Impact of Firm-Specific and Macroeconomic Determinants on Environmental Expenditures: Empirical Evidence from Manufacturing Firms

Abstract

This research aims to examine the association between firm-specific and macroeconomic determinants and environmental expenditures in the Indian manufacturing sector. Furthermore, it seeks to investigate the moderation effect of country-level governance and economic development on the association between macroeconomic, firm-specific, and environmental expenditures. The current study is based on 70 manufacturing firms for the period of 2011 to 2021. The dependent variable is environmental expenditures and the independent variables are firm-specific and microeconomic determinants. The results revealed that market capitalization and firm size have a positive and significant impact on environmental expenditures. On the other hand, inflation and the rule of law negatively and significantly affect environmental expenditures. Regarding the moderation effect, the results revealed that the rule of law and GDP positively moderate the association between inflation and environmental expenditures. Hence, this research has significant implications for corporate executives, financial experts, regulators, and other interested parties.

1. Introduction

There is growing interest among managers, investors, and customers in sustainable performance (Wanday and Zein 2022; Yang et al. 2024; Jin et al. 2024). As of April 2019, the Principles for Responsible Investment (PRI), supported by the United Nations (UN), had garnered the endorsement of more than 2300 investment management firms. These firms collectively possess resources under administration amounting to USD 86 trillion. By signing the PRI, these firms have committed to incorporating environmental, social, and governance (ESG) disclosure considerations into their investment decision-making processes (CFA Institute 2019). The integration of sustainability information into business reporting has been addressed by various organizations, including the Task Force on Climate-related Financial Disclosures (TCFD), the Sustainability Accounting Standards Board (SASB), the Global Reporting Initiative (GRI), and the World Economic Forum International Business Council. In contrast, the International Financial Reporting Standards (IFRSs) have primarily focused on incorporating sustainability information into business reporting (CDP et al. 2020). The separation of sustainability reports from financial reports by most businesses presents a significant obstacle to comprehending the relationship between financial performance (FP) and sustainability performance (Lee et al. 2023; Saini et al. 2022). This issue remains a prominent concern within the ESG movement (Li et al. 2023). Moreover, the outbreak of the COVID-19 pandemic and the subsequent implementation of lockdown measures caused uncertainty and led to various consequences that have disrupted the normal functioning of society. This has compelled the banking industry to make multiple adaptations, particularly concerning environmental, social, and governance (ESG) standards (El Khoury et al. 2023).

Corporations have undertaken several initiatives to mitigate the adverse impacts of climate change, encompassing considerations of environmental preservation, biodiversity conservation, sustainable resource utilization, and the dynamic nature of climatic patterns (Kedward et al. 2022). Mitigation, which involves a reduction in emissions, and adaptation, which focuses on preparedness for inevitable consequences, are two critical tactics employed in the battle against climate change. To mitigate greenhouse gas (GHG) emissions, it is essential to implement modifications in several domains, such as land use, business practices, structures, transportation, and energy infrastructure. In light of the comprehension of climatic phenomena and their associated extreme events, the adaptation process necessitates the cultivation of resilience and the implementation of disaster management strategies (Rolnick et al. 2022). Organizations such as BirdLife International, Wildlife Conservation Society, and the World Wide Fund for Nature have undertaken the ambitious goal of establishing a plantation consisting of one trillion trees. Plant for the Planet has initiated a tree campaign specifically dedicated to this endeavor. Additionally, Amazon has allocated USD 100 million from its climate fund initiative to safeguard, restore, and enhance carbon sequestration in peatland and wetland regions. The fund’s establishment aligns with the organization’s objective of attaining carbon neutrality by 2040 (Cohen 2020). In a similar vein, Apple has established a carbon mitigation initiative. The company is implementing a community-based approach to restoring and sustaining biological systems, specifically grasslands in Kenya and over 27,000 acres of mangroves in Colombia. Apple aims to attain net-zero carbon emissions throughout its supply network and product lifespans by 2030. This objective involves a 75% decrease in emissions, the remaining 25% being offset by credits obtained from nature-based solutions (NBSs) supported by the Climate Mitigation Fund. According to Apple (2020), Microsoft has implemented a biodiversity project intending to protect more land by 2025 than the land now utilized by the corporation. This will be achieved through strategies such as land acquisition, national park development, and indigenous communities’ preservation projects. Furthermore, Microsoft made a commitment to plant 250,000 trees in the year 2020. This initiative was in addition to the company’s existing vow to achieve carbon negativity by 2030 (Smith et al. 2020).

Besides corporations’ global initiatives in tackling the impacts of the changing climate, corporate social responsibility (CSR) has gained recognition for helping corporations tackle climate change issues (Bianco 2020; Narula et al. 2017, 2019). In India, for example, corporate social responsibility (CSR) is under the purview of the Firms Act 2013, which requires a certain class of firms to allocate two percent of their average net profit over the previous three years to CSR initiatives (Samantara and Dhawan 2020). The companies falling within the ambit of this act have been actively engaged in various ecosystem and biodiversity conservation efforts to tackle climate change impacts. For instance, India Tobacco Company Limited (ITC) (Kolkata, India) has a CSR-based afforestation program assisting farmers to turn their unproductive land assets into profitable pulpwood plantations using clonal saplings specially developed by the ITC R&D Centre to grow in harsh conditions. ITC is also actively involved in its CSR efforts, focusing on various initiatives, such as conserving and revitalizing water bodies by engaging with local communities, reducing CO₂ emissions, enhancing coastal and marine habitats to support native biodiversity, and addressing human–animal conflict while also improving the well-being of stray animals in community areas (Patil 2022).

Given the above considerations, it is evident that companies have been allocating financial resources towards environmental expenditures and implementing efforts to address the consequences of climate change. Environmental expenditures are a critical factor that firms evaluate due to its potential for bringing about various advantages, such as positive responses from investors and consumers. Ultimately, these factors can have a significant impact on the financial performance of an organization. In light of the established framework around the correlation between environmental spending and firm characteristics, scholars are still divided on the connection between environmental investment, environmental expenditures, and company-specific factors, such as financial performance. Based on prevailing beliefs, it is commonly held that environmental investment represents a costly obligation for companies, likely diminishing their overall profitability (Jin and Xu 2019). Fundamentalists claim that there is a trade-off between environmental conservation and financial performance. This perspective stems from the belief that environmental protection necessitates supplementary investments that do not directly contribute to financial gains. For instance, when a corporation aims to enhance its productivity to maximize profitability, such an increase is commonly associated with environmental considerations. In this scenario, the organization either bears the expenses associated with environmental protection measures or reaps the benefits from such investments (Xiao et al. 2019). Orsato (2006) argues that implementing corporate environmental protection measures requires substantial resources for environmental equipment and the advancement of novel environmental technologies, resulting in increased operational costs.

Taking the above into consideration, this study attempts to answer the following questions:

• What are the determinants of environmental expenditures in Indian manufacturing firms?
• Do country-level governance and economic development moderate the association between firm-specific and environmental expenditures of Indian manufacturing firms?
• What is the impact of the COVID-19 pandemic on environmental expenditures?

