Our research also contributes to goal 12 and goal 13 of the 17 Sustainable Development Goals because the sustainable development is supported through the increasing Environmental perform
INTRODUCTION
Growing global concerns about sustainable development highlight the need for a balanced approach that integrates economic growth, social progress, and environmental stewardship This imperative influences policies and initiatives aimed at addressing interconnected challenges, particularly in enhancing economic and social development while mitigating environmental degradation Over the past three decades, foreign direct investment (FDI) flows have shown a consistent upward trend, significantly contributing to economic growth Understanding the impact of foreign investment is essential for improving environmental performance and ensuring a sustainable future.
Institutional investors are increasingly integrating sustainability factors into their investment decisions, significantly impacting environmental performance According to Hillman & Keim (2001), higher returns from Corporate Environmental Performance (CEP) can be financially beneficial for investors, promoting the adoption of CEP A 2014 Eurosif report highlighted that institutional investors account for approximately 97% of socially responsible investments in EU countries Given the pressing environmental challenges, the financial sector plays a crucial role in steering economic activities towards sustainable development Investors prioritize social and environmental considerations not only for ethical reasons but also because they believe that sustainable investments will yield broader benefits in the long run.
Research shows mixed results regarding investors' influence on environmental performance Vyvyan, Ng & Brimble (2007) found that Australian investors, regardless of their environmental stance, have similar utility scores in investment selections, though environmentalists prioritize socially responsible investment (SRI) criteria more heavily Additionally, Wang & Chen (2014) emphasize the importance of local institutions over foreign ones in moderating the environmental externalities of foreign direct investment (FDI) Notably, many studies predominantly examine US corporations, overlooking the global variation in the demand for institutional investors to integrate sustainability into their decision-making processes.
Our research delves into the intricate relationship between foreign institutional investors and corporate environmental performance We aim to provide a thorough analysis of how various factors influence this relationship by conducting a literature review on the global impact of foreign institutional investors on environmental performance Additionally, we utilize econometric models to establish the causal links between these two variables.
In addition, the sustainable-related issues in institutional investors' decisions are considered to be increasing recently Findings made by Faller and Knyphausen-AufseB
Research indicates a positive relationship between institutional ownership and firms' ESG performance (2018) Escrig-Olmedo et al (2014) provide a comprehensive view of businesses' ESG performance However, previous studies have often treated investors as a homogeneous group (Faller and Knyphausen-AufseB, 2018) This article emphasizes the importance of analyzing different investor types and characteristics for a more nuanced understanding With the growing trend to reduce corporate externalities, a more detailed analysis is warranted Therefore, this research specifically investigates the impact of Foreign Institutional Investors on firms' environmental performance.
Numerous studies have explored the factors influencing environmental performance among investors, yet specific regional coverage remains limited Hillman & Keim (2001) found a positive relationship between sustainable institutional investors and environmental performance in a cross-national European context Flammer (2012) highlighted shareholder concerns regarding corporate social responsibility and environmental footprints, primarily using data from the United States Additionally, research by Masud, Nurunnabi & Bae (2018) established a positive correlation between Environmental Sustainability Reporting Practices (ESRP) and Foreign Institutional Ownership in South Asian countries To further investigate the impact of Foreign Institutional Investors on environmental performance, we conducted a global study encompassing 19,666 firm-year observations from 28 countries between 2002 and 2018, providing a comprehensive overview of this critical issue.
Institutional investors play a crucial role in the global economy, especially in emerging markets, where their influence is significantly pronounced With the globalization of financial markets and advancements in technology, foreign institutional investors are increasingly important in these markets (Hasan et al., 2021) Post-2008 financial crisis, the focus on a firm's engagement in ESG-related measures has grown, as investors prioritize companies that are environmentally and socially responsible (Marshall et al., 2022) This trend pressures businesses to enhance their performance in these areas However, there is a lack of research on the impact of foreign institutional investors on a company's environmental performance, presenting a challenge for understanding their full influence.
Environmental issues are a critical global concern that negatively impact humanity, the economy, and society To address these challenges and align with sustainable development, businesses play a crucial role alongside consumers and governments in promoting economic sustainability According to Ming, Goh, and Ramasamy (2015), investors are increasingly drawn to environmentally-friendly investments, making it advantageous for firms to adopt business strategies that prioritize environmental factors This approach not only attracts investors but also fosters business growth.
