Elsevier

Journal of Cleaner Production

Volume 151, 10 May 2017, Pages 53-59
Journal of Cleaner Production

Does energy efficiency affect financial performance? Evidence from Chinese energy-intensive firms

https://doi.org/10.1016/j.jclepro.2017.03.044Get rights and content

Abstract

Energy-intensive firms are confronted with increasing pressure to improve energy efficiency and reduce energy consumption. This paper explores the relationship between the energy efficiency and financial performance of a sample of firms in China based on a panel dataset for the period 2010–2014. Six financial indicators representing the benefits of different stakeholders are used in the analysis. Our empirical results show that energy efficiency is positively related to return on equity, return on assets, return on investment, return on invested capital and return on sales but has no significant relationship with Tobin’s q. In addition, we examine the interaction effect between energy intensity and firm growth and find that firm growth helps to enhance the positive relationship between energy intensity and financial performance. Our findings provide incentive for firms to be proactive in their efforts towards energy conservation and emissions reduction.

Introduction

Energy plays an important role in driving modern economic and social development. According to British Petroleum (BP) (2016), global energy consumption is likely to increase by 34% between 2014 and 2035. As the world largest energy consumer and CO2 emitter, China has made substantial efforts to improve energy efficiency and control fossil fuel consumption in the past decade. Since 2006, plans for energy reduction have been incorporated into the national strategic plans and policies in China (Zhang et al., 2016). The Eleventh Five-Year Plan set the target of reducing aggregate energy intensity, that is, the ratio of energy intensity to gross domestic product (GDP) by 20% from 2006 to 2010. The Twelfth Five-Year Plan proposed to decrease the aggregate energy intensity by 17% from 2011 to 2015. A summary of different energy-conservation policies in China can be found in Li and Lin (2016).

It is known that the achievement of national energy-conservation targets requires the concerted efforts from not only government but also firms. Despite the government-side efforts, some firms treat energy conservation as a mandatory obligation rather than as an opportunity to improve technology and management levels and accomplish positive organisational transformation. A possible reason is that the management of firms is concerned that improving energy efficiency or reducing energy intensity may have negative effects on their financial performance. Several studies have examined this issue using the data for industrial or manufacturing firms (e.g. Subrahmanya, 2006a, Bunse et al., 2011, Pons et al., 2013). However, few studies have investigated the case of Chinese firms, possibly due to the lack of data since energy data is not mandatory for corporate annual reports or corporate social responsibility reports. It is thus meaningful to conduct an exploratory research to investigate the relationship between firms’ energy efficiency and financial performance in China to provide direct evidence to guide the behaviour of Chinese firms in relation to energy conservation. The primary purpose of this paper is to examine whether implementing strategies for energy efficiency would affect the financial performance of Chinese energy-intensive firms. We also investigate the interaction effect between energy efficiency and firm size.

Most studies examining energy consumption (CO2 emissions) and GDP or economic growth have been conducted at the macro level in a number of countries (e.g. Zhang, 2011, Shahbaz and Lean, 2012, Omri and Kahouli, 2014), and most found that the relationship is positive. Studies at the micro level of enterprises cluster include Subrahmanya (2006b), who studied the relationships among labour productivity, energy intensity and economic performance and found that energy intensity is negatively related to economic performance. In contrast, Pons et al. (2013) found that there is no clear and significant relationship between these factors at firm level.

This paper contributes to the literature by revealing the effect of energy efficiency on the financial performance of Chinese firms and the interaction between energy intensity and firm growth in China. Earlier relevant studies on the case of China mainly focus on the relationship between corporate financial performance and corporate social performance (Lu et al., 2014) or environmental performance indicators (Qi et al., 2014). In the literature, the indicators of resources and environment include waste emissions (Iwata and Okada, 2011), sulphur dioxide (Qi et al., 2014) and carbon-dioxide emissions (Gallego-Álvarez et al., 2014). At present, energy saving and emissions reduction have become the focus of government in relation to environmental protection. Therefore, it is important for researchers to take a further step and examine other aspects of environmental performance such as energy efficiency more specifically.

The remainder of this paper is organised as follows. Section 2 presents a literature review based on which the research hypothesis is developed. Section 3 presents the methodology employed. Section 4 presents the main results of our empirical study. Section 5 concludes the study.

Section snippets

Hypothesis development

This paper takes the perspectives of stakeholder theory and corporate social responsibility in hypothesis development. Previous studies developed the hypothesis about the relationship between corporate environmental performance and corporate financial performance mainly from the viewpoint of corporate social responsibility. A novel feature of this paper is to consider a number of financial performance indicators which are linked to the perspectives of different stakeholders. Stakeholder theory

Methodology

This section explains the dependent, independent and control variables used in the equations, and describes the econometric model employed in the empirical analysis.

Data

The Chinese National Bureau of Statistic released a national economy and society statistical bulletin in 2010 that defined six high-energy-consuming industries: 1) raw chemical material and chemical products; 2) non-metal mineral products; 3) ferrous metal mining and dressing; 4) non-ferrous metal mining and dressing; 5) petroleum processing, coking and nuclear-fuel processing; 6) electricity and heating production and supply. In addition, the National Development and Reform Commission (NDRC)

Conclusion

This study employs econometric methodology to reveal the relationship between energy efficiency and financial performance in Chinese companies. A number of indicators are used to measure financial performance to gain a better understanding about the stated relationship. The results show that low energy intensity (i.e. high energy efficiency) can create better financial performance for the Chinese firms studied, which is consistent with the conclusions drawn by many previous studies at macro

Acknowledgements

The authors are grateful to the financial support provided by the National Natural Science Foundation of China (nos. 71573119, 71625005 & 71273005) and the Jiangsu Natural Science Foundation for Distinguished Young Scholar (no. BK20140038), and the Fundamental Research Funds for the Central Universities (no. 2012B04314).

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