Therefore, this research contributes to the existing literature in several ways. Firstly, it aims to uncover environmental spending patterns following the implementation of the Companies Act (2013) by analyzing a comprehensive dataset spanning a decade. Secondly, according to Gatenholm and Halldórsson (2023) and Brodeur et al. (2021), the COVID-19 pandemic caused supply-side disruptions and a considerable impact on consumer spending (Poddar et al. 2022). Thus, the loss of revenue caused severe financial strain for several types of businesses, increasing the need for financial liquidity (Fassas et al. 2021). Hence, this paper makes an effort to investigate how the COVID-19 pandemic affected environmental expenditures. Thirdly, it bridges a gap in previous research, which has predominantly focused on sustainability disclosures and corporate environmental initiatives rather than using secondary data. Fourthly, this research examines the moderation effect of country-level governance and economic development on the association between firm-specific and environmental expenditures, which represent a unique contribution to the literature. Nevertheless, this research also has a few limitations in achieving its overall objectives, such as dealing with diverse data, missing data points, and relying solely on a secondry set of data. To overcome these limitations, future researchers in this field can incorporate additional primary data, such as conducting questionnaire surveys on various aspects of environmental expenditure and related indicators.

2. Literature Review and Hypothesis Development

2.1. Firm-Specific and Environmental Expenditures

Research on company performance has witnessed a significant transformation in recent decades, with a shift from focusing on industry-specific factors to firm-specific characteristics (Chatzoglou et al. 2018; Barbosa et al. 2014). Identifying firm features has been recognized as a crucial indicator of company growth and development (Chatzoglou et al. 2018; Maditinos et al. 2011).

According to Rugman and Sukpanich (2006), firm-specific advantages (FSAs) refer to distinct capabilities exclusive to a particular organization and derived from its expertise in service, technology, advertising, or delivery skills. Consequently, FSAs encompass the advantageous aspects of brand strength, company culture, technological knowledge, and creative abilities. The categorization of FSAs in this research is based on the origin of competitive advantage inside a firm’s value chain, resulting in two separate groupings (Rugman et al. 2009; Lu and Beamish 2004). As a fundamental driver of economic value generation and competitive advantage, innovation plays a pivotal role in producing novel knowledge assets.

Due to growing public concern for the environment, the government mandates that businesses assume greater responsibility in addressing environmental issues (Singh et al. 2016; Luo et al. 2024). For example, the government exerts pressure on companies to increase their environmental spending (Haller and Murphy 2012; Kim and Kim 2018). While companies acknowledge the commendable goal of enhancing the environment, they are confronted with a predicament since investing in environmental initiatives could significantly raise their expenses, including those related to materials and power and perhaps have an adverse impact on the firms’ profitability (Dechezleprêtre and Sato 2017; Chong et al. 2017). Moreover, an excessive allocation of resources towards environmental expenses could potentially hinder the firms’ ability to invest in innovative projects, leading to a significant decrease in its overall efficiency (Yang et al. 2024). Eiadat et al. (2008) asserted that the increasing pressure on companies to safeguard the environment could lead to higher expenses in terms of capital and labor, distract management focus, and impede productive investments.

The existing body of literature has yet to extensively address the specific characteristics of firms and their influence on environmental expenditures. A study conducted by Kim and Kim (2018) shed light on the unique attributes of firms, providing examples to illustrate this point. The research and design capabilities of an entity enable it to address environmental concerns effectively, thus enhancing the efficiency of its environmental expenditures (Li et al. 2021; Khan et al. 2023). A firm’s research and development (R&D) capabilities serve to alleviate the adverse effects of environmental expenditures on its profitability. Specifically, a higher level of R&D intensity corresponds to a reduced negative impact of environmental spending on a firm’s return on assets (ROA) (Safitri et al. 2020; Kim and Kim 2018).

A study examining microeconomic issues, including market rivalry, revealed that a firm’s environmental performance can negatively impact shareholder value and the long-term viability of the business. In this scenario, motivations exist for engaging in cost-saving measures by taking shortcuts, such as in the context of investment in CER. According to Meng et al. (2016), this phenomenon may result in companies engaging in environmentally detrimental practices to generate financial gains and ensure their continued existence. There needs to be more research examining firms’ specific impacts on the environment. The allocation of funds has been highlighted as crucial in determining an organization’s financial well-being, with a particular emphasis on firm-specific factors. Several studies have demonstrated that increasing investment in research and development, indicative of developing technologically driven innovation capacities, can aid organizations in differentiating their final goods. This differentiation improves corporate performance and efficiency (Belderbos et al. 2004). Moreover, existing studies on marketing literature suggest that the augmentation of marketing, communication, and distribution-focused firm-specific advantages (FSAs) through heightened marketing investment and intensity positively correlates with enhanced organizational performance in a linear fashion (Holm and Sharma 2006; Lee and Rugman 2012).

Based on the above argument, it is evident that there needs to be more scholarly literature on this crucial subject. Some of the previous research is shown in

Table 1. Summary of some previous studies.

