The Impact of Green Innovation on the Financial Performance of Companies: Context of MENA Countries

Abstract This study focuses on the impact of green innovation on oil and gas firms' performance in the MENA region from 2010 to 2020. Return on assets (ROA) was used to measure the financial performance of firms. However, green innovation was measured using two different scores, namely the environmental pillar and the innovation scores. Additionally, we introduced an oil price-moderated variable to examine its effect on the firm's performance and the green innovation nexus. We collected data from the DataStream database. Regarding our empirical part, we use the generalized least squares method to carry out the analysis. Results showed a positive impact between green innovation scores and the firm's performance in the MENA region. Also, we found that green innovation has a linear effect on firm performance. Finally, a negative, moderated effect of crude oil prices on green innovation and the firm's financial performance nexus has been found. Keywords Green innovation Financial performance Pillar score Innovation score MENA region Financial technology Citation Kasraoui, N., Ben-Ahmed, K. and Feidi, A. (2024), "The Impact of Green Innovation on the Financial Performance of Companies: Context of MENA Countries", Hamdan, A., Alareeni, B. and Khamis, R. (Ed.) Digital Technology and Changing Roles in Managerial and Financial Accounting: Theoretical Knowledge and Practical Application (Studies in Managerial and Financial Accounting, Vol. 36), Emerald Publishing Limited, Leeds, pp. 87-94. https://doi.org/10.1108/S1479-351220240000036008 Publisher: Emerald Publishing Limited Copyright © 2024 Naziha Kasraoui, Kais Ben-Ahmed and Amira Feidi 1. Introduction Green finance appeared when the European Bank launched the green bond market (EIB) in 2007. Then, in March 2013, we saw the growing importance of green bonds issued by several countries, such as the USA, China, France, and Massachusetts (a state part of the New England region). More precisely, in 2019, the Green Finance Institute helped companies access green investment rules. Green finance aims to collect green funds, allowing investors to invest, in particular, in renewable energy projects, energy and environmental transition, and activities contributing to ecological transition projects that respect the environment. Green finance directs the use of natural resources toward improving human well-being. According to Kemps and Pearson (2007), the evolution of "green innovation" appeared through new concepts such as environmental innovation, eco-innovation, and eco-efficiency. For McKeown et al. (2008), environmental innovation has recently emerged because of global environmental challenges. Based on the work of Bansal (2005), Etzion (2007), and Starik and Kanashiro (2013), companies must operate in an environmentally responsible way to contribute to the well-being of society while ensuring their financial performance. Similarly, Dangelico and Pujari (2010) showed that green innovation affects performance, environmental sustainability, and quality of life. In this research work, we aim to unveil the nature of green innovation's effect on business performance. Admittedly, the ideal innovation, or "green innovation," favors respect for the environment and aims to reduce the number of resources used and, above all, the overall reduction of greenhouse gas emissions. For this reason, we now speak of a carbon market that presents an essential destination based on the allocation of "pollution rights," which can then be exchanged on the market to guarantee revenues. Thus, companies wishing to pollute more must buy additional rights. Also, the market fulfills its role in carbon taxation, increasing the cost of greenhouse gas emitting activities to encourage companies to find alternative energy sources. Several research studies have examined the relationship between green innovation and firm performance. Indeed, green innovation can help companies improve the overall quality of life while increasing profits through increased efficiency. For example, Hart (1995, 2002) shows the increased demand for products from social consumers in the environment (King & Lenox, 2002). According to Bansal (2005), environmental activities provide companies with a good brand image or reputation, so the firm will have the chance to benefit from higher prices and better sales, increasing turnover because of an increased social approach. Du and Li (2019) examined the effect of the intensity of green innovation on the financial