In 2015, all United Nations Member States adopted the 17 Sustainable Development Goals (SDGs), highlighting the urgent need for action from both developed and developing countries to address social, economic, and environmental issues related to sustainability This global trend emphasizes the importance of simultaneously tackling overall development and environmental challenges Consequently, extensive research is essential to identify the factors influencing the current state of sustainability efforts.
This research aims to explore the impact of foreign institutional investors on environmental performance, seeking to deepen our understanding of this relationship and establish a foundational reference for promoting sustainable economic development.
Our topic makes a significant contribution to the literature Gibson, Krueger & Mitali
A study conducted in 2020 highlighted the growing preference for sustainable investing among investors and the positive influence of sustainability efforts on institutional performance Research by Jiang et al (2022) revealed that institutional investors significantly enhance firm performance by boosting investments in environmental protection Additionally, Velte (2023) indicated that foreign institutional ownership substantially improves corporate social responsibility (CSR) performance Despite this, there is a notable gap in understanding how foreign institutional investors specifically impact environmental performance amid rising environmental concerns This study aims to bridge that gap by analyzing the mechanisms through which these investors can foster environmental sustainability, offering valuable insights for the literature Furthermore, the findings will assist investors in aligning financial returns with sustainability goals and provide policymakers with data to inform future regulations that promote responsible investment practices Ultimately, this research supports the global agenda of the 17 Sustainable Development Goals, highlighting the connection between financial decisions, environmental impact, and the quest for a sustainable future.
Our research paper consists of six sections as follows: Introduction is Section 1 Section
This article reviews existing literature and formulates hypotheses, followed by a detailed description of the data and variable measurements in Section 3, where models are constructed Section 4 presents the findings, and Section 5 concludes with key implications and recommendations for future research.
LITERATURE REVIEW AND HYPOTHESIS DEVELOPMENT
Foreign institutional investors and Environmental performance
Since the 1990s, global capital market integration has significantly increased FDI flows, although the COVID-19 pandemic caused a notable decline, which is now recovering rapidly FDI is essential for achieving the 17 Sustainable Development Goals, with a tendency to concentrate in low CO2 emissions industries Green investments contribute to reducing greenhouse gas emissions, which is vital for businesses striving for competitiveness The efficiency of corporate green investments plays a crucial role in fostering sustainable development and creating social value for firms, highlighting the importance of investors in enhancing environmental performance.
Institutional investors play a crucial role in promoting climate change accountability among large companies by holding management responsible for strategies that either worsen climate risks or overlook them (Kelly, 2021) Numerous empirical studies highlight the significant impact of institutional investors on enhancing environmental performance within firms (Garcia-Mcca & Puchcta-Martinez, 2018).
CSR reporting policies reveal varying incentives and conflicts of interest among institutional directors regarding the enhancement of CSR practices During the COVID-19 crisis, investors increasingly favored companies demonstrating accountability for climate change, as evidenced by the superior returns of firms with strong environmental scores (Garel & Petit-Romec, 2021) Research by Safiullah, Alam & Islam (2022) highlights the crucial role of independent, long-term institutional investors in improving corporate environmental performance, particularly in reducing carbon emissions.
Fu (2017) concentrated on the relationship between foreign institutional investors and firms' performance as a whole and their study proved that this impact is positive and significant.
Despite previous studies by Omri, Nguyen & Rault (2014) highlighting various findings, inconsistencies and uncertainties persist Notably, less developed nations have received less attention in research, with many studies focusing predominantly on China, a significant developing country grappling with serious environmental challenges like air and water pollution Additionally, issues such as industrial emissions, high population density, and rapid urbanization are critical concerns in China Similarly, India faces severe environmental problems, particularly air pollution, making it another key focus for researchers (Jah, 1999; Sanderson et al., 2013; Greenstone & Hanna, 2014).
Research indicates that the impact of foreign direct investment (FDI) on environmental quality can vary significantly A study by Azam & Ozturk (2020) analyzing 17 Asian countries from 1980 to 2014 reveals that inward FDI tends to degrade environmental quality by increasing pollution levels Notably, the detrimental effects of FDI are more pronounced in nations characterized by low political stability, weak rule of law, or low income, whereas countries with stable political systems, strong legal frameworks, and higher income levels experience a less negative or even positive impact on their environment.
In light of the increasing global focus on sustainable development, highlighted by the United Nations' 17 Sustainable Development Goals established in 2015, environmental issues are being prioritized worldwide Efforts to reduce pollution and enhance environmental quality are attracting significant attention from governments, businesses, and investors Consequently, effectively allocating foreign investments is crucial for generating economic value while improving environmental conditions We hypothesize that the benefits derived from foreign institutional investors surpass any negative impacts, positively influencing firms' environmental performance Thus, we propose our first hypothesis.