Authors’ Names	Title of the Study	Variables Used for Analysis	Study Outcome	Study Geographical Location
(Kim and Kim 2018)	Firm’s environmental expenditures, R&D intensity, and profitability	Return on assets, R&D, profitability, environmental expenditures	The findings indicate a detrimental correlation between a company’s environmental spending and its profitability, which is influenced by the company’s research and development (R&D) capacity as measured by its R&D intensity.	United States of America
(Samsinar and Firdaus 2019)	Is there a link between environmental expenditures, innovation, and revenue in Malaysian manufacturing industry?	Environmental expenditures and innovation	The findings unequivocally demonstrate that both environmental spending and innovation had a definite impact on the earnings of companies in various manufacturing industries. The findings also demonstrate the presence of a reciprocal correlation between innovation and environmental expenditures.	Malaysia
(He et al. 2018)	A study of the influence of regional environmental expenditures on air quality in China: the effectiveness of environmental policy	Environmental expenditures and fuel tax policy	The study found a persistent equilibrium connection between environmental expenditures and the air quality index. The findings not only provide clarification on the impact of environmental expenditures on air quality, but also offer an objective assessment of the success of China’s environmental policies to some degree.	China
(Luo et al. 2024)	Foreign shareholding and corporate environmental expenditures: evidence from China	Foreign investments and environmental expenditures	The results suggest that pre-IPO foreign investments have a substantial and beneficial impact, whereas post-IPO foreign investments have little to no influence.	China
(Wang 2018)	Analysis of the efficiency of public environmental expenditures based on data envelopment analysis	Fiscal spending environmental protection	The results indicate that the fiscal expenditures on environmental protection in the five provinces is characterized by technical inefficiency, with the exception of Hubei Province in Central China. Furthermore, there are significant variations among provinces in terms of the point at which scale return occurs.	China
(Wang et al. 2014)	The impact of environmental expenditures on performance in the U.S. chemical industry	Environmental expenditures and financial performance	The findings of this study offer significant evidence of a correlation between environmental expenses and financial performance. The results indicate that companies that allocate resources towards environmental expenditures demonstrate higher levels of efficiency and production.	United States of America
(Le Gallo and Ndiaye 2021)	Environmental expenditure interactions among OECD countries, 1995–2017	Strategic interactions, environmental expenditures, economic and political control variables	The findings indicate a notable presence of substantial positive spatial correlation in environmental spending, implying that OECD nations take into account the actions of their neighboring countries when making decisions regarding environmental expenditures.	OECD countries
(Cheng et al. 2024)	The unanticipated role of fiscal environmental expenditures in accelerating household carbon emissions: evidence from China	Fiscal environmental expenditures and environmental governance	The findings indicate that FEE had a substantial impact on household carbon emissions via diminishing satisfaction with environmental governance. Furthermore, factors such as public service satisfaction, household income, energy intensity, and geography play a crucial role in mitigating the situation.	China
(Arjomandi et al. 2023)	Environmental expenditures, policy stringency and green economic growth: evidence from OECD countries	Environmental policy stringency, environmental GDP and productivity	The findings indicate that government spending on environmental protection has a major positive impact on the national economy in the short run. The analysis demonstrates that implementing stricter environmental policies and increasing environmental expenditures can have a decelerating effect on long-term ‘green’ GDP and productivity growth. However, the impact of regulatory stringencies is relatively less pronounced.	OECD countries
(Basoglu and Uzar 2019)	An empirical evaluation about the effects of environmental expenditures on environmental quality in coordinated market economies	Total public expenditure increase, ecological deficit, environmental expenditures	The research has revealed a co-integration link between variables. Panel ARDL research has revealed that total public expenditures contribute to the ecological deficit, whereas environmental expenditures help reduce it. The impacts of public expenditures on the environment are multiple. The size effect has a detrimental influence on environmental quality, while the composition effect, which shifts spending towards environmental initiatives, has a beneficial effect.	Europe

. Consequently, further exploration of the topic is imperative as it has the potential to yield valuable research insights. Our study exhibits some notable additions compared to other publications in the literature. While several references examine the correlation between environmental spending and company performance, the majority rely on subjective or qualitative methods, such as case studies. However, we make a deliberate effort to demonstrate our hypotheses in an unbiased and methodical manner by gathering and examining real data from manufacturing companies. Considering the above, we proceeded to analyze the underlying assumptions, and the following hypotheses were formulated:

H01. 

Firms’ specifics have a significant impact on environmental expenditures.

H01a. 

Return on net worth has a significant impact on environmental expenditures.

H01b. 

Leverage has a significant impact on environmental expenditures.

H01c. 

The current ratio has a significant impact on environmental expenditures.

H01d. 

Market capitalization has a significant impact on environmental expenditures.

H01e. 

Firms’ size has a significant impact on environmental expenditures.

2.2. Macroeconomic Determinants, Country-Level Governance, and Environmental Expenditures

The macroeconomic components encompass external aspects beyond organizational management’s purview. These components encompass ecological, social, and political factors, vendors, competitors, and government rules and regulations (Egbunike and Okerekeoti 2018; Madlani et al. 2021). Significant economic indicators encompass the consumer price index, unemployment rate, gross domestic product, stock market index, corporate tax rate, and interest rate (World Bank Group 2015; Broadstock et al. 2011). The macro components under consideration have the potential to either enhance or adversely affect the financial and environmental outlays of an organization. Despite the limited availability of research on this subject matter, few studies have examined the impact of macroeconomic conditions on ecological expenditures. Bui and Kapon (2012) employ the objective of business involvement to elucidate the rationale for a company’s self-regulation and voluntary engagement in environmental projects. The relationship between business and society is influenced by various elements that shape an organization’s environmental practices, policies, and tasks. These aspects elucidate the motivations behind corporations’ engagement in socially responsible acts.

Several studies have been conducted to examine the factors that impact corporate environmental behavior, including corporate ecological expenditures. In a study conducted by Murovec et al. (2012), a theoretical framework was constructed to examine the impact of several factors on environmental spending. The researchers found that legislation, prior environmental expenditures, customer demand for green technologies, and business performance positively influence environmental expenditures. Costa-Campi et al. (2017) investigated the factors influencing environmental expenditures across 22 industrial sectors in Spain from 2008 to 2013. The primary discovery of the study is that the management method plays a crucial role in facilitating environmental expenditures. Wang et al. (2015) found a positive correlation between the seniority of management and the environmental behavior of energy enterprises in China. The findings suggest that upper management exhibited a greater understanding of and experience in environmental matters. The data were collected through questionnaires administered to 60 energy enterprises in China in 2013. Moreover, the allocation of ownership (Wang et al. 2019; He et al. 2016), the influence exerted by shareholders (Kassinis and Vafeas 2006), the attributes of the chief executive officer (Sun and Cahan 2012; Sun and Zou 2021), the size of the firm (Darnall et al. 2010; Nawaiseh 2015), the internal incentive system of corporate governance (Ding et al. 2016), and regulatory frameworks (He et al. 2016) are factors that impact environmental expenditures.

Significant macroeconomic drivers influence firms’ environmental expenditures, including governance, inflation rate, and GDP. Li et al. (2022) conducted a study that found that the presence of in-house governance structures, such as audit committees and environmental expenditures, had a detrimental impact on business performance by increasing costs and reducing outcomes. Osiichuk et al. (2021) and Van Hoang et al. (2021) highlight the limited focus on the relationship between internal corporate governance and company performance.

There is a need for more research on the correlation between the quality of corporate governance and the transition to environmental sustainability inside firms (Haque 2017). Li et al. (2018) found that a chief executive officer (CEO) who wields significant influence within an organization can favor the disclosure of environmental expenditures, particularly concerning internal corporate governance. The components of governance encompass various aspects related to the environment, such as the formulation of environmental policies, the utilization of internal assessment tools such as benchmarking and accounting methods, the establishment of environmental performance objectives, the public disclosure of ecological performance data (Hart 2005), the completion of both internal and external environmental audits, the provision of training to employees on environmentally responsible behaviors, and the integration of environmental expenditures into employee compensation (Darnall et al. 2010). Abaidoo and Agyapong (2021) posit that a decline in gross domestic product growth may not necessarily have a uniform effect on all its sectors, including environmental expenditures, in terms of their ultimate impact on firm or business performance. Furthermore, the presence of inflation-related uncertainties can significantly diminish or influence the extent to which segmented factors contribute to corporate performance volatility.

Considering the above literature, limited literature is available on this important topic, as shown in Table 1, making it necessary to further delve into the subject and provide some insightful research contributions. With this in mind, the set of hypotheses listed below was tested.

H02. 

Macroeconomic determinants have a significant impact on environmental expenditures.

H02a. 

Gross domestic product has a significant impact on environmental expenditures.

H02b. 

Inflation rate has a significant impact on environmental expenditures.

H03. 

