as the sample for this study.

Explicit inclusion criteria were established to ensure the consistency and reliability of the data. Eligibility criteria for companies included: (1) exclusion of banks, which are governed by distinct regulations; (2) listing on the Frankfurt Stock Exchange to facilitate comparative analysis; (3) provision of comprehensive data regarding environmental fines, sustainability metrics, and financial indicators; and (4) continuous operation from 2006 to 2024 to enable long-term evaluation.

The sample was further refined using exclusion criteria. Entities within the banking sector were excluded due to their specialized reporting procedures and little environmental impact. The study excluded companies lacking dependable data on fines or sustainability disclosures as well as those that were delisted, merged, or liquidated during the study period. Furthermore, enterprises with minimal environmental impact, particularly those in the digital or service-oriented sectors, were excluded from this study.

A purposive sampling technique was employed, resulting in a sample of 187 non-financial firms listed on the Frankfurt Stock Exchange from 2006 to 2024, with data obtained from Thomson Reuters Eikon DataStream. This dataset provides a robust and pertinent basis for this study.

The years 2006 to 2024 were selected due to their significance as policy milestones for Germany and the EU. The Paris Agreement (2015), the initiation of the CSRD (2021), and Phase II of the EU Emissions Trading System (2006) align with the environmental and sustainability policy developments in Germany. These activities in the selected years establish a robust policy-oriented framework that enhances the use and relevance of this study.

3.2. Dependent, Independent, and Control Variables

Table 1. Summary of the variables (dependent, independent, and control variables).

Index	Variable	Acronym	Formulae
	Dependent variables:
1	Corporate sustainability performance	CSP	ESG score (from 0 to 100)
	Independent variable:
1	Environmental fines	ENF	Log (total environmental fines)
	Control variables
1	Corporate governance quality	CGQ	Governance pillar scores (from 0 to 100)
2	Firm size	FMZ	Log (total assets)
3	Institutional ownership	ISO	$\left({\displaystyle \frac{Shares owned by Institutional Investors}{Total outstanding share }}\right)\times 100$
4	Return on assets	ROA	$\left({\displaystyle \frac{Net income}{Average assets }}\right)\times 100$
5	Leverage	LEV	${\displaystyle \frac{Total liabilities }{Shareholde{r}^{\prime }s equity}}$
6	Firm age	FMA	The years that the companies selected for this study were incorporated to the years (2006–2024) that the data were extracted for the study
7	Capital intensity	CPI	${\displaystyle \frac{Total assets}{Total sales}}$

provides a summary of all the variables utilized in this study. It also shows the abbreviations used for the variables and the formulae used to compute the figures.

3.2.1. Dependent Variables

The dependent variable of this study was CSP, defined as a firm’s capacity to integrate environmental, social, and governance (ESG) principles into its long-term strategic objectives [63]. This study utilized ESG scores as a proxy for CSP, as they reflect a company’s performance in three domains. The environmental factor examines how corporations address issues such as climate change, pollution, and the utilization of natural resources [64]. The social dimension reflects a business’s accountability to its employees, the community, and society at large [65]. The governance dimension examines aspects such as leadership structures, transparency, accountability, and ethical conduct [66]. ESG scores provide a systematic, competitive, and widely recognized method for assessing a firm’s sustainability performance. They link a business’s operations to legal responsibilities, stakeholder expectations, and the creation of enduring value, making them robust for assessing CSP.

3.2.2. Independent Variables

The independent variable of this study was environmental fines, defined as monetary penalties imposed on enterprises for violating environmental regulations [67]. This study employed the natural logarithm to normalize the total environmental fines (amount paid by the corporation) by the companies, thereby reducing skewness. Environmental fines highlight the severity of environmental regulation violations and the associated financial and reputational consequence) [68]. Their existence suggests that the government is exerting pressure on businesses to comply with environmental regulations and enhance their sustainability efforts. The log transformation enhanced the robustness and statistical reliability of the measure for empirical research.

3.2.3. Control Variables

This study controlled for corporate governance quality, firm size, institutional ownership, return on assets (ROA), leverage, firm age, and capital intensity to account for their influence on CSP. The governance pillars score was used as a proxy for corporate governance quality. These scores take into account the independence of the board, the efficacy of the audit committee, shareholder rights, and openness. Controlling for this variable ensures that strong governance reduces risks, ensures that rules are followed, and prevents differences in governance systems from impacting sustainability outcomes [69,70].

The natural logarithm of total assets is a measure of a firm’s size, indicating its financial strength and size [71]. Larger companies may invest more in sustainability, but they also face increased scrutiny and the risk of environmental harm [72].

Institutional ownership refers to the percentage of shares held by institutional investors including banks, pension funds, and mutual funds. These investors have considerable power to monitor developments, which makes companies more accountable and forces them to go beyond merely following the rules and develop genuine plans for sustainability [73,74].