Hypothesis 1: Foreign institutional investors have positive impacts on Environmental performance.
Roles of Common law
A transparent and stable legal system is essential for attracting and retaining investments, as it fosters an environment conducive to economic growth and development Countries with effective legal institutions are more likely to experience such growth However, the common law approach can lead to challenges in managing environmental issues, resulting in economic inefficiencies, welfare losses, and violations of property rights due to poorly defined property rights and high transaction costs Despite these challenges, common law countries often have superior corporate governance systems that prioritize the protection of shareholder interests.
Research by Kock & Min (2016) indicates that environmental performance is negatively impacted by the "belter" corporate governance systems prevalent in common law nations Their findings suggest that governance structures prioritizing stakeholder interests lead to better environmental outcomes compared to those that do not Additionally, Kim, Park & Ryu (2017) support this view, revealing that the Corporate Environmental Responsibility (CER) levels of firms governed by common law are generally lower than those of their civil law counterparts.
This literature review highlights the significant impact of the Common law environment on the relationship between Foreign Institutional Investors (FIIs) and Environmental Performance The Common law framework may present additional barriers and challenges for FIIs, primarily due to its stronger emphasis on shareholder rights at the expense of stakeholder rights This imbalance can lead to a detrimental effect on overall environmental performance, as the interests of crucial stakeholders—such as employees, customers, suppliers, and the broader community—are often overlooked, despite their heightened environmental concerns Consequently, we anticipate that the positive influence of Foreign Institutional Investors on Environmental Performance will be diminished within the Common law system Thus, we propose the following hypothesis:
Hypothesis 2: The positive impact of Foreign institutional investors on Environmental performance is less pronounced for firms from Common law countries.
Roles of Economic freedom
The performance of foreign institutional investors is significantly influenced by economic freedom, which fosters a favorable investment climate by enhancing confidence, safeguarding property rights, promoting competition, and stimulating innovation Sambharya & Rasheed (2015) highlight that improved economic management, reduced government intervention, and greater political freedom correlate with increased foreign direct investment (FDI) inflows Gwartney et al (2007) identify five key components of economic freedom: government size, legal structure and property rights security, access to sound money, international trade freedom, and regulation of credit, labor, and business The size of government, particularly influenced by taxation, can deter investment by diminishing returns (Justesen, 2008; Easterly & Rebelo, 1993) Furthermore, a robust legal framework that protects property rights is essential for individuals and businesses to effectively manage their assets, as private property incentivizes saving and resource conservation, ultimately impacting economic growth.
Economic freedom plays a crucial role in fostering growth, as maintaining a low inflation rate can lead to immediate short-term economic benefits (Heckelman, 2000) Additionally, international trade significantly contributes to economic growth by expanding the market size for producers, allowing them to leverage their comparative advantages effectively (Dollar & Kraay, 2003; Haan, Sturm & Gable, 2006) Furthermore, lenient regulations on credit, labor, and business, combined with a robust legal framework and strong property rights, enhance entrepreneurial opportunities, thereby promoting economic freedom (Angulo-Guerrero, Perez-Moreno & Abad-Guerrero, 2017).
Prior research reveals a debate regarding the impact of economic freedom on environmental performance Alavi & Mohammadi (2023) suggest that while economic freedom negatively affects climate change and ecosystem viability, it positively influences environmental health Moreover, government regulations play a crucial role in promoting environmental protection by imposing requirements and incentives on environmentally harmful technologies (Graafland, 2019) Consequently, we hypothesize that the positive effect of foreign institutional investors on environmental performance diminishes in the presence of higher levels of economic freedom To investigate the influence of economic freedom, we propose the following third hypothesis.
Hypothesis 3: The positive impact of Foreign institutional investors on Environmental performance is less pronounced for firms from higher levels of Economic freedom.
Roles of Performance and growth opportunities
Return on assets (ROA) significantly influences investor decision-making; however, a high ROA does not always signify a firm's advantages ROA, calculated by dividing net income by total assets, can be inflated by a decline in total assets Almeida & Campello (2007) highlight that tangible assets boost investments for financially constrained firms, unlike those without such constraints Therefore, when using ROA as an indicator of firm performance, it is anticipated that higher performance levels may diminish the positive impact of foreign institutional investors on environmental performance.