Country-level governance significantly moderates the association between firm-specific and environmental expenditures.

H04. 

Economic development significantly moderates the association between firm-specific and environmental expenditures.

2.3. COVID-19 Pandemic and Firms’ Environmental Expenditures

The COVID-19 pandemic has exerted a substantial influence on consumer expenditures and has resulted in disruptions on the supply side (Gatenholm and Halldórsson 2023; Brodeur et al. 2021). The financial strain experienced by many businesses as a consequence of revenue declines has led to an increased need for financial liquidity (Zhang and Fang 2022; Fassas et al. 2021). The pandemic has had significant effects on the environment and the economy, as Caraka et al. (2020) noted. The ongoing transmission of COVID-19 remains a substantial risk to the well-being of the general population (Chinazzi et al. 2020) and has substantial ramifications for the worldwide financial system. The global lockdown due to the pandemic has led to several repercussions, including labor displacement, business closures, and stock market downturns. Based on an analysis conducted by the International Monetary Fund (IMF), the outbreak of COVID-19 led to a significant decline in the global economy during the year 2020, accompanied by a contraction in economic growth of around 3%.

The implementation of lockdown measures led to the global shutdown of firms, resulting in significant financial losses for these entities. Consequently, a reduction in expenses was observed across multiple sectors (Dube et al. 2023). One notable consequence was the loss of employment opportunities (Sáenz and Sparks 2020), while the financial resources allocated by corporations for environmental initiatives were been affected (Priya et al. 2021). Despite the scarcity of research on the response of firms to environmental expenditures in the aftermath of COVID-19, there is a pressing need to conduct a study in order to gain a more comprehensive understanding of this topic. Taking this into consideration, the following hypothesis was examined:

H05. 

The COVID-19 pandemic has a significant impact on environmental expenditures.

3. Research Methodology

3.1. Sample and Data

Unlike prior research that relied on primary data, this study relies on financial and accounting data collected from the Prowess IQ database (available online at https://prowessiq.cmie.com/, accessed at 1 April 2022). Several scholars have utilized the Prowess IQ database extensively to gather information (e.g., Sinha et al. 2021; Farhan et al. 2021; Govind and Jain 2018; Singh and Kaur 2021). During the conceptualization and study design, the scope of the data utilized was defined for a period of 10 years, i.e., 2011–2021. This time frame was chosen based on the criteria of data homogeneity, availability, and relevance to the objectives. The study analyzed companies from several industries that experienced multiple constraints during the COVID-19 interruptions, including challenges related to record keeping and data update. The majority of the enterprises included in this study successfully withstood the disruptions caused by COVID-19 and are currently engaged in their business activities, actively contributing to the nation’s economic development.

The Prowess IQ database classifies firms according to the following categories: manufacturing firms, mining firms, electrical firms, real estate firms, and service firms. Bajaj et al. (2018) argue that conducting studies on individual sectors can offer more profound and distinct insights due to the diverse nature of business processes across different sectors (Farhan et al. 2023). Therefore, this study extracted data for the manufacturing sector only, which consists of more than 4000 firms. Due to the non-availability of data related to environmental expenses, this research is confined to 70 manufacturing firms whose data are available and do not have missing values. Hence, the final sample of this study included 70 firms with 770 years of observations.

Table 2. Sample distribution across industries.

Industry Name	Number of Firms	Number of Observations—Whole Samples	Number of Observations—Sub-Sample (2015–2021)	The Relative Importance of the Sample
Food and Agro-Based Product	6	66	42	8.57%
Textiles	7	77	49	10%
Chemical and Chemical Products	37	407	259	52.8%
Consumer Goods	4	44	28	5.7%
Construction Materials	7	77	49	10%
Others	9	99	63	12.8%
Total	70	770	490	100%

shows the distribution of the sample throughout the manufacturing industries. The table demonstrates that the majority of firms belong to the chemical products industry, as they represent 52.8% of the sample; the rest of the sample is from other industries: 10% construction materials firms, 10% textile firms, 8.57% food and agro-based product firms, 5.7% consumer foods, and 12.8% other industries.

Table 3. Variables’ description.

Variable	Measurements	Symbol	Definition	Expected Sign
Dependent variable	Environment- and Pollution Control-Related Expenses	ENVEXP	It refers to all expenses that are spent in order to control or reduce pollution caused during the manufacturing process. These expenses can be for effluent disposal and environmental development.
Independent variables	Return on Net Worth	RONW	The profit-earning capacity of the company on the shareholders’ invested amount.	+
	Leverage	LEV	The ratio of total debt to equity.	-
	Current Ratio	CR	The ratio of current assets to current liabilities.	+
	Market Capitalization	MCAP	It is the share price multiplied by the number of shares outstanding.	+
	Firms’ Size	TA	It is the logarithm of total assets.	+
	Gross Domestic Product	GDP	Gross domestic product is a monetary measure of the market value of all the final goods and services produced in a specific time by countries.	+
	Inflation	INF	The rate of increase in prices over a given time.
Moderating variable	Country-Level Governance—Rule of Law	RL	Rule of law captures perceptions of the extent to which agents have confidence in and abide by the rules of society. Rank indicates the country’s rank among all countries covered by the aggregate indicator, with 0 corresponding to the lowest rank and 100 to the highest rank. Percentile ranks were adjusted to correct for changes over time in the composition of the countries covered by the Worldwide Governance Indicators (WGI).	+
	Economic Development- GDP	GDP	Gross domestic product is a monetary measure of the market value of all the final goods and services produced in a specific time by countries.	+
Dummy variable	COVID-19	COVID-19	The years from 2020 to 2021 are coded 1, and 0 otherwise.	-

shows the variables’ measurements, which reveal how the variables were calculated, the symbols that illustrate how the variables are used in the manuscript and analysis, and finally, the definition of the variables and their expected outcomes.

3.2. Research Framework and Variable Definition

Figure 1 shows the interactions between the variables, as this study aims to examine the association between macroeconomic determinants and firm-specific and environmental expenditures. Furthermore, it seeks to investigate the moderation role of country-level governance and economic development on the association between macroeconomic, firm-specific, and environmental expenditures. Moreover, the study evaluates the effect of COVID-19 on environmental expenditures. Following previous studies (Chen and Miller 2007; Linder 2016; Abdu and Jibir 2018; Zainudin et al. 2018), this study used firms’ specifics, such as return on net worth (RONW), leverage (LEV), current ratio (CR), market capitalization (MCAP), and firm size (FS). Gross domestic product and inflation are the macroeconomic determinants. The first moderation variable, country-level governance, is represented by the rule of law. The second moderator is economic development, which is measured by gross domestic product.