Return on assets (ROA) is a measure of a company’s profitability and its ability to utilize its assets effectively. It is determined by dividing the net income by total assets. Financially strong companies are better equipped to invest in sustainability and cover compliance costs, making profitability a crucial aspect [75,76].

Leverage, which is the ratio of total liabilities to shareholder equity, shows how the company is financially structured. Companies with significant debt may prioritize paying it off over investing in the environment, which could limit their efforts to become more sustainable (Ding et al., 2022; Arhinful & Radmehr, 2023) [77,78].

The length of time a firm has been listed on the Stock Exchange was used as a proxy for the firm’s age. Established firms often possess reputational capital, streamlined processes, and a deeper understanding of regulations, all of which can impact CSP [79,80].

Capital intensity, defined as the ratio of fixed assets to total assets, reflects the extent to which firms depend on physical resources for operations. Capital-intensive firms, particularly in manufacturing, often generate higher environmental impacts and face stricter compliance obligations [81,82]. This is controlled for because such firms may have limited flexibility in adopting sustainability practices, and differences in asset structures could otherwise confound the relationship between explanatory variables and CSP.

3.3. Pre-Estimation Tests

Selecting appropriate estimating methods is crucial for ensuring the accuracy and reliability of empirical findings. This study employed many diagnostic steps to select the most suitable estimating model.

The first diagnostic step involved analyzing cross-sectional dependence, defined as the correlation of error terms among firms in a panel dataset, which arises from unobserved common shocks, spillover effects, or interdependencies [83]. Neglecting cross-sectional dependence may result in biased and inconsistent parameter estimates. This study employed the Pesaran, Friedman, and Free tests, where the null hypothesis indicates independence and the alternative hypothesis indicates dependence. The results in

Table 2. Heterogeneity, cross-sectional and endogeneity tests.

Type of Test	Corporate Sustainable Performance
Cross-sectional tests
Pesaran’s test	73.932 ***
Friedman’s test	303.425 ***
Frees’ test	66.092 ***
Heterogeneity test (Peseran–Yamagata test)
Δ-tilde stat.	32.044 ***
Δadj-tilde stat.	29.324 ***
Endogeneity test
Durbin–Wu–Hausman (DWH) test	12.934 ***

*** p < 0.01.

support the alternative hypothesis, confirming cross-sectional dependence.

The second diagnostic step involved using the Pesaran–Yamagata test to determine whether the slopes were uniform across all cross-sections. This test is crucial as it assumes uniformity (homogeneity) in the response of all units to the explanatory variables. Neglecting slope heterogeneity may result in erroneous outcomes. The null hypothesis asserts consistent slopes (homogeneous slopes), whereas the alternative hypothesis suggests variability (heterogeneous slopes). The statistical results in Table 2 corroborate the alternative hypothesis, indicating that the slope is heterogeneous.

The third step was assessing the issue of endogeneity, which could result in erroneous and inconsistent estimates if not considered [84]. The study employed the Durbin–Wu–Hausman (DWH) test, which posits that the null hypothesis is exogeneity (the absence of endogeneity) and the alternative hypothesis is endogeneity. The statistical evidence in Table 2 supports the alternative hypothesis, confirming the presence of endogeneity. Neglecting endogeneity diminishes reliability, necessitating the use of robust estimation methods in this investigation.

This study employed the cross-sectionally augmented Dickey–Fuller (CADF) and cross-sectionally augmented IPS (CIPS) tests to determine the stationarity and non-stationarity of the variables, taking into account the presence of cross-sectional dependence. The CADF test enhances the conventional ADF exam, whereas the CIPS test is based on the IPS framework [85]. Both consider cross-sectional correlations that may diminish the accuracy of traditional unit root testing. The null hypothesis asserts the presence of unit roots, while the alternative hypothesis indicates stationarity. The findings in

Table 3. Panel unit root test assessment.

Variable	Cross-Sectional Augmented Dickey–Fuller (CADF)		Cross-sectional Augmented IPS (CIPS)
	Levels	1st Difference	Levels	1st Difference
Corporate sustainable performance	−13.843 ***	−73.427 ***	−11.823 ***	−55.381 ***
Environmental fines	−8.762 ***	−61.445 ***	−7.532 ***	−49.283 ***
Corporate governance quality	−10.531 ***	−69.228 ***	−9.245 ***	−53.117 ***
Firm size	−6.348 ***	−57.913 ***	−5.872 ***	−47.662 ***
Institutional ownership	−12.417 ***	−71.563 ***	−10.398 ***	−54.832 ***
Return on assets	−7.921 ***	−63.784 ***	−6.842 ***	−50.239 ***
Leverage	−9.664 ***	−67.352 ***	−8.375 ***	−52.496 ***
Firm age	−5.892 ***	−59.478 ***	−4.933 ***	−48.215 ***
Capital intensity	−11.275 ***	−72.118 ***	−9.932 ***	−56.701 ***

*** p < 0.01.

support the alternative hypothesis by demonstrating that the variables are stationary at both their levels and first differences. These findings enhance the dataset’s reliability for further time-series analysis.