Hertzel & Li (2010) indicate that companies with significant mispricing are often larger in scale, and a high market-to-book (MTB) ratio can signal overvaluation risks, necessitating stock price corrections when market expectations are unmet This mispricing can adversely affect investors, leading to potential financial losses Alzahrani & Rao (2014) highlight that investment sensitivity to stock mispricing is greater in firms facing severe financial constraints, particularly for those with short-term shareholder perspectives Our research utilizes the MTB ratio as a proxy for growth opportunities, suggesting that increased growth potential may diminish the positive influence of foreign institutional investors on environmental performance.
Hence, we propose 2 testable hypotheses as follow:
Hypothesis 4a: The positive impact of Foreign institutional investors on Environmental performance is less pronounced for firms with higher levels of performance.
Hypothesis 4b: The positive impact of Foreign institutional investors on Environmental performance is less pronounced for firms with higher levels of growth opportunities.
Size Tangible Market-to-book ratio Sales growth
Leverage ROA Inflation GDP growth Control of corruption
DATA AND RESEARCH DESIGN
Sample selection
This study investigates the relationship between Foreign Institutional Investors (FIIs) and Environmental Performance from 2002 to 2018, utilizing data sourced from Thomson Reuters ASSET4 for environmental metrics and Factset Ownership Tools for FII data Financial information is obtained from Compustat, while utility and financial companies are excluded due to their unique regulatory environments The analysis includes 19,666 firm-year observations from 2,254 unique firms across 28 countries, after removing missing data and outliers Additionally, macroeconomic indicators like inflation are sourced from World Development Indicators The research aims to determine the positive impact of FIIs on Environmental Performance, focusing on specific influencing factors.
Measure of variables
We utilize environmental performance scores from the Thomson Reuters ASSET4 database to assess our key dependent variable, consistent with previous research (Semenova & Hassel, 2015; Rajesh & Rajendran, 2020) Higher ratings, measured as a percentage, signify better performance, with positive coefficients indicating that investors associate high environmental ratings with future economic benefits, while negative coefficients suggest potential future costs (Baboukardos, 2018) Ilinitch et al (1998) outline four dimensions of corporate environmental performance: organizational systems, stakeholder relations, regulatory compliance, and environmental impacts, highlighting that enhancing stakeholder relations can positively influence environmental scores.
The environmental pillar score, ranging from 0 to 100, reflects a higher environmental performance with increased values To enhance comprehension of the regression analysis, we have rescaled this environmental score to a range of 0 to 1, following the methodology established by Gulzar, M A et al (2019).
Recent studies have primarily focused on how institutional investors are influenced by a country's external information environment However, foreign investors also play a crucial role in shaping the post-investment information landscape, especially regarding the quality of climate change disclosures Notably, international institutional investors significantly enhance governance in countries with weak shareholder protection laws Therefore, it is expected that these investors in Codex nations will demand higher-quality climate change disclosures to improve governance and facilitate better information sharing.
Foreign institutional shareholding refers to the percentage of equity owned by foreign institutional investors, as defined by Kim et al (2016) This variable is treated as a dummy variable, assigned a value of 1 when foreign institutional investors are present and 0 when they are not.
This study examines the impact of foreign institutional investors on environmental performance by analyzing various firm- and nation-level variables Utilizing Tobin's q index to measure firm performance, we address information asymmetry at the company level Business size, represented by SIZE as the logarithm of total assets, is included, as larger companies tend to exhibit higher levels of corporate social responsibility (CSR) The tangible assets ratio (TAN) and market-to-book ratio (MTB) are also considered, as they reflect a firm's asset composition and valuation To mitigate information asymmetry and enhance market pricing, we incorporate sales growth (SLG), which measures revenue changes year-over-year Additionally, we analyze the leverage ratio (LEV), which may negatively influence CSR activities due to its impact on financial flexibility Lastly, return on assets (ROA) is evaluated, highlighting a positive correlation between profitability and CSR performance.
Additionally, we account for macroeconomic variables that may have an impact on business profitability, such as annual inflation rate (INF) and GDP per capita growth
Corruption significantly impacts GDP growth and poses a major barrier to low-carbon infrastructure investment, as highlighted by Gopalan & Jayaraman (2012) The World Bank's institutional control variables reveal that the influence of anti-corruption measures on environmental performance in international institutional investor partnerships remains underexplored Evidence from Chen et al (2018) indicates that corruption-related political events can lead to a notable decline in the stock values of publicly listed firms To further investigate this relationship, we incorporated corruption as a control variable in our model, drawing on the findings of Kong, Cheng & Jiang (2021).