3.3. Model Specifications

To determine whether there were any outliers in the sample, preliminary data analysis was used. It was found that there were some outliers in the dataset. There are two methods for handling outliers: winsorization or removal (Beiner et al. 2006). Following Hellerstein (2008), the decision was made to winsorize the values that had outliers. The choice to winsorize the values was in line with similar approaches used by earlier accounting and finance researchers (e.g., Hill et al. 2010; Kieschnick et al. 2006). After handling the outliers, serial correlation and heteroscedasticity were checked by running the Durbin–Watson and Breusch–Pagan LM tests. The results indicated the absence of serial correlation and heteroscedasticity, as shown in Table 6. Furthermore, the Hausman test was run to identify the appropriate model. The Hausman tests’ results in Table 6 suggest the appropriateness of the random model over the fixed effect model. Therefore, the following regression equations were estimated:

$$\begin{array}{ll}{\left(ENVEXP\right)}_{it}=& \alpha { + \beta }_1{\left(RONW\right)}_{it}+{ \beta }_2 {\left(LEV\right)}_{it}+{\beta }_3{\left(CR\right)}_{it}+{\beta }_4{\left(MCAP\right)}_{it}+{\beta }_5{\left(TA\right)}_{it}+{\beta }_6{\left(GDP\right)}_{it}\\ & +{\beta }_7{\left(INF\right)}_{it}+{\beta }_8{\left(RL\right)}_{it} {{+\beta }_9{\left(\mathit{COVID-19}\right)}_{it}+\epsilon }_{it}\end{array}$$

$$\begin{array}{ll}{\left(ENVEXP\right)}_{it}=& \alpha +{\beta }_1{\left(RONW\right)}_{it}+{ \beta }_2{\left(LEV\right)}_{it}+{\beta }_3{\left(CR\right)}_{it }+{\beta }_4{\left(MCAP\right)}_{it}+{\beta }_5{\left(TA\right)}_{it}+{\beta }_6{\left(GDP\right)}_{it}\\ & +{\beta }_7{\left(INF\right)}_{it}\\ & +{\beta }_8{\left(RL\right)}_{it} +{\beta }_9{\left(RONW\ast RL\right)}_{it}+{\beta }_{10}{\left(LEV\ast RL\right)}_{it}+{\beta }_{11}{\left(CR\ast RL\right)}_{it}\\ & +{\beta }_{12}{(MCAP\ast RL)}_{it}+{\beta }_{13}{(TA\ast RL)}_{it}+{\beta }_{14}{(GDP\ast RL)}_{it}+{\beta }_{15}{(INF\ast RL)}_{it}+{\epsilon }_{it}\end{array}$$

$$\begin{array}{ll}{\left(ENVEXP\right)}_{it}=& \alpha +{\beta }_1{\left(RONW\right)}_{it}+{ \beta }_2{\left(LEV\right)}_{it}+{\beta }_3{\left(CR\right)}_{it }+{\beta }_4{\left(MCAP\right)}_{it}+{\beta }_5{\left(TA\right)}_{it}+{\beta }_6{\left(GDP\right)}_{it}\\ & +{\beta }_7{\left(INF\right)}_{it}\\ & +{\beta }_8{\left(RL\right)}_{it} +{\beta }_9{\left(RONW\ast GDP\right)}_{it}+{\beta }_{10}{\left(LEV\ast GDP\right)}_{it}+{\beta }_{11}{\left(CR\ast GDP\right)}_{it}\\ & +{\beta }_{12}{(MCAP\ast GDP)}_{it}+{\beta }_{13}{(TA\ast GDP)}_{it}+{\beta }_{14}{(GDP\ast GDP)}_{it}+{\beta }_{15}{(INF\ast GDP)}_{it}+{\epsilon }_{it}\end{array}$$

4. Data Analysis and Discussion

4.1. Descriptive Statistics

The results in

Table 4. Descriptive statistics.

	Whole Sample				Sub-Sample (2015–2021)
	N	Mean	Median	Std. Deviation	N	Mean	Median	Std. Deviation
ENVEXP	770	35.185	9.000	57.198	490	41.292	12.050	61.959
RONW	770	8.877	10.785	19.138	490	8.756	10.535	18.326
LEVE	770	1.466	0.640	2.238	490	1.257	0.510	2.126
CR	770	1.535	1.250	1.001	490	1.607	1.315	1.042
MCAP	770	32,988.778	1376.205	75,784.707	490	37,074.524	2289.865	80,553.948
TA	770	22,231.608	3000.700	44,873.455	490	24,962.481	3366.250	47,690.034
GDP	770	5.397	6.533	4.210	490	4.826	6.795	5.101
INF	770	5.283	3.969	2.556	490	3.533	3.566	0.666
RL	770	53.823	53.365	1.148	490	54.258	54.327	1.163

show that the mean and median values of environmental expenditures are 35.18 and 9, respectively; for the sub-sample, it is 41.292 and 12.05, respectively. These results indicate that the environmental expenditures of Indian manufacturing firms increased after the introduction of the CSR law. This means that the CSR law in India has forced firms to be more environment-friendly. Regarding the profitability of firms, the results revealed that the mean and median values of return on net worth were 8.877 and 10.785, respectively, with 19.138 standard deviations. Similar results were found for the sub-sample, in which the mean and median values were 8.756 and 10.535 with 18.326 standard deviation. Concerning leverage of manufacturing firms, Table 4 demonstrates that the mean and median values for the whole sample are 1.466 and 0.64, which are quite similar to the mean and median of the sub-sample, which are 1.257 and 0.51, respectively. Regarding liquidity, Table 4 shows that the mean and median values are 1.535 and 1.25 with a 1.001 standard deviation; these results are quite similar to the results of the sub-sample, which are 1.607 and 1.315 with a 1.042 standard deviation, respectively. The table also shows that there are slight differences in the central tendencies of the whole sample and the sub-sample; it demonstrates that the MCAP mean and median values for the whole sample are 32,988.78 and 1376.205, while for the sub-sample, the values are 37,074.52 and 2289.865, respectively. For total assets of the firms, the results reveal that the mean and median values for the whole sample are 22,231.61 and 3000.7 with 44,873.46 standard deviations. On the other hand, the mean and median values of GDP are 5.397 and 6.533 for the whole sample and 4.826 and 6.795 for the sub-sample, respectively. Regarding inflation, Table 4 shows that the mean inflation is 3.969 and 3.566 for the whole sample and the sub-sample, respectively. Concerning country-level governance, the results in Table 4 demonstrate that India had a score of 53.365 for the period of 2011 to 2021 and 54.327 for the period of 2015 to 2021, which indicates an increase in the rule of law enforcement in India in recent years.

It is concluded that in terms of environmental expenditures measured by environment- and pollution control-related expenses, there is a significant difference in the central tendencies between the whole sample from 2011 to 2021 and the sub-sample from 2015 to 2021. It is evident that environmental expenditures in the sub-sample period are higher than in the whole sample period, which could be due to the enforcement of the CSR law. On the other hand, no significant difference in firms’ specifics was found in the whole sample or the sub-sample.

4.2. Correlation Analysis

Table 5. Correlation analysis.

