The study aims to examine the impact of carbon emission reduction on financial performance in an emerging market context. Thirty eight Indian-listed firms were drawn from the Bombay Stock Exchange for the sample, and firms’ data were collected from sustainability reports and Capitaline Plus corporate database. Carbon productivity and market-to-book ratio were used as a proxy to measure carbon emission reduction and financial performance, respectively. Results show a positive association between carbon emission reduction and financial performance after employing the appropriate panel regression model. This study contributes to the ongoing “pays to be green” literature, and the findings of this study complement the “win–win” research by empirically showing that corporate effort to reduce carbon emission generates a positive impact on firm’s financial performance. Moreover, the findings provide crucial managerial and policy implication.

PurposeThe primary purpose of this study is to investigate the impact of carbon productivity on firms' financial performance. Secondly, the study also examines the moderating effect of industry types and firm size in the relationship between productivity and firm performance.Design/methodology/approachThe data used for the study includes 66 listed Indian firms over the period from 2015–2016 to 2019–2020. The data used in the study are collected from the published corporate annual reports and sustainability reports. The study uses a random effect model based on the results of the Hausman test and the Breusch-Pagan test to investigate its objectives.FindingsCarbon productivity has a favorable impact on firms' financial performance in India, indicating that firms may gain competitive advantages by minimizing carbon emissions and improving carbon productivity. Small and high carbon-intensive firms reap greater benefits from the improvement in carbon productivity compared to their opposite counterparts. However, such differential impact is only observed for the market-based measure but not for the accounting-based measure of financial performance.Practical implicationsThe results suggest that high carbon-intensive firms should focus more on improving carbon productivity. Small firms and firms belonging to high carbon-intensive industries can improve their market performance by improving carbon productivity.Originality/valueThis study is a noble attempt to investigate the moderating effect of industry type and firm size while examining the impact of carbon productivity on firm performance in the context of an emerging economy.

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