Environmental performance ENV The environmental performance score Thomson Reuters
Foreign institutional investors IO FOR Total foreign institutional ownership in the firm Factset
Firm size SIZE Logarithm of total assets in millions Compustat
Leverage LEV Ratio of total liabilities to total assets Compustat
Tangible TAN Ratio of tangible assets to total assets Compustat
Market-to-book MTB Market-to-book ratio Compustat
ROA ROA Ratio of net income before extraordinary items or preferred dividend to total assets
Sales Growth SLG Annual growth of net sales Compustat
The Control of Corruption (COR) index measures perceptions regarding the degree to which public power is misused for personal gain, encompassing both minor and major instances of corruption.
"capture" of the state by elites and private interests.
GDP growth GDP GROWTH Annual percentage growth rate of GDP at market prices based on constant local currency
Inflation INF The inflation rate World
Common law COMLAW Dummy variable that takes a value of 1 for firm from common law countries and 0 otherwise
Low Trade freedom LTRADE Dummy variable that takes a value of 1 for firm from countries that have a Trade freedom index lower than the yearly sample median and 0 otherwise
Model specifications
Low Monetary freedom LMONE Dummy variable that takes a value of 1 for firm from countries that have a Monetary freedom index lower than the yearly sample median and 0 otherwise
Low Financial freedom LFIN Dummy variable that takes a value of 1 for firm from countries that have a Financial freedom index lower than the yearly sample median and 0 otherwise
Low Investment freedom LINVEST Dummy variable that takes a value of 1 for firm from countries that have a Investment freedom index lower than the yearly sample median and 0 otherwise
Low Business freedom LBUSI Dummy variable that takes a value of 1 for firm from countries that have a Business freedom index lower than the yearly sample median and 0 otherwise
Low Markct-to-hook LMTB Dummy variable that takes a value of 1 for firm from countries that have a Market-to-book index lower than the yearly sample median and 0 otherwise
Low ROA LROA Dummy variable that takes a value of 1 for firm from countries that have a ROA index lower than the yearly sample median and 0 otherwise
This study explores the relationship between foreign institutional investors and environmental performance by employing multiple linear regression (MLR) models Linear regression effectively illustrates the relationship between independent and dependent variables, as established by Mattjik and Sumertajaya (2000).
ENVi,t= po + piio FORi.t + aControlụ + Industry fixed effects + Year fixed effects
In our regression model, the primary dependent variable is Environmental Performance (ENV) for country i at time t The intercept is represented as po, while pl signifies the slope parameter for the independent variable, Foreign Institutional Investors (IO FOR), which is anticipated to positively influence Environmental Performance To account for time-invariant industry-level factors impacting both ENV and IO FOR, we include control variables such as Firm Size, Leverage, Tangible Assets, Market-to-Book Ratio, Return on Assets (ROA), Sales Growth, Control of Corruption, GDP Growth, and Inflation Additionally, industry-fixed effects and year-fixed effects are incorporated to address unobserved industry-specific and time-specific factors affecting the regression The model employs robust standard errors to mitigate potential heteroskedasticity in the dataset.
The research outlines the definitions of the primary and control variables, including their measurement units and sources, as detailed in Table 1 Additionally, the model incorporates the error term £i.t, which is clustered at the country level across all specifications.
EMPIRICAL RESULTS
Descriptive statistics
This table provides a descriptive statistic for all variables, with 19,666 firm-year observations from 28 countries from 2002 to 2018 'Table 1 contains the definitions of the variables
Table 2 presents descriptive statistics for our research model covering the years 2002 to 2018, encompassing 19,666 observations Key metrics such as mean, standard deviation, and quartiles (p25, p50, and p75) are detailed for each variable Notably, Environmental performance has a mean of 0.426 and a median of 0.411, while the main independent variable, IO FOR, shows a mean of 0.102 and a standard deviation of 0.114 Additionally, SIZE exhibits a mean of 9.974 and a standard deviation of 2.994 The data indicates that eight variables display a normal distribution, as evidenced by their closely aligned mean and median values.
Table 3 Descriptive statistics by countries num firm num obs
FOR SIZE LEV TAN MTB ROA SLG COR GDP
This table presents a descriptive statistic of the mean (dependent and independent and control variables) in 28 nations with a total 2254 firms from 2002 to 20 J 8 Table J contains the definitions of the variables
According to Table 3, the Netherlands achieved the highest environmental performance score of 0.626, although it had a limited number of observations and firms, suggesting a relatively minor impact compared to other countries Switzerland leads in the foreign institutional investors category with a score of approximately 0.2 In contrast, despite China and the US having a significant number of firms and observations, their scores for foreign institutional investors are notably low at 0.237 and 0.380, respectively.
