📈 economics

Circular Economy Orientation, Environmental Innovation, and Corporate Carbon Performance: Evidence from European Listed Firms

This study of 1,468 European listed firms reveals that while environmental innovation consistently reduces carbon intensity, the impact of circular economy orientation on carbon performance is contingent on whether emissions are measured in absolute or intensity terms, highlighting the critical importance of metric selection in evaluating corporate sustainability.

Original authors: Sonia Chalak, Leila Sharifmoghadasi

Published 2026-07-06

📖 5 min read🧠 Deep dive

CC BY 4.0

Original authors: Sonia Chalak, Leila Sharifmoghadasi

Original paper licensed under CC BY 4.0 (https://creativecommons.org/licenses/by/4.0/). ✨ This is an AI-generated explanation of the paper below. It is not written or endorsed by the authors. For technical accuracy, refer to the original paper. Read full disclaimer

Imagine you are looking at a massive fleet of European ships (the listed companies) and trying to figure out which ones are truly "green" and which ones are just pretending to be. The researchers in this paper, Sonia Chalak and Leila Sharifmoghadasi, decided to test two different "eco-claims" these ships make: Environmental Innovation (building better, cleaner engines) and Circular Economy Orientation (trying to reuse everything, like a giant recycling program).

Here is the simple breakdown of what they found, using some everyday analogies.

1. The Two Main Claims

The study looked at 1,468 companies to see if these two strategies actually lowered their carbon footprint. They measured this in two ways:

Total Emissions (The "Total Smoke"): How much pollution the whole company puts out in total.
Carbon Intensity (The "Efficiency"): How much pollution the company produces for every dollar of business it does.

2. The "Better Engine" Effect (Environmental Innovation)

The Finding: Companies that invest in Environmental Innovation consistently produce less pollution per unit of work.
The Analogy: Think of this like a car company switching from a gas-guzzling V8 engine to a high-tech hybrid engine. No matter how big the car is, the new engine burns less fuel to go the same distance.
What the paper says: The data shows that "Environmental Innovation" is the most reliable way to lower a company's carbon intensity. It's like a magic wand that makes the company's operations cleaner and more efficient.

3. The "Big House" Paradox (Circular Economy)

The Finding: This is where it gets tricky. When the researchers looked at Total Emissions, companies with a strong "Circular Economy" orientation actually had more pollution. But when they looked at Efficiency (Intensity), the relationship flipped or became neutral.
The Analogy: Imagine a family that is obsessed with recycling, composting, and reusing everything (Circular Economy). They are very "green" in their habits. However, they also live in a massive mansion with 20 rooms, a heated pool, and three cars.

Total Smoke: Because the house is so huge, they still generate a lot of total trash and use a lot of energy, even if they recycle it all.
Efficiency: If you measure how much waste they generate per person, they might actually be doing better than a small family that throws everything away.
What the paper says: Companies that focus on the Circular Economy are often huge, heavy industries (like factories or utilities). They are "green" in their strategy, but because they are so big, their total pollution numbers are high. The paper warns us not to confuse "being a big company with a green strategy" with "being a small company that is clean."

4. The Scorecard Trap (ESG vs. Real Data)

The Finding: The study found that looking at a company's overall "ESG Score" (a general report card for Environment, Social, and Governance) isn't as helpful as looking at specific details.
The Analogy: Imagine a student who gets an "A" on their report card because they are good at sports and art, but they actually failed math. If you only look at the overall "A," you think they are great at everything. But if you look at the specific "Math" grade, you see the real picture.
What the paper says: The researchers found that specific scores for "Environmental Innovation" and "Resource Use" tell a much truer story about carbon performance than the big, combined ESG score.

5. The Big Lesson

The main takeaway is that how you measure success changes the story.

If you just look at the total amount of pollution, big companies with circular strategies look like the worst polluters (because they are big).
If you look at efficiency (pollution per dollar), companies that actually innovate their processes (new tech, cleaner methods) are the true winners.

The Warning: Just because a company says, "We are circular!" (we reuse everything!) doesn't mean they have reduced their total pollution yet. They might just be a giant company trying to be a giant, green company. To actually lower the planet's temperature, companies need to pair their circular ideas with real, measurable process innovations (like the "better engines").