This study employed the Westerlund panel cointegration test to ascertain the existence of a long-term equilibrium among the variables. It utilizes error-correction-based statistics to mitigate cross-sectional dependence, hence enhancing the trustworthiness of the results relative to traditional cointegration tests [86]. The null hypothesis asserts that cointegration is absent, whereas the alternative hypothesis posits the existence of a stable long-term relationship.

Table 4. Westerlund test for cointegration.

Test	Corporate Sustainable Performance
Westerlund test	−32.621 ***

*** p < 0.01.

indicates that the findings refute the null hypothesis and substantiate a robust long-term association between the variables. This indicates the use of long-run estimation for this study.

3.4. The Choice of Regression Model

The augmented mean group (AMG) estimator was employed due to cross-sectional dependence, slope variability, and an established long-term connection among the variables. The AMG estimator improves traditional methods by integrating common shocks and unit-specific dynamics, addressing correlated disturbances and structural heterogeneity [87]. This study considered employing alternative estimators such as pooled OLS, fixed effects, and random effects models. However, this study ultimately opted not to apply them. Pooled OLS neglects cross-sectional correlation and unit-specific variations [88]. In contrast, fixed-effects and random-effects models fail to adequately address slope heterogeneity and cross-sectional dependence [89]. Conversely, AMG addresses these issues and produces more precise and reliable long-run estimates [90].

The common correlated effects mean group (CCEMG) estimator was employed to assess the reliability (robustness testing) of the AMG results. CCEMG explicitly integrates unobserved common variables and cross-sectional dependence while allowing for varying slope coefficients [91]. The alignment of AMG and CCEMG data confirms that the identified long-term relationships are robust against common shocks, thereby bolstering the validity of the findings.

Finally, the study employed the generalized method of moments (GMM) to address potential endogeneity. Endogeneity may arise from simultaneity, omitted variables, measurement error, or reverse causality, each of which can introduce bias into standard estimators [84]. The two-step difference GMM was selected over the one-step form due to its provision of more precise standard errors that account for heteroskedasticity and autocorrelation [92]. This model enhances the reliability of the causal findings derived from the analysis.

3.5. Choice of Regression Model

This study employed four econometric models to analyze both the direct impact of environmental fines on CSP and the moderating effects of governance quality, firm size, and institutional ownership. Model 1 estimated the direct relationship between the independent variables, control variables, and CSP. Model 2 extended the baseline model by incorporating the moderating effect of corporate governance quality. Model 3 introduced the moderating role of firm size, while Model 4 examined the moderating influence of institutional ownership. The specifications of these models are formally presented below.

Model 1:

$$\begin{array}{ll}\mathrm{SP} = \beta 0_{T FFSEM}& + \beta 1{\mathrm{LOGENF}}_{T FFSEM}+\beta 2CG{Q}_{T FFSEM}+\beta 3{\mathrm{LOGFMZ}}_{T FFSEM}+\beta 4IS{O}_{T FFSEM}+\beta 5RO{A}_{T FFSEM}\\ & +\beta 6LE{V}_{T FFSEM}+\beta 7FM{A}_{T FFSEM}+\beta CP{I}_{T FFSEM}+u\end{array}$$

(1)

Model 2:

$$\begin{array}{ll}\mathrm{CSP} = \beta 0_{T FFSEM}& + \beta 1{\mathrm{LOGENF}}_{T FFSEM}+\beta 2CG{Q}_{T FFSEM}+\beta 3{\mathrm{LOGFMZ}}_{T FFSEM}+\beta 4IS{O}_{T FFSEM}+\beta 5RO{A}_{T FFSEM}\\ & +\beta 6LE{V}_{T FFSEM}+\beta 7FM{A}_{T FFSEM}+\beta 8CP{I}_{T FFSEM}+\beta 9LOGENF\ast CG{Q}_{T FFSEM}+u\end{array}$$

(2)

Model 3:

$$\begin{array}{ll}\mathrm{CSP} = \beta 0_{T FFSEM}& + \beta 1{\mathrm{LOGENF}}_{T FFSEM}+\beta 2CG{Q}_{T FFSEM}+\beta 3{\mathrm{LOGFMZ}}_{T FFSEM}+\beta 4IS{O}_{T FFSEM}+\beta 5RO{A}_{T FFSEM}\\ & +\beta 6LE{V}_{T FFSEM}+\beta 7FM{A}_{T FFSEM}+\beta 8CP{I}_{T FFSEM}+\beta 9LOGENF\ast LOGFM{Z}_{T FFSEM}+u\end{array}$$