Table 4 Descriptive statistics by years num firm per ENV IO
SIZE LEV TAN MTB ROA SLG COR GDP
This table summarizes the number of affirmations from 28 countries between 2002 and 2018, alongside descriptive statistics for the mean of both dependent and independent control variables Additionally, Table 1 provides definitions for these variables.
Table 4 illustrates the annual distribution of foreign institutional investors across various industries from 2002 to 2018 The number of foreign investors rose significantly from 642 in 2002 to 1,728 in 2015, before experiencing a sharp decline to 2,071 in 2018 In terms of percentage, the highest representation of firms occurred in 2015 at 8.79%, while the lowest was in 2002 at 3.26% Additionally, the Environmental Performance indicator showed a consistent decline from 2002 to 2018, whereas the total foreign institutional ownership (IO FOR) increased annually during the same period.
This table shows the correlations matrix of variables used in our analysis The sample covers the period between
2002 and 2018 The definitions of the variables are provided in Table I Significance at the 1% level is ***, 5% level is indicated by **, 10% level is *
Table 5 presents the pairwise correlations among the independent variables in our primary regression analysis using the full sample Notably, Environmental performance shows significant correlations with most of the variables, indicating a strong association.
The analysis reveals a positive correlation between Environmental performance scores (EN V) and the presence of Foreign institutional investors (IO FOR), indicating that countries with better environmental practices attract more foreign investment, consistent with findings by Lalridis (2013) Conversely, a negative relationship is observed between Environmental performance and GDP growth (GDP GROWTH) and inflation (INF), suggesting that nations with higher environmental scores tend to experience lower inflation rates, as supported by Alkadrie and Khairunnisa (2023) Overall, the study concludes that there is no perfect collinearity among the variables, evidenced by the low correlation observed.
Baseline results
Table 6 Control of Environmental performance and Foreign institutional investors
for 5%, and * for 10%.
Industry FEs Yes No Yes Yes
Year FEs Yes Yes No Yes
Table 6 presents the baseline results examining the relationship between environmental performance and foreign institutional investors, with robust standard errors indicated in parentheses to address heteroscedasticity This analysis aims to evaluate hypothesis 1 effectively.
In our analysis, we utilize several combinations of control variables Column (I) excludes control variables but accounts for industry and year fixed effects In contrast, columns (2), (3), and (4) incorporate all control variables, with column (2) omitting industry fixed effects, column (3) lacking year fixed effects, and column (4) including both Notably, column (4) exhibits the highest R-squared value, signifying a superior fit of the regression model to the data.
The analysis reveals that foreign institutional investors have a significant positive impact on environmental performance, with a coefficient of 0.156 This indicates that a one standard deviation increase in foreign institutional investment correlates with a 15.6% enhancement in environmental performance, thereby strongly supporting Hypothesis 1.
Foreign institutional investors have positive impacts on Environmental performance
Our results are consistent with some latest research (Bose et al., 2023)
In our analysis of control variables, we find that most are significant at the 1% level, with the exception of TAN in models (2) and (3) lacking industry and year fixed effects Our findings align with previous research, notably by Dyck et al (2019) and Yahia et al (2023), which highlight the strong positive influence of SIZE on environmental performance Additionally, MTB is shown to be positive and statistically significant at the 1% level in models (2), (3), and (4), consistent with the findings of Li, Wang & Wu (2021) Other positively correlated variables include LEV, ROA, COR, and IF, while SLG and GDP GROWTH demonstrate a negative impact on environmental performance The mixed signs of TAN control variables indicate weak evidence regarding their effects on environmental performance in our study.
Endogeneity concerns
Table 7 Endogeneity addressing, GMM approach
GMM_mode GMM_mode GMM_niode GMM_mode
The table presents findings on the influence of foreign institutional investors on environmental performance, which serves as the dependent variable across all models from (1) to (4) Detailed definitions of the variables can be found in Table I Statistical significance is denoted as follows: a significance level of 1% is marked by ***, 5% by **, and 10% by *.
Industry FEs Yes Yes No Yes
Year FEs Yes No Yes Yes
We acknowledge potential endogeneity issues in our results due to possible omitted variables during data collection Despite incorporating industry and year fixed effects, these omitted variables can influence our dependent variable, Environmental performance, and independent variable, Foreign institutional investors Additionally, reverse causality may occur, where low Environmental performance could reduce Foreign institutional investors To address these concerns, we employ the GMM estimation model developed by Blundell and Bond (1998), which effectively manages unobserved heterogeneity and simultaneity To mitigate instrumental weakness, we limit the lag range for instrument generation to two, as suggested by Roodman (2009) The findings, presented in Table 7, indicate that the coefficients on IO FOR are statistically significant at the 1% level across four columns, aligning with baseline results and suggesting that endogeneity is not a significant issue in our model.
