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Carbon Emissions and Their Impact on Firm Performance


It is an effective approach for companies to reduce their carbon footprint while producing their products in reducing their carbon footprint. However, there is a more effective approach than that, which is for consumers to pay attention to it. For example, when consumers’ positive health and nutritional knowledge increases, their purchasing decisions increase, which in turn increases actual purchases. Perhaps more importantly, evidence shows that nutrition labels increase interest in nutritional aspects of food. When examining carbon emission labeling with these findings, it is expected that labeling will increase awareness of carbon emissions and its negative effects on the environment, while at the same time increasing purchasing preferences and actual purchases for low emission products.
However, the relationship between reduction in carbon footprint level and increases in firm income may not be linear. In other words, companies can see that the returns of their sustainability investments decrease in terms of both customer perceptions and financial returns. Customer satisfaction researchers found a negative second-order relationship between customer satisfaction and accounting metrics, and corporate reputation and price premiums. Researchers report an increase in customer retention rate of about 67 percent in customer satisfaction score, but no further increase in scores above 70.Carbon Emissions and Their Impact on Firm Performance
In terms of carbon footprint labels, a greater increase in revenue can be achieved by ranking a product better than the industry norm. Instead of raising it to two standard deviations above the industry norm, it may result in a higher standard deviation than the industry norm. If this non-linear relationship applies to carbon emission levels, the increased revenue associated with emission reduction may be outweighed by the increased costs required to further reduce emissions at some point. In addition, investors may hesitate to increase investments to reduce emission levels.
Carbon footprint improvements beyond the product category average will generate positive but diminishing marginal financial returns. An important question is how the financial results of firms will change as their carbon footprint becomes worse than the industry average. It is argued that firms will experience increasing marginal negative financial returns and customer perception as the carbon footprint of their products further exceeds the industry average. Ultimately, a plateau will be reached where customer perception will no longer decline due to carbon emission levels and that produces an S-shaped response function.
In many election decisions, loss avoidance states that the risk of loss outweighs the equivalent gains. Therefore, carbon emission levels higher than the industry average should be heavier than achieving emissions (gains) below the industry average. However, higher levels of carbon emissions must be taken even more seriously. For example, it has been determined that negative performance has a disproportionate effect on customer satisfaction and more importantly, sensitivity to positive performance is reduced, which is not true for negative performance.
In CSR, customer satisfaction and corporate ability studies, it has been determined that the company income is damaged more when the company innovation and CSR connection are disconnected. When researching nutrition labeling, researchers found that consumers pay more attention to negative than positive nutritional traits. Increases in carbon footprint levels above the product category average will produce asymmetric (accelerated) negative financial impacts before they flatten.

Testing

Carbon Emissions and Their Impact on Firm PerformanceExperimental testing of propositions for reducing carbon footprint is an important next step. Possible approaches and methodologies should be presented to assist in testing the recommendations made by researchers. Most of the propositions (P1-P5) focusing on industry and firm characteristics can be tested using the best secondary data sources. Recommendations focusing on label and consumer characteristics (P6-P13) contribute to lab work, scanner data and possibly questionnaires.
One of the challenges of testing the recommendations is the lack of available knowledge about carbon emission levels, which is seen as an opportunity rather than an obstacle. As the market adopts carbon footprint labeling, researchers will be able to better track changing consumer attitudes and purchasing behavior. In other words, researchers are ripe for natural, quasi-experimental field studies in the field of carbon labeling, and they did so with the Nutrition Labeling and Education Act of 1990.
As more of the world’s population becomes interested in environmental protection, the relevance of sustainable development to company management will increase. One measurable aspect of sustainability suggests universal carbon footprint labeling, and its impact on firms and consumers is studied. Industry, firm, consumer and label characteristics that affect firm action, the content of carbon footprint labels, consumer preferences and finally financial results should be analyzed.
First, managers must recognize that carbon footprint labeling is not only a benefit to society, but can also be used to improve the firm’s competitive position. Managers must mobilize resources to prepare for this eventuality. Second, practitioners need to consider how consumers will interpret the information shown on the carbon footprint label. Carbon Emissions and Their Impact on Firm Performance
As with other managerial decisions, cost effectiveness must be balanced with understanding the response of consumers and its precise profitability implications. It is probably preferable to be better than the industry average in terms of carbon emissions, but there may be diminishing returns on emission reductions at some point. On the other hand, falling below the industry average can have negative financial consequences for a firm. Since brand reliability increases the likelihood of being included in the assessment sets, many benefits can be provided to low-emission companies during the consumer decision-making and purchasing process.
Third, any carbon labeling system must account for the carbon released during the entire life cycle of the product. If consumers place more emphasis on the parts of the product life cycle that are under their control, firms may want to emphasize use and disposal, although they have the most control over production and shipping that can be valued by other consumers. Still, reducing carbon emissions for some or all of the life stages of many products can be difficult, so firms may choose to use offsetting in these situations. Consumers may view these programs with varying degrees of skepticism, so firms should exercise discretion when managing these programs.
Fourth, management must understand how carbon footprint labeling will interact with other firm and industry characteristics such as advertising, innovation, competition, and product category. Finally, companies should be aware of possible changes in consumption habits. For example, more consumers may switch to filtering their own water instead of purchasing bottled water with a large transport carbon footprint. Similarly, when consumers understand the high carbon levels to create a pound of beef, they can eat less meat overall or choose pork with a much lower carbon footprint.
Researchers have not yet completed their research on all aspects of sustainability. For example, although we are addressing various customer features, others such as guilt can also have an impact. In addition, other issues such as legal market-based approaches or other relevant environmental issues such as water use, deforestation and nitrogen emissions have not been addressed. These topics can be included in future product labeling, but key recommendations should remain valid.

References:
https://www.mdpi.com/2071-1050/10/7/2398/pdf
https://www.researchgate.net/publication/319243461_Corporate_Carbon_and_Financial_Performance_The_Role_of_Emission_Reductions

Author: Ozlem Guvenc Agaoglu


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