performance of multinational companies and introduced internationalization as a mediating variable; the results reveal the existence of a positive association since companies that implement green innovation could improve their financial performance by focusing on cost leadership and product differentiation. Similarly, based on the work of Xie et al. (2019), green innovation positively affects business performance. Indeed, it improves both the return on equity and assets. In addition, Miroshnychenko et al. (2017) argued that the development of green products has a favorable (positive) impact on the company's stock market performance as measured by Tobin's Q, so there will be a better return on investments. In these senses, the authors add that the profitability of companies depends on the availability of ecological articles. The work of Fernando, Jabbour, and Wah (2009) shows a negative link between green innovation and business performance. They point out that green business strategies do not contribute to increasing a firm's market value. In addition, companies that emphasize green innovation face the risk of permanent government subsidies; thus, leaders will only be able to achieve environmental gains. In this sense, Yu-Shan, Shyh-Bao, and Chao-Tung (2006) state that even if companies overcome obstacles because of the development of environmentally friendly technologies, these advances do not always translate into improved financial performance. The rest of this chapter is as follows: Section 2 stands for method and data sources, Section 3 provides results, and Section 4 concludes. 2. Methodology and Data Sources Available data were collected from 2002 up to the end of 2020 from DataStream. Additionally, we considered companies from the oil and gas industry and those that reported environmental scores for 2012–2020. We collected this sofa data from Environmental, Social, and Governance (ESG). The sample comprises 13 companies from the MENA region, distributed according to 11 countries. Considering the previous theory, we test the following hypothesis: H0. Green finance positively impacts firm performance. H1. Green finance hurts firm performance. Following Refinitiv (2020), we used ESG to measure green innovation. Moreover, the ROA was used to quantify financial performance. Noticeably, the ROA variable has been widely used to measure firms' financial success (Xie et al., 2019). The looter score contains three types of information: Resource consumption. Reducing emissions. Company innovation scores. The resource consumption score measures a company's ability to decrease material or, more often, energy or water consumption. However, the emission reduction score shows the commitment of such a company to reducing environmental emissions in production and operational processes. We weighed these three variables according to their relative significance to the industry group getting the final environmental pillar score (Refinitiv, 2020). Finally, we apply the Pillar score and its third subcategory (innovation score) to evaluate the green innovation efforts of gas and oil companies. In this study, the independent variable was the ROA, which measures the company's performance. However, the independent variables comprise firm size, leverage-to-debt ratio, oil price, green innovation, and a dummy variable (see models 1–6). The variables included in the model, and their acronyms are briefly defined in Table 8.1. Table 8.1. Summary of Variables Study. Variable Symbol Definition Firm size S Firm size in the natural logarithm of total assets Leverage-to-debt ratio Lev Percentage ratio of total debt to total capital to account for the business' risk level Oil price OP The financial performance of gas companies and their revenue components is based on the product's price and the number of sales (Bagirov & Mateus, 2019) Green innovation GI The environmental pillar (PS) and innovation scores (IS) measured it Dummy variable D This variable is 1 for the 2014–2015 oil crisis and zero otherwise Therefore, we used six different panel models in the analysis and proceeded as follows: (1)ROAit = β0 + β1Sit + β2Levit + β3OPit + β4Dt + εit Model 2 is a simple regression containing green innovation variables: (2)ROAit = β0 + β1ISit+ εit Because of the multicollinearity of the variables, models 1 and 2 were estimated to identify whether there is an excessively strong correlation between the various explanatory factors. In model 3, we introduce the innovation score variable as a control variable to examine the impact of green innovation level on firm