Do renewable energy incentive policies improve the performance of energy firms? Evidence from OECD countries

Abstract

Natural capital inventory approach to sustainability accounting advocates accountability system that keeps stock of natural capital intact. Substituting exhaustible energy resources with renewable energies (RE) is a particular example of the 'substitutability' condition for sustainability and a key principle of the natural capital theory. This paper investigates the effects of RE incentive policies, as facilitators of 'substitutability', on the financial performance of 420 energy firms in OECD countries over 4 years (2013, 2014, 2015 and 2016). Findings reported using fixed effects paneldata modelling reveal that most RE incentive policies deployed in OECD countries stimulate improved accounting-based measures of financial performance. In addition, some incentive policies that are long-term in nature appear value relevant. Overall, the paper documents that substituting RE for fossil fuels, incentivised through RE policies, stimulates improved financial performance of energy companies in OECD countries. The significance of these results is evident in the empirical support they lend to the effectiveness of RE incentive policies, progress of global energy transition and the natural capital inventory theory. Furthermore, the results could be of benefit to policymakers, energy firms and investors.Renewable energy incentives and firm performance

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“…The selected variables are described in Table 4 . Consistent with earlier research, in order to measure firm performance, the quantitative investigation comprised both accounting measures—such as return on assets [ 2 , 19 , 20 , 25 , 26 , 30 , 32 , 33 , 34 , 35 , 39 , 41 , 77 , 78 , 85 , 86 , 87 , 88 , 99 , 100 , 101 ], return on common equity [ 19 , 20 , 25 , 30 , 32 , 33 , 39 , 42 , 44 , 86 , 99 ], return on capital [ 19 , 20 ], and return on invested capital [ 25 ]—and market-based measures of performance like price-to-book value [ 34 ]. Additionally, several measures of firm characteristics were included in order to counteract any bias and error that may have distorted the association among selected variables [ 41 ].…”

“…Corporate liquidity measures are covered driven by that fact that enterprises that suffer from a low liquidity level may attempt to lifting their disclosure level of the CSR and voluntary actions [ 102 ]. In line with earlier research [ 13 , 24 , 26 , 29 , 31 , 33 , 34 , 36 , 38 , 41 , 42 , 43 , 77 , 84 , 86 , 88 , 90 , 99 , 100 , 101 ], indebtedness was included here because of the fact that a minor financial risk motivates an enterprise to implement technical innovation because it is convenient to persuade lenders and attract capital [ 18 ]. Fakoya [ 41 ] noticed that indebtedness measures the amount that a firm is funded by debt capital and shows the level to which external resources finance ecological investments.…”

“…Prior research has focused on energy efficiency and financial performance in Korea [ 19 ], China [ 20 ], Spain and Slovenia [ 21 ]; energy efficiency and productivity/exporting in Latin America [ 3 ], Ethiopia [ 22 ], and India [ 23 , 24 ]; waste and enterprise performance in Japan [ 25 ] and the US [ 26 , 27 ]; emissions and firm performance in Europe [ 28 , 29 , 30 ], Japan [ 25 ], and the US [ 26 , 31 , 32 ]; and other diverse countries worldwide [ 33 ]. Additionally, earlier studies have focused on a wide range of industries [ 2 , 27 , 30 , 32 , 33 , 34 , 35 , 36 ]; manufacturing firms [ 21 , 24 , 25 , 31 , 37 , 38 , 39 ]; manufacturing and industry [ 40 ]; manufacturing, service, and IT organizations [ 1 ]; mining and manufacturing companies [ 41 ]; energy companies [ 19 , 20 , 42 , 43 ]; fossil fuel-related and non-fossil-fuel-related industries [ 44 ]; and industrial and commercial firms [ 45 ]. Nevertheless, industries intensely diverge in their emanations, whilst a company’s environmental performance substantially hinges on its industrial positions [ 46 ].…”

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“…For example, Rassier and Earnhart (2015) study the relationship between environmental regulations and the firm profitability of chemical manufacturing firms and find that strict environmental regulations increase the firms' actual profitability—measured by the return on sales—but have a negative impact on the investors' expectations about the firm profitability, which is proxied by Tobin's q ratio. Hassan (2019) investigates the effect of renewable energy incentives on the performance of energy firms in the Organization for Economic Cooperation and Development countries and documents an improvement in their accounting‐based performance with the implementation of the incentives. Oberndorfer and Ziegler (2006) reveal the impact of environmental regulations on German energy firms.…”

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“…Activities of corporate organisations in every sector of human life is associated with the utilization of natural resources that are converted into manufactured goods or means of delivering services (Paul 2006). Utilization of the earth natural resources are accompanied with lots of social and environmental negative effects which are becoming global concerns (Hassan 2019). Indeed, the environments of modern corporate organisations are surrounded by strong public scrutiny from diverse stakeholder groups (Chen and Wang 2011) calling on corporate organisations to account for not only their economic actions, but also the social and environmental implications of their activities.…”