(3)

Model 4:

$$\begin{array}{ll}\mathrm{CSP} = \beta 0_{T FFSEM}& + \beta 1{\mathrm{LOGENF}}_{T FFSEM}+\beta 2CG{Q}_{T FFSEM}+\beta 3{\mathrm{LOGFMZ}}_{T FFSEM}+\beta 4IS{O}_{T FFSEM}+\beta 5RO{A}_{T FFSEM}\\ & +\beta 6LE{V}_{T FFSEM}+\beta 7FM{A}_{T FFSEM}+\beta 8CP{I}_{T FFSEM}+\beta 9LOGENF\ast LOIS{O}_{T FFSEM}+u\end{array}$$

(4)

NB: Table 1 shows the abbreviations used in the equation. “FFSEM” denotes the Frankfurt Stock Exchange, “T” denotes years, and “u” denotes the error term.

4. Data Analysis, Results and Interpretations

4.1. Descriptive and Variance Inflation Analysis

Table 5. Descriptive statistics.

Variable	Obs	Mean	Std. Dev.	Min	Max	VIF	1/VIF
Corporate sustainable performance	3553	62.45	15.32	12	95	-	-
Environmental fines	3553	1.84	0.67	0	3.25	1.95	0.513
Corporate governance quality	3553	68.12	14.85	20	98	2.36	0.424
Firm size	3553	15.23	1.12	12.85	18.21	2.81	0.356
Institutional ownership	3553	3.56	0.12	0.005	23.08	2.04	0.49
Return on assets	3553	6.34	4.82	−5.2	18.4	1.88	0.532
Leverage	3553	4.59	0.21	0.12	19.92	2.45	0.408
Firm age	3553	42.17	27.54	5	136	1.77	0.565
Capital intensity	3553	2.47	0.19	0.08	23.83	2.29	0.437

presents the outcomes of the descriptive statistics and the variance inflation factor (VIF). The average CSP indicates that most companies are making incremental progress toward sustainability, reflecting their emerging consideration of social, environmental, and governance concerns concurrently. Companies initiate such projects to enhance their reputation, ensure continued growth within the organization, and augment stakeholder value.

The average environmental fines indicate a minimal payment, suggesting partial compliance with the regulations. This suggests that certain regulations are being adhered to, although the minor penalties indicate that compliance alone does not significantly impact the overall situation. The average score for corporate governance quality indicates that governance systems emphasizing accountability, transparency, and oversight function effectively. Such frameworks foster confidence among stakeholders, facilitate oversight, and help individuals make informed decisions.

The average firm size indicates that the majority of enterprises in the sample are large, affording them greater resources and market influence. This enables the initiation of sustainability programs, and these often arise from stakeholder needs rather than being made as intentional promises. Institutional ownership is relatively low, suggesting that institutional investors have limited influence in holding corporations accountable and promoting adherence to sustainability norms.

The average ROA indicates that enterprises are generating substantial profits, signifying effective resource utilization and the capacity to engage in sustainability initiatives. Moderate leverage necessitates external funding, which can enhance operational discipline. The corporation must adhere to sustainability criteria to satisfy its investors’ requirements. Enduring companies require expertise and resilience. Established enterprises typically possess superior governance frameworks, enhanced stakeholder confidence, and enduring pledges to sustainability.

Ultimately, the average capital intensity necessitates substantial expenditure on fixed assets, hence complicating the implementation of environmentally sustainable solutions. However, these types of enterprises possess the financial resources to invest in cleaner technologies and more sustainable business practices. All VIF values were below 5 [93,94], indicating the absence of multicollinearity. This indicates that the regression estimations are authentic and not distorted.

4.2. Matrix Correlation Analysis

A correlation matrix is a statistical tool employed to assess the strength and direction of linear relationships among variables [95]. This study employed it to assess potential multicollinearity, a situation defined by a significant correlation among independent variables. Multicollinearity elevates standard errors and diminishes the reliability of coefficient estimations. Mensah et al. [92] assert that correlation coefficients exceeding 0.70 provide a concern.

Table 6. Matrix correlation assessment.

Variables	(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)	(9)
(1) Corporate sustainable performance	1.000
(2) Environmental fines	0.245	1.000
(3) Corporate governance quality	0.312	0.276	1.000
(4) Firm size	0.184	0.215	0.298	1.000
(5) Institutional ownership	0.402	0.338	0.254	0.187	1.000
(6) Return on assets	0.521	−0.163	0.347	0.219	0.308	1.000
(7) Leverage	−0.276	0.194	−0.148	0.315	0.261	−0.331	1.000
(8) Firm age	0.293	0.224	0.311	0.412	−0.245	0.367	0.285	1.000
(9) Capital intensity	0.417	−0.285	0.259	0.338	0.278	0.432	−0.198	0.365	1.000

indicates that all correlation coefficients fell below this threshold, signifying that the independent variables were sufficiently distinct from one another. The VIF results in Table 5 corroborate this conclusion by indicating the absence of multicollinearity in the dataset.