performance: (3)ROAit = β0 + β1Sit + β2Levit + β3OPit + β4Dt + β5ISit + εit The curvilinear relationship between green innovation and firm performance was verified by introducing a quadratic term, green innovation, on the right-hand side of model 4: (4)ROAit=β0+β1Sit+β2LEVit+β3OPit+β4Dt+β5ISit+β6ISit2+εit To stress the moderating effect of OP on the relationship between IS and OP, we introduce IS–OP interaction on the right-hand side of model 5: (5)ROAit = β0 + β1Sit + β2Levit + β3OPit + β4Dt + β5ISit + β6ISitOPit + εit Model 6 includes all variables studied and is used as a robustness check to validate the estimation results further. (6)ROAit=β0+β1Sit+β2Levit+β3OPit+β4Dt+β5ISit+β6ISitOPit+β7ISit2+εit It is important to notice that i denotes firm and t denotes year in models 1–6. 3. Results Table 8.2 shows that the ROA variable is, on average, 0.031; it reaches a maximum value of 1.607 but a negative minimum value, which amounts to a decrease in assets within a few companies after the oil crisis of 2015. The size of the firm was, on average, 17.56, and it can reach a maximum value of over 23. These values show that most enterprises are large. The price of oil varies between 1.8 and 6.5. This variable is widely fluctuating. Suddenly, it has a standard deviation (1.02) lower than the average of 4.11. Environment and innovation scores vary between 0.19 and 0.76. They have averages of 0.47 and 0.41, respectively. Table 8.2. Summary Statistics. Variable Mean SD Min. Max. ROA 0.031 0.175 –0.498 1.607 S 17.561 2.941 10.096 23.359 Lev 24.674 84.365 0.006 927.778 OP 4.108 1.024 1.833 6.53 PS 0.474 0.12 0.185 0.762 IS 0.411 0.102 0.183 0.653 We apply a generalized least squares model for the estimates, allowing us to control for heteroscedasticity and autocorrelation of errors. This method also excludes the potential endogeneity that could impact a firm's performance. Table 8.3 reports the results of models 1 and 2. However, Table 8.4 presents the results of estimating models 4–6. The innovation score positively impacts the financial performance of oil and gas firms in the MENA region. One might, therefore, support efforts to develop new and environmentally friendly products that could ensure a company's long-term survival by maintaining its competitiveness. Aastvedt, Behmiri, and Lu (2021) investigate the impact of green innovation on the financial performance of oil and gas companies. The authors found that green innovation significantly and positively affects firms' performance in the US. However, the authors showed that the environmental pillar score is not linear. The authors also found that low environmental pillar scores positively affect firm performance in the US. However, the effect changes at higher levels. Table 8.3. Model Linear Estimation. Model 1 Model 2 Model 3 Variables Controls PS IS PS IS S 0.0111**** 0.00798** 0.0108*** (0.00302) (0.00359) (0.00300) Lev 0.00139*** 0.00141*** 0.00135*** (0.000324) (0.000318) (0.000319) OP 0.00980*** 0.0415*** (0.00352) (0.0147) D −0.00117 −0.00118 (0.00563) (0.00581) PS −0.0682 0.283** (0.0478) (0.132) IS −0.205*** 0.0924*** (0.0489) (0.0344) Constant −0.224*** −0.0133 0.0324 −0.173*** −0.220*** (0.0586) (0.0256) (0.0238) (0.0664) (0.0583) Observations 143 143 143 143 143 Number of id 13 13 13 13 13 Table 8.4. Estimation Results of Models 4–6. Model 4 Model 5 Model 6 Variable PS IS PS IS PS IS S 0.00778*** 0.00968*** 0.00772* 0.00968* 0.00772*** 0.00968*** (0.000595) (0.000775) (0.000611) (0.000775) (0.000611) (0.000775) Lev 0.00139*** 0.00137*** 0.00139*** 0.00137*** 0.00139*** 0.00137*** (9.29e–05) (5.94e–05) (9.61e–05) (5.94e–05) (9.61e–05) (5.94e–05) OP 0.0315*** 0.221*** 0.0242 0.221*** 0.0242 0.265*** (0.00300) (0.00657) (0.0175) (0.00657) (0.0175) (0.00661) D 0.0225*** 0.0224*** 0.0213** 0.0213** 0.0224** 0.0106** (0.00215) (0.00114) (0.00215) (0.00114) (0.00215) (0.00057) PS −1.859*** −1.888*** −1.888*** (0.121) (0.200) (0.200) In contrast, low levels of the environmental pillar score negatively affect firms' performance in Europe. Similarly, the effect changes sign when the environmental pillar score has higher levels. Finally, higher crude oil prices negatively moderated European innovation scores and the financial performance nexus. The effect of the environmental score is positive, but with a decreasing rate in the MENA region. As a result, green innovation efforts can positively impact other operational activities that use fewer resources (Wagner, 2005). These findings are consistent with the study by Trump and Guenther (2017). However, innovation can negatively affect financial