Correlation Matrix—Whole Sample
	ENVEXP	RONW	LEV	CR	MCAP	TA	GDP	INF	RL
ENVEXP	1
RONW	0.185 **	1
LEV	−0.158 **	−0.609 **	1
CR	0.010	0.121 **	−0.315 **	1
MCAP	0.638 **	0.138 **	−0.162 **	0.125 **	1
TA	0.559 **	0.118 **	−0.137 **	0.085 *	0.852 **	1
GDP	−0.104 **	−0.002	0.103 **	−0.093 *	−0.038	−0.054	1
INF	−0.123 **	0.036	0.081 *	−0.074 *	−0.057	−0.071 *	0.054	1
RL	0.030	0.002	−0.007	0.005	0.035	0.018	0.062	−0.451 **	1
Variance Inflation Factor (VIF)		1.638	1.804	1.135	3.708	3.670	1.032	1.298	1.273
Correlation Matrix—Sub-Sample from 2015 to 2021
ENVEXP	1
RONW	0.219 **	1
LEV	−0.164 **	−0.604 **	1
CR	−0.010	0.171 **	−0.357 **	1
MCAP	0.700 **	0.157 **	−0.148 **	0.107 *	1
TA	0.565 **	0.125 **	−0.122 **	0.057	0.866 **	1
GDP	−0.092 *	−0.026	0.113 *	−0.092 *	−0.032	−0.047	1
INF	0.091 *	0.047	−0.139 **	0.103 *	0.040	0.047	−0.732 **	1
RL	−0.053	−0.035	0.095 *	−0.059	−0.004	−0.028	0.121 **	−0.371 **	1
Variance Inflation Factor (VIF)		1.599	1.792	1.166	4.089	4.035	2.288	2.614	1.236

* Correlation is significant at the 0.05 level (2-tailed). ** Correlation is significant at the 0.01 level (2-tailed).

’s findings show that market capitalization, firm size, and return on net worth have a positive and significant association with environmental expenditures; this association is significant at the 0.01 level. On the contrary and at the same level of significance, there is a negative association between leverage and environmental expenditures. Furthermore, liquidity has an insignificant impact on environmental expenditures. Concerning macroeconomic variables, Table 5 shows that GDP and inflation negatively and significantly correlate with environmental expenditures. Finally, country-level governance, measured by the rule of law, has an insignificant association with environmental expenditures.

The correlation matrix not only shows the association between the dependent and independent variables, it also gives a signal of the presence of multicollinearity. The results reveal that there is no high correlation among the independent variables. Further, the variance inflation factor (VIF) was run to examine the absence of multicollinearity. Table 5 shows that there is no multicollinearity between the independent variables as long as the VIF values are less than 5.

Table 5 shows that the results for both the whole sample and the sub-sample are similar in terms of the association and the level of significance, with a small variation in terms of correlation coefficients.

4.3. Regression Analysis

In order to estimate the outcomes, the study used a panel dataset of 70 manufacturing enterprises. Baltagi et al. (2005) believed that there are many advantages to using panel data analysis. One of these advantages is the robust estimations it produces in comparison to cross-sectional and time-series techniques. In the same vein, Kyereboah-Coleman (2007) argued that panel data have better control over individual multicollinearity and heterogeneity. Hence, the Hausman test was run to decide whether to use a random or fixed effect model. The Hausman tests’ results in

Table 6. Random effect model—whole sample, 2011–2021.

	(1)	(2)	(3)
Variable	Direct Effect	Moderating Effect—RL	Moderating Effect—GDP
RONW	−0.130 *	0.0503	0.0154
	(0.0720)	(3.100)	(3.091)
LEV	−1.005	−2.527	−2.991
	(0.780)	(26.06)	(25.91)
CR	−0.801	28.30	28.67
	(1.587)	(43.45)	(43.37)
MCAP	0.000221 ***	−0.000276	−0.000275
	(2.78 × 10−5)	(0.000585)	(0.000584)
TA	4.670 ***	5.418	5.207
	(1.285)	(31.68)	(31.64)
GDP	−1.343	−11.62	−4.033 ***
	(0.986)	(42.24)	(1.436)
INF	−1.344 ***	−90.94 **	−87.17 ***
	(0.415)	(39.41)	(33.31)
RL	0.510	−6.032	−4.891
	(0.966)	(7.472)	(3.924)
COVID-19	10.85 ***	−0.439	0.0148
	(3.582)	(6.072)	(5.515)
RONW*RL		−0.00321
		(0.0578)
LEV*RL		0.0316
		(0.485)
CR*RL		−0.552
		(0.808)
MCAP*RL		9.42 × 10−6
		(1.08 × 10−5)
TA*RL		−0.0163
		(0.589)
GDP*RL		0.139
		(0.774)
INF*RL		1.666 **
		(0.733)
RONW*GDP			−0.00255
			(0.0576)
LEV*GDP			0.0401
			(0.483)
CR*GDP			−0.558
			(0.806)
TA*GDP			−0.0133
			(0.588)
MCAP*GDP			9.41 × 10−6
			(1.08 × 10−5)
INF*GDP			1.595 ***
			(0.619)
Constant	−1.344	373.2	311.4
	(51.06)	(406.5)	(215.8)
R-square	0.457	0.462	0.462
Chi-square	230.979	248.028	248.259
p-value	0.000	0.000	0.000
Hausman (chi-square)	6.303	7.964	6.329
Breusch–Pagan LM (chi-square)	1456.94 ***	1451.35 ***	1449.78 ***
Observations	770	770	770
Number of companies	70	70	70

***, **, and * indicate significance at 1%, 5%, and 10%, respectively.

indicate that the random effect model is more suitable than the fixed effect model.

The results in Table 6 show that the return on net worth has a negative significant effect on environmental expenditures (p-value < 0.1). This result indicates that when profitability increases by 1 percent, environmental expenditures decrease by 0.130 units. This result contradicts the CSR law, which states that Indian firms have to spend 0.02 percent of their net profit on CSR activities, including environmental activities.

The results in Table 6 also reveal that market capitalization has a positive and significant impact on environmental expenditures, with a low coefficient (0.0002). This result suggests that companies with higher market capitalization typically have more financial resources. This allows them to allocate more funds towards environmental initiatives without significantly affecting their financial stability. Furthermore, companies with higher market capitalization may benefit from economies of scale in their environmental expenditures. They can spread the costs of environmental programs over a larger base of operations, making these initiatives more cost-effective compared to smaller firms.

Concerning the size of firms and their impact on environmental expenditures, the results in Table 6 reveal that a firm’s size positively and significantly impacts environmental expenditures at the 0.01 level, indicating that bigger firms spend more on environmental issues. The reason behind this result is that bigger firms are well established in the market and do not suffer from any liquidity or profitability issues compared to smaller firms that fight for survival in the market. Moreover, bigger firms are concerned about their reputation, and any damage to the environment caused by bigger firms would negatively affect their reputation.