Cross-sectional analysis
Table 8 Interaction between Foreign institutional investors and Common law
Industry FEs Yes No Yes Yes
Year FEs Yes Yes No Yes
The table presents findings on the impact of Foreign Institutional Investors (FIIs) on Environmental Performance, specifically under Common Law conditions In the models from (I) to (4), Environmental Performance serves as the dependent variable, with the Common Law indicator (COM LAW) assigned a value of 1 for countries with Common Law and 0 otherwise The models also account for industry and year fixed effects Variable definitions are detailed in Table / Statistical significance is marked at the 1% level with ***, at the 5% level with **, and at the 10% level with *.
Our research examines the impact of Common law on the relationship between Foreign institutional investors and Environmental performance The empirical results, presented in the table, highlight the interaction between a dummy variable for Common law—where it equals 1 for countries that implement it and 0 for those that do not—and the primary explanatory variable, Foreign institutional investors.
The analysis presented in the table highlights two primary variables along with their interaction term, while also accounting for industry and year fixed effects The fourth column expands on this by incorporating a range of control variables Specifically, column (2) features IO FOR, COMLAW, and their interaction IO FOR* COMLAW, whereas column (3) includes additional control variables, with varying fixed effects applied in each instance.
The results indicate a reliable outcome, as all coefficients of the interaction term are negative and statistically significant at the 1% level Specifically, columns (1) and (4) reveal that the coefficient for IO FOR* COMLAW is -0.566 and -0.281, respectively, both highly significant at the 1% level This suggests that the positive impact of foreign institutional investors on environmental performance is less pronounced in firms operating within common law countries compared to those outside this legal framework.
Research indicates that a one-unit increase in foreign institutional investment correlates with a 28.1% reduction in environmental performance in countries with common law, compared to those without This aligns with Liang & Renneboog's (2017) findings that common law societies tend to invest less in environmental responsibility Additionally, firms in these countries often exhibit lower levels of environmental protection and demonstrate reduced responsiveness to changing demands for corporate social responsibility (CSR).
With this support, our Hypothesis 2 is backed up, indicating that the positive impact of Foreign institutional investors on Environmental performance is less pronounced for firms from Common law countries.
Table 9 Interaction between Foreign institutional investors and Economic freedom
(1) (2) (3) env env env env env
Industry FEs Yes Yes Yes Yes Yes
Year FEs Yes Yes Yes Yes Yes
The table demonstrates the impact of Foreign Institutional Investors on Environmental Performance, with Economic Freedom serving as a conditional factor Environmental Performance is the primary dependent variable across all models presented.
(5) LT RADE is an indicator that equals 1 if Trade freedom is smaller than the sample median in a given year and
The indicators LMONE, LFIN, LINVEST, and LBVSi represent whether monetary, financial, investment, and business freedoms, respectively, fall below the sample median in a given year, assigning a value of 1 if true and 0 otherwise The model also incorporates industry and year fixed effects, with detailed variable definitions available in Table 1 Statistical significance is noted at the 1% level.
***, 5% level is indicated by **, 10% level is *
This study explores the moderating effect of Economic freedom on the relationship between Foreign institutional investors and Environmental performance, as outlined in Hypothesis 3 To quantify Economic freedom, we utilize five dummy variables: Trade freedom, Monetary freedom, Financial freedom, Investment freedom, and Business freedom The empirical findings, presented in the table, highlight the interaction between these Economic freedom variables (LTRADE, LMONE, LFIN, LINVEST, LBUSI) and Foreign institutional investors, which serve as the primary explanatory variable Each of the five components is classified based on their median values, where LTRADE, LMONE, LFIN, LINVEST, and LBUSI indicate levels of freedom that fall below the sample median, assigning a value of 0 otherwise.
The regression analysis reveals that the interaction terms consistently exhibit positive and significant coefficients across all specifications Specifically, the interaction term IO FOR*LTRADE in column (1) shows a coefficient of 0.168, indicating that lower trade freedom is associated with a 0.168 percentage point increase in environmental performance In column (2), the interaction term IO FOR*LMONE has a coefficient of 0.081, suggesting that reduced monetary freedom correlates with a 0.081 percentage point improvement in environmental performance Similar positive coefficients are recorded for financial freedom, investment freedom, and business freedom in columns (3), (4), and (5), respectively These findings highlight that the influence of foreign institutional investors on environmental performance is more significant in firms operating under lower levels of economic freedom, supporting Hypothesis 3 Additionally, prior research by Mironiuc & Huian (2017) indicates that CO2 emissions, an environmental factor, are adversely impacted by economic freedom.