4.3. Testing of Hypothesis

This study evaluated the hypotheses using the empirical results presented in

Table 7. Augmented mean group (AMG) estimator.

	Corporate Sustainable Performance
	Model 1	Model 2	Model 3	Model 4
Environmental fines	0.634 *** (0.230)	0.521 *** (0.214)	0.487 *** (0.175)	0.452 *** (0.162)
Corporate governance quality	0.312 *** (0.101)	0.298 *** (0.102)	0.285 *** (0.101)	0.264 *** (0.102)
Firm size	0.402 *** (0.152)	0.379 *** (0.147)	0.351 *** (0.135)	0.338 *** (0.129)
Institutional ownership	0.521 *** (0.194)	0.498 *** (0.181)	0.472 *** (0.163)	0.455 *** (0.157)
Return on assets	0.293 *** (0.112)	0.281 *** (0.109)	0.268 *** (0.106)	0.254 *** (0.101)
Leverage	−0.417 *** (0.060)	−0.395 *** (0.153)	−0.372 *** (0.142)	−0.359 *** (0.037)
Firm age	0.365 *** (0.149)	0.342 *** (0.138)	0.328 *** (0.126)	0.315 *** (0.119)
Capital intensity	0.289 *** (0.103)	0.276 *** (0.104)	0.262 *** (0.105)	0.249 *** (0.101)
Environmental fines × corporate governance quality		0.165 *** (0.028)
Environmental fines × firm size			0.229 *** (0.008)
Environmental fines × institutional ownership				0.163 *** (0.024)
CD-statistic	2.417 ***	2.362 ***	2.298 ***	2.244 ***
Constant	0.318 *** (0.101)	0.307 ** (0.106)	0.296 ** (0.108)	0.285 ** (0.104)
Observation	3553	3553	3553	3553
Wald tests	41.27 ***	43.15 ***	44.82 ***	46.03 ***
RMSE	0.381	0.374	0.367	0.359

*** p < 0.01.

(AMG estimator). The findings revealed that environmental fines exert a positive and significant effect on CSP, confirming and supporting Hypothesis 1 (H1). Furthermore, corporate governance quality, firm size, and institutional ownership were found to positively and significantly moderate the relationship between environmental fines and CSP, thereby confirming Hypotheses 2, 3, and 4 (H2, H3, and H4). Overall, all of the proposed hypotheses were supported and accepted.

4.4. Robustness Testing

The CCEMG estimator was employed to validate the reliability of the AMG results. Although the two models showed slight variations in coefficients and standard errors, both consistently revealed the same directional impact on CSP. These differences arise because AMG captures common dynamic processes across panels, while CCEMG accounts for unobserved common factors and heterogeneous slopes. The consistency of results across both models (Table 7 and

Table 8. Robustness testing (CCEMG).

Corporate Sustainable Performance	Corporate Sustainable Performance
	Model 1	Model 2	Model 3	Model 4
Environmental fines	0.452 *** (0.102)	0.468 *** (0.098)	0.481 *** (0.094)	0.495 *** (0.090)
Corporate governance quality	0.364 *** (0.089)	0.379 *** (0.085)	0.391 *** (0.081)	0.405 *** (0.078)
Firm size	0.283 *** (0.076)	0.295 *** (0.073)	0.307 *** (0.070)	0.319 *** (0.067)
Institutional ownership	0.438 *** (0.095)	0.452 *** (0.092)	0.464 *** (0.089)	0.479 *** (0.086)
Return on assets	0.555 *** (0.104)	0.569 *** (0.101)	0.582 *** (0.098)	0.596 *** (0.095)
Leverage	−0.318 *** (0.082)	−0.331 *** (0.079)	−0.343 *** (0.076)	−0.356 *** (0.073)
Firm age	0.394 *** (0.088)	0.408 *** (0.085)	0.421 *** (0.082)	0.434 *** (0.079)
Capital intensity	0.469 *** (0.097)	0.482 *** (0.094)	0.496 *** (0.091)	0.509 *** (0.088)
Environmental fines × corporate governance quality		0.365 *** (0.080)
Environmental fines × firm size			0.442 *** (0.085)
Environmental fines × institutional ownership				0.429 *** (0.078)
Constant	0.325 *** (0.079)	0.338 *** (0.076)	0.351 *** (0.073)	0.364 *** (0.070)
Observation	3553	3553	3553	3553
Wald tests	68.45 ***	70.12 ***	72.08 ***	74.36 ***
RMSE	0.329	0.322	0.316	0.309

*** p < 0.01.

) confirms the robustness of the findings and strengthens the reliability of the AMG estimates.