Regarding macroeconomic variables, the results in Table 6 show that inflation negatively and significantly affects environmental expenditures at a 0.01 level of significance. These results indicate that as the prices of goods and services rise (inflation increases), companies tend to reduce their spending on environmental initiatives. This result could be explained by the fact that inflation leads to higher prices for raw materials, labor, and other operational costs. Companies facing these increased expenses might reallocate their budgets, prioritizing essential operational expenditures over environmental projects, which are often seen as non-essential in the short term. Furthermore, inflation pressures can shift corporate focus to short-term survival rather than long-term investments. Environmental expenditures often have long-term benefits, and companies might defer these investments until economic conditions stabilize.

Concerning country-level governance, the results in Table 6 reveal that country-level governance measured by the rule of law has a negative impact on environmental expenditures. The basic explanation for this result is that in countries with a strong rule of law, companies might already be incurring significant costs to comply with stringent environmental regulations. As a result, additional voluntary environmental expenditures might be seen as unnecessary since compliance with the law already involves considerable expense.

As regards the moderation effect, the results reveal the impact of country-level governance and economic development on the association between firm-specific, macroeconomic, and environmental expenditures. Table 6 demonstrates that the rule of law positively moderates the association between inflation and environmental expenditures; the interaction term is p-value < 0.05. This result suggests that in contexts with strong legal frameworks, the negative impact of inflation on environmental expenditures is mitigated. In the same vein, GDP positively and significantly moderates the association between inflation and environmental expenditures. These results mean that the negative impact of inflation on environmental expenditures is low in countries with a higher GDP. In other words, in wealthier economies, the adverse effects of inflation on environmental spending are mitigated. This result could be attributed to the fact that countries with higher GDP are generally more stable and resilient to economic fluctuations. This stability allows companies and governments to plan long-term investments, including in environmental projects, without being overly constrained by short-term inflationary pressures. Moreover, companies in high-GDP countries are more likely to engage in long-term strategic planning, which includes sustainability goals. Such planning can help ensure that environmental expenditures are maintained even during inflationary periods.

In order to measure the impact after the enforcement of the CSR law, which was enforced in 2014, a sub-sample was introduced to analyze the data from 2015 to 2021. The law states that businesses must adhere to CSR regulations in accordance with the Firms Act 2013, Section 1. First, companies have a net worth greater than INR 500 crores annually; second, businesses generate yearly revenues of at least INR 1000 crore; third, businesses have a net income of at least INR 5 crore every year. If a company meets any of these criteria for three years in a row, the CSR law is applied. Hence, the data from 2015 to 2021 were analyzed, and the results are presented in

Table 7. Random effect model—sub-sample 2015–2021.

	(1)	(2)	(3)
Variable	Direct Effect	Moderating Effect—RL	Moderating Effect—GDP
RONW	−0.213 **	4.524	0.0939
	(0.0858)	(3.136)	(0.306)
LEV	0.374	45.91 *	1.483
	(0.913)	(25.18)	(2.759)
CR	−0.980	3.408	−5.858
	(1.730)	(39.32)	(3.882)
MCAP	3.67 × 10−5	0.000825	0.000383 ***
	(5.50 × 10−5)	(0.000515)	(6.05 × 10−5)
TA	4.417 **	75.09 **	12.18 ***
	(1.728)	(30.32)	(3.133)
GDP	−4.756 **	346.3 ***	−3.241
	(2.002)	(96.97)	(5.441)
INF	0.597	−157.6	−7.578
	(2.110)	(104.7)	(11.88)
RL	−0.224	42.35 ***	−0.279
	(0.833)	(14.21)	(1.635)
COVID-19	−2.169	−28.72 ***	0.0324
	(6.197)	(9.164)	(12.59)
RONW*RL		−0.0875
		(0.0577)
LEV*RL		−0.840 *
		(0.464)
CR*RL		−0.0925
		(0.725)
MCAP*RL		−1.48 × 10−5
		(9.45 × 10−6)
TA*RL		−1.326 **
		(0.556)
GDP*RL		−6.799 ***
		(1.870)
INF*RL		2.392
		(1.907)
RONW*GDP			−0.0385
			(0.0448)
LEV*GDP			−0.227
			(0.385)
CR*GDP			0.558
			(0.577)
MCAP*GDP			−1.67 × 10−5 **
			(7.27 × 10−6)
TA*GDP			−0.993 **
			(0.428)
INF*GDP			0.825
			(1.976)
Constant	64.62	−2.008 ***	55.22
	(53.87)	(724.5)	(77.55)
Observations	490	490	490
R-squared	0.172	0.239	0.563
p-value	0.000	0.000	0.000
Hausman (chi-square)	48.33 ***	68.25 ***	3.15
Breusch–Pagan LM (chi-square)	797.37 ***	802.09 ***	783.54 ***
Number of companies	70	70	70

***, **, and * indicate significance at 1%, 5%, and 10%, respectively.

. The results in Table 7 demonstrate that the GMM estimations effectively forecast outcomes, indicating their resilience and precision due to the fulfillment of GMM assumptions. Notably, the lagged dependent variable exhibits significance (with a p-value below 0.05), while the Prob (J-statistic) and AR2 exceed 0.05 across all models.

Regarding the direct effect of firm-specific and macroeconomic variables on environmental expenditures in the sub-sample, the results in Table 7 show that return on net worth, leverage, current ratio, and total assets have the same impact, which means that the results are similar to those of the whole sample, with some variations in the coefficients. On the other hand, GDP, the rule of law, and COVID-19 have a negative impact on environmental expenditures. Further, in terms of moderation analysis, the results reveal that the rule of law negatively and significantly moderates the association between leverage, total assets, GDP, and environmental expenditures. These results suggest that in countries with a strong rule of law, the positive relationship between a company’s financial leverage (debt levels), total assets, and environmental expenditures is weakened. These results could be attributed to the fact that in countries with a robust legal framework, companies with higher leverage might be more constrained in their spending on environmental initiatives. This could be due to stricter regulatory oversight and more stringent enforcement of financial and environmental regulations. Companies might prioritize compliance with financial regulations over environmental regulations. Moreover, a strong rule of law often means higher compliance costs for both financial and environmental regulations. Companies with higher leverage and large assets might allocate more resources to ensure compliance, thereby reducing the funds available for voluntary environmental expenditures. Finally, the results reveal that GDP negatively and significantly moderates the association between market capitalization, total assets, and environmental expenditures. This indicates that in countries with a higher GDP, the positive relationship between a company’s market capitalization, total assets, and environmental expenditures is weakened.

4.4. Robust Analysis

To verify robustness and address any potential endogeneity in the random effect model, the study also utilized the generalized method of moments (GMM). According to Roodman (2006), GGM estimates tackle the problem of autocorrelation and heteroscedasticity. Furthermore, one way to overcome endogeneity problems is the use of the GMM estimation model. Gupta and Mahakud (2020) argued that the generalized method of moments is suitable for tackling endogeneity problems, if any. Therefore, the decision was made to employ the generalized method of moments (GMM). Both the system and difference GMM estimators are appropriate for cases including “small T, large N” panels, non-exogenous independent variables, fixed individual effects, heteroscedasticity, and autocorrelation (Roodman 2006).

The findings presented in

Table 8. GMM estimates.

