Resolving the Carbon—Performance Paradox: Global Evidence on Stakeholder Engagement, Risk and Institutions

Abstract

This study examines how greenhouse gas emissions influence corporate performance and explains why prior evidence on the carbon–performance relationship has remained inconsistent. Drawing on institutional, stakeholder and slack resource perspectives, the study investigates the direct effects of carbon intensity and emissions reduction (efficiency) on return on capital employed, return on assets and Tobin's Q, while assessing the moderating roles of stakeholder engagement and idiosyncratic risk. Using a global panel of 3070 publicly listed firms from Europe, North America, Asia‐Pacific and Africa between 2014 and 2023, the analysis employs dynamic System GMM to address endogeneity, persistence and firm‐level heterogeneity. The findings show that carbon intensity is positively associated with market valuation and capital efficiency in capital‐intensive contexts, whereas emissions reduction tends to generate short‐term performance costs. Stakeholder engagement and firm‐specific risk significantly shape these relationships, revealing that the financial consequences of decarbonisation depend on credibility, risk exposure and institutional context. Cross‐regional analyses confirm that the valuation of carbon performance varies systematically across regulatory and market environments. The study contributes to the literature by identifying boundary conditions that explain divergent findings on carbon performance and offers practical implications for managers, investors and policymakers seeking to align decarbonisation strategies with long‐term value creation.