Environmental Performance, Financial Constraints, and Tax Avoidance Practices: Insights from FTSE All-Share Companies

Area of Science:

• Environmental Economics
• Corporate Finance
• Taxation Policy

Background:

• The UK's Climate Change Act (2008) incentivizes corporate environmental performance to reduce greenhouse gas emissions.
• Prior research suggests strong environmental, social, and governance (ESG) practices correlate with reduced tax avoidance.
• Existing literature often views enhanced environmental performance favorably for corporate governance and environmental protection.

Purpose of the Study:

• To investigate the relationship between corporate environmental performance and tax avoidance.
• To determine if increased environmental performance influences tax avoidance behaviors.
• To examine the moderating role of financial constraints on this relationship.

Main Methods:

• Analysis of 567 UK firms listed on the FTSE All Share index (2014-2022).
• Application of entropy balancing, propensity score matching, instrumental variable method, and Heckman test.
• Econometric modeling to address endogeneity concerns in the environmental performance-tax avoidance nexus.

Main Results:

• A positive association was found between higher environmental performance and increased tax avoidance.
• The effect of environmental performance on tax avoidance is amplified for firms experiencing financial constraints.
• Environmental performance emerges as a significant explanatory factor for variations in corporate tax avoidance.

Conclusions:

• Contrary to expectations, enhanced corporate environmental performance may correlate with increased tax avoidance.
• Financial constraints exacerbate the tendency for high-performing environmental firms to engage in tax avoidance.
• Findings necessitate a re-evaluation of the interplay between environmental stewardship and corporate financial strategies.