performance because of the high risk involved (D'Oliveria & Terence, 2018). Firms will operate with increased costs and lower profits if innovation fails. Our results show that all moderated effects are significant for crude oil prices based on the strength of the environmental score and financial performance nexus. However, in MENA firms, innovative scores and financial performance relationships decrease with increasing crude oil prices. Concerning the environmental score, we found that when crude oil prices are high, oil and gas firms should focus on their conventional activities rather than allocating resources to green innovation practices. The high price of crude oil supports the idea that supply is short, and demand from the consumer side is vital. As resources are scarce, investing in green practices would have a high opportunity cost. The negative opportunity cost of investment in green innovation increases the negative effect of environmental regulations. Therefore, when oil prices rise, the positive effect of higher green innovation practices on financial performance becomes lower. Financial leverage is significant in external financing modes. Financial leverage shows that a business needs finance to purchase a new asset or enhance its production or operational activities; financial leverage is one of the best ways for an organization to achieve its goal; with the help of financial leverage, a company can not only achieve its goals but also maximize the value of its shareholders. Iqbal and Usman (2018) showed that financial leverage positively impacts the ROA of firms in Pakistan. 4. Conclusion Through this study, we aimed to know if the environmental index and the innovation score positively affect performance, which helps to fight against pollution and excessive gas emissions on the one hand and provides the durability of oil and gas firms since oil and gas do not have removable resources. To do so, we used a sample of 13 oil and gas firms in the MENA region over a period ranging from 2010 to 2020. The method of fixed effect, which makes it possible to control the firm's heterogeneity level, estimated the parameters possible. We also used the Breush-Pagan and Cook-Wesihery tests based on heteroscedasticity knowledge like the Goldfield and Qwandt tests. However, the difference between them is that the normality of the errors is unnecessary and that we can test several variables that apply in our world since our sample size is less than 15 (13 oil firms from 11 countries in the MENA region). The econometric results showed a linear effect of green innovation on financial performance, a positive effect of the environmental pillar score on financial performance, and a negative moderated effect of crude oil price on the green innovation and the firm's financial performance nexus. References Aastvedt, Behmiri, & Lu 2021Aastvedt, T. M., Behmiri, N. B., & Lu, L. (2021). Does green innovation damage financial performance of oil and gas companies. Resources Policy, 73, 102235. doi:10.1016/j.resourpol.2021.102235 Bagirov, & Mateus 2019Bagirov, M., & Mateus, C. (2019). Oil prices; stocks markets and firm performance: Evidence from Europe. International Review of Economic and Finance, 61, 270–288. Bansal, 2005Bansal. P. (2005). Evolving sustainability: A longitudinal study of corporate sustainable development. Strategic Management Journal, 26(3), 197–218. D'Oliveria, & Terence 2018D'Oliveria. P. H., & Terence, A. C. F. (2018). Innovation practices in small technology-based companies during incubation and port incubation periods. Innovation and Management Review, 15(2), 174–188. Dangelico, & Pujari 2010Dangelico. R. M., & Pujari, D. (2010). Main streaming green product innovation: Why and how companies integrate environmental sustainability. Journal of Business Ethics, 95, 471–486. Du, & Li 2019Du, K., & Li, J. (2019). Towards a green world: How do green technology innovations affect total-factor carbon productivity. Energy Policy, 131, 240–250. Etzion 2007Etzion, D. (2007). Research on organizations and the natural environment, 1992–present: A review. Journal of Management, 33, 637–664. Fernando, Jabbour, & Wah 2019Fernando, Y., Jabbour, C. J. C., & Wah, W. X. (2019). Pursuing green growth in technology firms through the connections between environmental innovation and sustainable business performance: Does service capability matter? Resources; Conservation and Recycling, 141, 8–20. Hart 1995Hart, S. L. (1995). A natural resource-based view of the firm. Academy of Management Review, 20, 986–1014. Hart, & Christensen 