4.5. Dealing with Endogeneity and Evaluation of GMM Model Fitness

The DWH test presented in Table 2 indicates that the independent variables were endogenous. To address this issue, the CSP as a dependent variable was included in the regression model as a dynamic regressor (lag 1). This approach addresses autocorrelation, reduces omitted variable bias, and alleviates reverse causality by allowing prior outcomes to influence current values [95].

To mitigate endogeneity, the endogenous variables were lagged (lag 1), a technique known as employing internal instruments to correct endogeneity. The study also considered external variables including total sales, debt ratio, equity ratio, and total capital employed. All of them were lagged variables (from lag 1 to 5). This comprehensive approach mitigated estimation bias, addressed unforeseen disruptions, resolved issues related to absent data, and enhanced the overall reliability of the results.

Diagnostic testing confirmed the precision of the GMM estimations. The Arellano–Bond (AR (1) and AR (2)) was employed to evaluate the validity of the GMM model, where the AR (1) test yielded significant values and AR (2) yielded statistically insignificant values. Furthermore, the AR(2) results indicate the absence of second-order autocorrelation and confirm the model specification [96]. The Sargan test yielded statistically insignificant results, confirming the exogeneity of the instrumental variables used to address the endogeneity concern. The Hansen J-test (with p-values ranging from 0.10 to 0.30) provided further corroboration that the instrumental variables were uncorrelated with the error terms.

Table 9. Two-step difference GMM results.

	Corporate Sustainable Performance
	Model 1	Model 2	Model 3	Model 4
Environmental fines	0.184 *** (0.021)	0.231 *** (0.019)	0.207 *** (0.022)	0.196 *** (0.018)
Corporate governance quality	0.312 *** (0.018)	0.265 *** (0.020)	0.298 *** (0.019)	0.287 *** (0.017)
Firm size	0.451 *** (0.025)	0.438 *** (0.023)	0.462 *** (0.024)	0.429 *** (0.022)
Institutional ownership	0.522 *** (0.027)	0.498 *** (0.021)	0.541 *** (0.026)	0.517 *** (0.023)
Return on assets	0.334 *** (0.019)	0.356 *** (0.018)	0.347 *** (0.020)	0.339 *** (0.019)
Leverage	−0.612 *** (0.028)	−0.589 *** (0.024)	−0.627 *** (0.027)	−0.603 *** (0.025)
Firm age	0.442 *** (0.021)	0.417 *** (0.022)	0.463 *** (0.020)	0.451 *** (0.019)
Capital intensity	0.287 *** (0.018)	0.294 *** (0.017)	0.279 *** (0.019)	0.301 *** (0.018)
Environmental fines × corporate governance quality		0.214 *** (0.015)
Environmental fines × firm size			0.712 *** (0.026)
Environmental fines × institutional ownership				0.531 *** (0.022)
Observation	3271	3271	3271	3271
AR (1)	0.000	0.000	0.000	0.000
AR (2)	0.745	0.812	0.791	0.768
Sargan test	0.327	0.412	0.386	0.401
Hansen test	0.156	0.121	0.298	0.272

*** p < 0.01.

presents the two-step GMM results, which satisfied all requirements for model validity and effectively addressed endogeneity, omitted variable bias, and reverse causality. The direction of the results, consistent with the positive effect, aligned with the baseline AMG estimates in Table 7, thereby enhancing the credibility of the findings. The distinction between the two methods was in the magnitude of the coefficient estimations and their corresponding standard errors.

5. Discussion of the Findings

The study found that environmental fines have a positive impact on CSP. According to institutional theory, organizational behavior is influenced by formal regulations and societal norms. To remain compliant and evade penalties, firms adhere to external regulations such as governmental fines [97]. The findings indicate that sanctions motivate organizations to enhance compliance, implement cleaner technologies, and integrate sustainability into their operations, hence improving performance [98]. This reinforces the notion that enterprises adapt their operations to maintain legitimacy and fulfill the requirements of their stakeholders.

The stringent regulations in Germany, including the CSRD and the Energiewende initiative, exacerbate these outcomes [99]. Companies subjected to fines must comply with the regulations immediately and implement measures to prevent future occurrences of similar issues [100]. Non-financial enterprises that significantly impact the environment can enhance efficiency and improve environmental management, hence amplifying these advantages. Consequently, environmental fines promote competition, resource efficiency, and ecological innovation, potentially resulting in increased profits over time [101]. This mitigates risk for investors, maintains consistent profitability, and emphasizes the necessity of incorporating sustainability into long-term strategies.