	(1)	(2)	(3)
Variable	Direct Effect	Moderating Effect—RL	Moderating Effect—GDP
L. ENVEXP	0.794 ***	0.827 ***	0.776 ***
	(0.00511)	(0.00983)	(0.00680)
RONW	−0.0126	4.943 ***	2.230 ***
	(0.00794)	(1.023)	(0.367)
LEV	−0.620 **	21.09 ***	13.86 ***
	(0.247)	(5.899)	(3.413)
CR	−1.070 **	18.79 **	58.84 ***
	(0.458)	(7.799)	(13.70)
MCAP	0.000108 ***	−0.000140	−0.000288 ***
	(4.69 × 10−6)	(0.000107)	(8.74 × 10−5)
TA	2.612 ***	5.451	10.04 **
	(0.234)	(6.130)	(4.516)
GDP	−1.820 ***	−36.43 **	−2.746 ***
	(0.179)	(17.08)	(0.186)
INF	−0.837 ***	−38.94 **	−15.89 ***
	(0.0889)	(16.32)	(5.019)
RL	−0.236 *	−4.858	1.570 *
	(0.142)	(3.195)	(0.821)
COVID-19	−3.805 ***	−3.678 ***	−5.441 ***
	(0.572)	(1.197)	(0.539)
RONW*RL		−0.0911 ***
		(0.0191)
LEV*RL		−0.391 ***
		(0.110)
CR*RL		−0.376 **
		(0.144)
MCAP*RL		4.30 × 10−6 **
		(1.90 × 10−6)
TA*RL		−0.0532
		(0.115)
GDP*RL		0.652 **
		(0.326)
INF*RL		0.728 **
		(0.313)
RONW*GDP			−0.0425 ***
			(0.00699)
LEV*GDP			−0.264 ***
			(0.0634)
CR*GDP			−1.191 ***
			(0.261)
TA*GDP			−0.115
			(0.0862)
MCAP*GDP			7.37 × 10−6 ***
			(1.64 × 10−6)
INF*GDP			0.278 ***
			(0.0944)
Constant	26.06 ***	265.7	−61.54
	(7.498)	(166.4)	(44.06)
AR (1) p-value	0.14	0.133	0.125
AR (2) p-value	0.337	0.332	0.326
Hansen J-statistics	44.60	38.66	52.45
Hansen J-statistics (p-value)	0.446	0.44	0.342
No. of groups	70	70	70
No. of instruments	55	56	66

***, **, and * indicate significance at 1%, 5%, and 10%, respectively.

indicate that GMM predictions are robust and precise in forecasting outcomes, given that the prerequisites of GMM have been satisfied. Specifically, the lagged dependent variable holds significance (with a p-value less than 0.05). Furthermore, the Prob (J-statistic), AR1, and AR2 exceed 0.05 across all models. The results of GMM are quite similar to the results of the random effect model, with some variations. Therefore, when interpreting the results, GMM estimates were considered.

5. Conclusions

With the increasing significance of environmental concerns, both the government and the public are demanding that businesses take greater action to safeguard the environment. As a result, businesses are facing a growing push to allocate more funds to environmental initiatives. Despite feeling obligated to allocate more resources to environmental activities, businesses may be hesitant to expand their environmental expenditure due to the significant negative impact it has on their profitability.

This study aimed to examine the impact of firm-specific and macroeconomic variables on environmental expenditures. Furthermore, it examines the moderation effect of country-level governance and economic development on the association between firm-specific and environmental expenditures. The current study is based on 70 manufacturing firms for the period of 2011 to 2021. The results revealed that market capitalization and firm size have a positive and significant impact on environmental expenditures. On the other hand, inflation and the rule of law negatively and significantly affect environmental expenditures. Furthermore, the results revealed that the rule of law and GDP positively moderate the association between inflation and environmental expenditure.

This study may be utilized by environmental managers and sustainability specialists in a firm to establish a framework around the correlation between environmental spending and firm characteristics in helping the firm to take care of environmental concerns. Our study will also help business managers understand the fundamental connection between environmental investment, environmental expenditure, and company-specific factors, such as financial performance and help in leveraging the overall balance in environmental expenditure and firms’ profitability.

This research also holds theoretical and practical significance as many firms strive to diminish their water consumption, carbon footprints, packaging waste, and other environmental impacts. For instance, by reducing the amount of packing materials used, it is possible to achieve cost savings and enhance fuel economy. Indian industrial businesses, being the primary contributors to carbon footprints, should implement measures to minimize waste and lessen their environmental impact. In addition, sustainable enterprises should give priority to their shareholders, employees, and the local community in which they operate. Various approaches can be employed to acquire and retain such endorsements, but ultimately, they all revolve around treating employees equitably and demonstrating accountability in local and global communities. Therefore, firms should explore alternate manufacturing techniques, prioritizing the community’s safety. Businesses should recognize that sustainability offers the chance to unify varied operations under one comprehensive concept and get respect for doing so.

This research makes several notable contributions to the existing literature. Firstly, it aims to uncover environmental spending patterns following the implementation of the Companies Act (2013) by analyzing a comprehensive dataset spanning a decade. Secondly, according to Gatenholm and Halldórsson (2023) and Brodeur et al. (2021), the COVID-19 pandemic caused supply-side disruptions and a considerable impact on consumer spending. Thus, the loss of revenue has caused severe financial strain for several types of businesses, increasing the need for financial liquidity (Fassas et al. 2021). Therefore, the authors made an effort to investigate how the COVID-19 pandemic affected environmental expenditures. Thirdly, it bridges a gap in previous research, which has predominantly focused on sustainability disclosures and corporate environmental initiatives rather than using secondary data. Fourthly, this research examines the moderation effect of country-level governance and economic development on the association between firm-specific and environmental expenditures, which represents a unique contribution to the literature. Hence, this research seeks to fill this gap in the literature.

Our study exhibits some important additions compared to other publications in the literature. While several studies examine the correlation between environmental spending and company performance, the majority of them rely on subjective or qualitative methods, such as case studies. However, we made a deliberate effort to demonstrate our hypotheses in an unbiased and methodical manner by gathering and examining real data from manufacturing companies.

Despite the valuable contributions of this study, it is important to acknowledge certain limitations. Firstly, the measurement of environmental expenditure relied solely on one variable, suggesting that future research should explore the inclusion of additional variables. Secondly, there is potential for further investigation by comparing different sectors. Therefore, it is advisable for researchers to conduct comparisons between the manufacturing sector and other sectors.

The market conditions and competitive landscape can be very different for large firms compared to smaller ones. Large firms may have more resources and different competitive advantages, which can lead to different strategies for addressing environmental issues. Moreover, focusing on the biggest firms can lead to conclusions that do not apply to smaller or mid-sized firms. The business environment, strategies, and challenges faced by large firms can be significantly different from those faced by smaller firms. Furthermore, focusing on the biggest firms may overlook the lessons from firms that are struggling or have not achieved similar levels of success, which can provide important insights into market dynamics and business strategies. Thus, future research on smaller or mid-sized firms is recommended.