4.4.3 Roles of Performance and growth opportunities
Table 10 Interaction between Foreign institutional investors and Performance and growth opportunities
Industry' FEs Yes Yes Yes Yes
Year FEs Yes Yes Yes Yes
for 5%, and * for 10%.
This research examines how the combination of the Market-to-book ratio and the Return on Assets (ROA) influences the relationship between Foreign Institutional Investors (FIIs) and Environmental Performance Specifically, we analyze the interaction between low Market-to-book (LMTB) and low ROA (LROA) ratios with FIIs as the main explanatory variable Firms are categorized based on whether their Market-to-book and ROA ratios fall below the sample median, with LMTB and LROA indicating lower performance levels Our hypothesis posits that improved performance and growth opportunities positively affect the relationship between FIIs and Environmental Performance Consequently, if LMTB and LROA limit the impact of Foreign Institutional Ownership on Environmental outcomes, we anticipate a positive and statistically significant coefficient Robust standard errors are employed to address potential heteroskedasticity issues.
The coefficients of the IO FOR* LMTB and IO FOR* LROA are positive and statistically significant at 1%, supporting hypotheses 4a and 4b, indicating that Foreign institutional investors have a more pronounced positive impact on the environmental performance of firms with lower performance and growth opportunities This finding aligns with Clarkson et al (2011), who suggest that companies with poor environmental performance have greater potential for improvement and can greatly benefit from the guidance of Foreign institutional investors in adopting sustainable practices Additionally, research by Yan, Almandoz, and Ferraro (2021) highlights that these investors often prioritize environmental initiatives in underperforming companies to enhance their sustainability efforts.
CONCLUSION
Environmental performance has emerged as a crucial trend for growth, particularly following the introduction of the 17 Sustainable Development Goals by the WHO Engaging in environmental protection not only provides companies with governance support and incentives but also positively influences government GDP and FDI, especially in developing nations This paper aligns with Goals 12 and 13 of the United Nations Sustainable Development Goals by advocating for responsible consumption and production, as well as climate action.
In this study, we use an international sample of businesses spanning 28 countries from
From 2002 to 2018, a study examined the influence of Foreign Institutional Investors (FIIs) on Environmental Performance using the Generalized Method of Moments (GMM) approach to address endogeneity and fixed effects estimators for static panel data The findings reveal a positive correlation between FIIs and Environmental Performance, suggesting that these investors prioritize ecologically conscious companies and encourage the implementation of eco-friendly policies Their exposure to international standards enhances their commitment to sustainability within their investee companies However, in common law nations, this correlation is weaker Factors such as higher economic freedom and better growth prospects for enterprises amplify FIIs' incentives to advocate for environmental disclosures Overall, the research highlights the significant role of Foreign Institutional Investors in shaping Environmental Performance.
Our research highlights key managerial insights and policy recommendations for firms aiming to attract Foreign Institutional Investors (FIIs) to enhance business and environmental performance It is essential for companies to implement strategies that leverage FII investments, as these contribute significantly to sustainable development and global well-being However, our findings indicate that the Common Law system does not effectively support FIIs in improving environmental performance, suggesting a need for reviews of the legal framework to close potential loopholes in environmental standards Furthermore, maintaining an appropriate level of economic freedom is crucial for promoting FII engagement and improving firms' environmental outcomes.
Higher levels of economic freedom often correlate with weaker enforcement of environmental standards, potentially resulting in poorer environmental performance by businesses and reduced commitment from investors to sustainability Our research indicates that firms enjoying greater economic freedom tend to receive less positive environmental stimuli from foreign institutional investors This may be attributed to the trade-offs in resource allocation, where companies prioritize investments in areas like expansion or innovation over environmental sustainability.
Our research has notable limitations that should be acknowledged While we utilized data from 28 nations across various regions, the findings may not fully capture the global context Future studies could enhance validity by incorporating data from a broader range of countries Additionally, our analysis focuses solely on the overall relationship between Foreign Institutional Investors and Environmental Performance Future research should consider examining this relationship within different country groups Furthermore, our study emphasizes the firm-level connection; therefore, scholars might explore the relationship at the country level to further investigate and elaborate on our findings regarding this association.
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