ROA exhibited a positive and significant effect on CSP. Stakeholder theory posits that profitable firms are better positioned to meet the diverse expectations of their stakeholders [102]. The findings indicate that financially robust companies are likely to invest in environmental initiatives, social programs, and enhanced governance practices. The CSRD and Energiewende have contributed to the development of Germany’s regulatory framework, which contributed to these outcomes. Financially robust companies are better equipped to manage compliance expenses and invest in renewable technologies [103]. An elevated ROA enables companies to achieve equilibrium between profit generation and sustainability investments, enhancing efficiency, competitiveness, and stakeholder trust while mitigating investor risk.

Leverage was negatively and significantly associated with CSP. Stakeholder theory suggests that indebted firms often exhibit rigidity in meeting stakeholder expectations, prioritizing debt repayment over sustainability initiatives [104]. The stringent CSRD and Energiewende regulations in Germany impede heavily indebted enterprises from securing sufficient funding to comply with the requirements or initiate environmental initiatives [105]. Excessive debt heightens financial risk and constrains long-term growth [106], exposing investors to increased regulatory and operational challenges. This illustrates the significance of companies meticulously planning their finances.

Firm age had a positive and significant influence on CSP. Institutional theory posits that mature organizations possess established routines and legitimacy, facilitating their ability to fulfill public and regulatory requirements [107]. The findings suggest that established companies excel at integrating ESG norms into their operations, thereby facilitating sustainable outcomes. Policies such as the CSRD and Energiewende have gradually transformed company operations in Germany, which has contributed to this outcome. Established businesses have demonstrated superior adaptability [108]. Established organizations utilize their resources to implement sustainability initiatives, hence enhancing investor stability and fostering confidence among stakeholders [109].

Capital intensity had a positive and significant impact on CSP. Institutional theory posits that firms possessing substantial physical assets are more susceptible to scrutiny by regulators and other stakeholders [110]. This finding supports that viewpoint, indicating that capital-intensive firms are more likely to adopt sustainable practices to maintain credibility. The CSRD and Energiewende are two key German initiatives that have a significant impact on capital-intensive industries and have contributed to this outcome as they compel sectors to invest in environmentally beneficial technology [111]. These companies may utilize their physical assets to enhance operational efficiency and reduce environmental impact. This would enhance their competitiveness and assure investors that their investments will remain secure in the long-term.

The moderating role of corporate governance quality had a positive and significant effect on the relationship between fines and CSP. Institutional theory clarifies the role of governance frameworks in enabling organizations to comply with regulatory requirements. Effective governance facilitates adherence to the regulations and transforms penalties into opportunities for enhancing sustainability [112]. The CSRD and Energiewende in Germany advocate for robust governance frameworks, including independent boards and audit committees, to enhance transparency, accountability, and strategic planning [37,113]. This mitigates risk for investors and enables management to include sustainability in their long-term objectives.

Firm size also positively moderated the relationship between fines and CSP. Institutional theory posits that larger enterprises possess enhanced financial, technological, and managerial capabilities, enabling them to manage regulatory responsibilities more efficiently [114]. The findings indicate that larger corporations can afford compliance expenses, invest in environmentally friendly technologies, and ensure adherence to sustainability regulations [115]. Due to their substantial size, firms may incorporate fines into broader sustainability initiatives without adversely affecting their profitability. This mitigates the risk for investors and enhances the company’s legitimacy.

Finally, institutional ownership significantly moderated the relationship between fines and CSP. Stakeholder theory emphasizes the importance of institutional investors in promoting adherence to environmental, social, and governance standards [116]. The results demonstrate that firms with higher institutional ownership are more likely to address penalties by undertaking substantial environmental activities, rather than viewing them merely as costs. Neubaum and Zahra [117] assert that institutional investors inside Germany’s regulatory framework function as monitors, ensuring that sanctions promote sustainable practices and enhance long-term success. This benefits investors by mitigating risk and demonstrating management’s commitment to accountability and ethical conduct.

6. Conclusions

The impact of environmental fines on CSP as well as the moderating roles of corporate governance quality, firm size, and institutional ownership has not been adequately addressed in the existing literature. To fill this gap, the present study applied stakeholder theory and institutional theory, analyzing data from 187 non-financial firms listed on the Frankfurt Stock Exchange between 2006 and 2024. Three advanced estimation models—AMG, CCEMG, and GMM—were employed to ensure robust results. The findings revealed that environmental fines exert a positive and significant effect on CSP. Moreover, corporate governance quality, firm size, and institutional ownership were found to positively and significantly moderate this relationship.

7. Theoretical Implications

The findings underscore the importance of robust corporate governance for companies listed on the Frankfurt Stock Exchange. Institutional theory posits that firms with robust governance frameworks can leverage regulatory instruments, such as sanctions for environmental infractions, to enhance their sustainability outcomes. As boards exhibit greater independence, audit committees adopt a more assertive stance, and shareholders wield increased influence over the company, compliance evolves into a critical component of long-term strategy rather than merely a legal obligation. This approach increases the likelihood of company engagement in sustainability by altering the perceptions of penalties. Rather than merely serving as a mechanism for enforcing compliance, they are now perceived as a means to effectuate enduring transformation.