2002Hart, S. L., & Christensen, C. M. (2002). The great leap: Driving innovation from the base of the pyramid. MIT Sloan Management Review, 44(1), 51. Iqbal, & Usman 2018Iqbal, U., & Usman, M. (2018). Impact of financial leverage on firm performance: Textile composite companies of Pakistan. Sisense Journal of Management, 1(2), 70–78. Kemp, & Pearson 2007Kemp, R., & Pearson, P. (2007). Final report MEI project about measuring eco-innovation, deliverable 15 of MEI project D 15. Project report, Masstricht, 45 p. King, & Lenox 2002King, A., & Lenox, M. (2002). Exploring the locus of profitable pollution reduction. Management Sciences, 48, 289–299. McKeown, Anderson, Balakrishnan, Parulkar, Peterson, Rexford, … Turner 2008McKeown, N., Anderson, T., Balakrishnan, H., Parulkar, G., Peterson, L., Rexford, J., … Turner, J. (2008). OpenFlow: Enabling innovation in campus networks. ACM SIGCOMM Computer Communication Review, 38(2), 69–74. Miroshnychenko, Barontini, & Testa 2017Miroshnychenko, I., Barontini, R., & Testa, F. (2017). Green practices and financial performance: A global outlook. Journal of Cleaner Production, 147, 340–351. doi:10.1016/j.jclepro.2017.01.058 Refinitiv 2020Refinitiv. (2020). Environmental, social and governance (ESG) scores from refinitiv. Retrieved from https://www.refinitiv.com/content/dam/marketing/en_us/documents/methodology/esg-scoresmethodology.pdf. Accessed on April 19, 2020. Starik, & Kanashiro 2013Starik, M., & Kanashiro, P. (2013). Toward a theory of sustainability management. Organization & Environment, 26(1), 7–30. doi:10.1177/1086026612474958. Trump, & Guenther 2017Trump, C. T., & Guenther, T. (2017). Too little or too much? Exploring the U-shaped relationship between corporate environmental performance and corporate financial performance. Business Strategy and the Environment, 26(1), 49–68. Wagner 2005Wagner, M. (2005). How to reconcile environmental and economic performance to improve corporate sustainability: Corporate environmental strategies in the European paper industry. Journal of Environmental Management, 76(2), 105–118. doi:10.1016/j.jenvman.2004.11.021 Xie, Huo, & Zou 2019Xie, X., Huo, J., & Zou, H. (2019). Green process innovation, green product innovation, and corporate financial performance: A content analysis method. Journal of Business Research, 101, 697–706. Yu-Shan, Shyh-Bao, & Chao-Tung 2006Yu-Shan, C., Shyh-Bao, L., & Chao-Tung, W. (2006). The influence of green innovation performance on corporate advantage in Taiwan. Journal of Business Ethics, 67(4), 331–339. Book Chapters Prelims Part I: Tech-managerial, Fintech and Financial Innovation Chapter 1: Utilizing Big Data Analytics Lifecycle for Early Detection of Suspicious Financial Operations: A Proposed Model for Money Laundering Detection Chapter 2: The Behavioral Intention of Fintech Usage: Applying Theory of Planned Behavior in Jordan Chapter 3: The Role of Artificial Intelligence in Stock Forecasting in Indonesian Stock Exchange Firm Chapter 4: The Factoring 2.0 in the Era of the Fintech Revolution Context Chapter 5: Investigating the Role of Business Model Innovation in the Relationship Between Digitalization and Firm Performance Chapter 6: User's Continuance Intention Towards Banker's Chatbot Service – A Technology Acceptance Using SUS and TTF Model Chapter 7: The of and Communication Technology in Resource Management Chapter The Impact of Green Innovation on the Financial Performance of Companies: Context of MENA Part Digitalization of and the Role of Managerial Accounting, and Chapter Service Digitalization and Chapter of and its Role in A of the Chapter the Usage: Role of Chapter Business Strategy and Financial Firms Chapter Impact of Financial Technology on of in and Chapter The Management of Through Applying Model on the of in Chapter Financial and Financial – A in a – Bank & Bank Limited Chapter A on Finance of in Part Digital and Chapter Firm Firm and Environmental Evidence from in and Stock Chapter The of in Jordan to Technology to Financial Chapter of the of in the Context of Digital Chapter and Business Performance of in the – Chapter of Finance in Chapter How to and in from an Company Chapter The of of the Variable and Financial Performance in Chapter of and Environmental Part Big Data and Financial Management Chapter in from a Review Chapter and in Financial A on Big Data at Exchange Company Chapter Financial of and in – Chapter Impact of on Firm Performance Chapter The Impact of Artificial Intelligence on and in Chapter through Digital Resources Management Chapter of with the of Digital in the Chapter A Review of of Data