The size of a firm significantly impacts its ability to comply with regulations and achieve sustainability objectives. Large corporations possess greater financial resources to allocate toward fines and invest in environmental initiatives. These organizations can leverage economies of scale to adopt innovative green technologies, ensuring that compliance costs yield improved environmental outcomes and enhanced operational efficiency.

Institutional ownership enhances corporate accountability and transparency. The participation of institutional investors in sustainability management guarantees that enterprises operate in environmentally and socially beneficial ways over the long-term. This link enables management to allocate additional funds toward renewable energy, environmental sustainability, and reliable reporting methods. Regulatory fines serve as a mechanism to promote innovation and provide enterprises with a competitive advantage, thereby enhancing investor confidence and legitimizing the market.

8. Policy Implication

These findings significantly influence the regulations established by the authorities’ governing enterprises on the Frankfurt Stock Exchange. The positive moderating influence of corporate governance quality indicates that regulators must advocate for reforms that enhance board transparency, increase the independence of audit committees, and promote greater shareholder engagement. Enhancements in governance can integrate sustainability into the company’s core strategy. This suggests that sanctions will be employed to facilitate lasting environmental improvements rather than merely transient budgetary adjustments.

The size of a firm also influences the efficacy of regulatory rules. Large corporations possess greater financial resources and are more adept at managing penalties while reinvesting in environmental initiatives. Policymakers can use this potential by establishing regulations that incentivize large corporations to implement comprehensive environmental management systems, adopt sustainable technology, and enhance operational efficiency. Tax incentives, subsidies, or assistance with IT issues could transform fines from mere punitive measures into catalysts for systemic reform. This approach enables authorities to strike a balance between ensuring compliance among enterprises of all sizes and promote genuine environmental responsibility among them.

Institutional ownership has a significant influence on investor engagement in achieving sustainability objectives. Policymakers can enhance corporate accountability by mandating greater transparency in business operations and providing incentives for investors to ensure compliance with the environmental regulations. Authorities can enhance the efficacy of sanctions, promote the adoption of environmentally sustainable practices by enterprises, and bolster public trust in corporate accountability by involving investors in the regulatory process. This perspective regards investors as not merely profit-seekers, but also as vital collaborators in achieving enduring social and environmental objectives.

9. Practical Implication

The outcomes have a significant impact on the management of companies listed on the Frankfurt Stock Exchange. Robust corporate governance equips management with the resources necessary to transform environmental penalties into competitive advantages. Management views fines not only as discipline measures, but also as a way to promote investments in sustainability initiatives, enhance risk management frameworks, and foster a culture of accountability. This adherence to regulatory expectations and stakeholder requirements ensures that compliance procedures maintain the company’s competitiveness and legitimacy over time.

The size of a firm has a significant impact on its managerial operations. Large corporations have a distinct advantage over smaller enterprises in resource allocation due to superior financial and operational capabilities. Such organizations are more adept at financing compliance initiatives, employing advanced green technologies, and integrating sustainability into their core operations. By integrating sustainability into their business strategies, large corporations can ensure that sanctions lead to lasting environmental improvements while maintaining profitability and efficiency.

The influence of institutional ownership on managerial decisions underscores the importance of incorporating all stakeholders. Managers may leverage the insights and oversight of institutional investors by prioritizing long-term sustainability initiatives, fostering environmental innovation, and ensuring transparency in reporting. This relationship enhances the company’s credibility, instills greater confidence in investors, and ensures that adherence to regulations yields tangible sustainability outcomes. Companies may demonstrate their dedication to environmental protection and enhance their resilience by collaborating with institutional investors as strategic allies.

10. Limitations and Future Directional Study

This study faced several limitations that need to be addressed in future studies. The study’s exclusive focus on Germany restricts the generalizability of its findings across diverse regulatory and economic contexts. Moreover, by concentrating solely on non-financial firms listed on the Frankfurt Stock Exchange, it overlooks banks and other entities that may possess unique policies regarding environmental standards. A further disadvantage is that companies with incomplete or absent data were excluded, resulting in selection bias and constraining the scope of potential interpretations. The study addressed underexplored areas in the literature, which restricts direct comparisons with previous research.

Future studies may expand the analysis to include many nations and industries, thereby enhancing external validity and incorporating a broader range of institutional contexts. Furthermore, future studies should integrate moderating variables, such as management competency, innovative capabilities, or corporate social responsibility practices, to enhance the understanding of the factors influencing CSP.

This study did not explore potential nonlinear relationships, such as diminishing effects at higher levels of fines, due to limitations in the secondary data. Future research using richer datasets may investigate such dynamics to deepen the theoretical insights.