Summary for the Everyday Reader

Innovation = Efficiency: Making better, cleaner processes works to lower pollution per unit.
Circularity = Size: Being "circular" often means you are a big company. Big companies make a lot of total pollution, even if they are trying to be green.
Don't be fooled by the Report Card: A high general "Green Score" doesn't guarantee low pollution. You have to look at the specific numbers for innovation and efficiency.

The authors conclude that managers and policymakers need to stop just celebrating the idea of being circular and start demanding proof of efficiency and innovation to see real climate results.

Technical Summary: Circular Economy Orientation, Environmental Innovation, and Corporate Carbon Performance

Problem Statement
Despite the European Union's policy momentum framing the circular economy (CE) as a cornerstone of climate-neutral industrial transformation, empirical evidence at the firm level remains limited. Existing literature is often conceptual, industry-specific, or reliant on case studies, failing to control for confounding factors such as firm size and environmental management quality. A critical gap exists in understanding whether a firm's circular economy orientation genuinely translates to lower carbon burdens. Furthermore, current discourse often conflates circularity with decarbonization, ignoring the tension where firms may expand circular activities (e.g., recycling, remanufacturing) while maintaining or increasing their absolute operational carbon footprint due to scale effects. Additionally, the literature frequently treats absolute emissions and emissions intensity as interchangeable metrics, potentially obscuring the true efficacy of sustainability strategies.

Methodology
This study employs a cross-sectional analysis of 1,468 listed firms across 33 European countries, utilizing firm-level environmental, financial, and emissions data from Refinitiv/LSEG.

Data Construction: The authors constructed a "Circular Economy Orientation Index" (CE Index) as the arithmetic mean of three Refinitiv/LSEG indicators: the Environmental Pillar Score, the Resource Use Score, and the Environmental Innovation Score. This index serves as a proxy for a firm's aspirational transition orientation.
Dependent Variables: The study analyzes two distinct carbon performance metrics:
1. Absolute Emissions: Natural logarithm of total CO2-equivalent emissions ( $ln\ CO2_{total}$ ).
2. Carbon Intensity: Natural logarithm of total CO2-equivalent emissions divided by total assets ( $ln\ CO2_{per\ assets}$ ).
Model Specification: The authors estimate heteroskedasticity-robust Ordinary Least Squares (OLS) models using HC3 standard errors. The baseline equation includes controls for firm size (log assets), profitability (ROA), and fixed effects for country and sector to absorb institutional and industry heterogeneity.
Diagnostic Checks: The study addresses multicollinearity (Variance Inflation Factors remain within acceptable thresholds) and heteroskedasticity (confirmed via Breusch–Pagan test), justifying the use of robust standard errors.

Key Contributions

Differentiation of Metrics: The study rigorously separates absolute emissions from emissions intensity, demonstrating that the choice of metric fundamentally alters the interpretation of corporate sustainability efficacy.
Decoupling Orientation from Performance: It empirically distinguishes between a firm's "aspirational transition orientation" (circularity signaling) and its "empirically realized environmental performance."
Granular Indicator Analysis: By integrating specific environmental innovation scores alongside aggregate Environmental, Social, and Governance (ESG) scores, the study identifies specific environmental capabilities as superior predictors of carbon performance compared to broad ESG aggregates.

Results

Environmental Innovation: The study finds that environmental innovation is the most reliable negative correlate of carbon intensity. Firms with stronger innovation profiles exhibit lower emissions per unit of output, supporting the hypothesis that process redesign and cleaner technologies drive decarbonization.
Circular Economy Orientation (Absolute vs. Intensity):
- Absolute Emissions: In the pooled sample, circular economy orientation is positively associated with absolute emissions. This reflects scale and sector-composition effects, where firms with strong circular positioning are often large, asset-intensive organizations with structurally high emission baselines.
- Carbon Intensity: When emissions are expressed in intensity terms, the relationship between circular economy orientation and carbon performance reverses or becomes less positive, suggesting that circularity may reflect long-term transition positioning rather than immediate absolute reduction in a cross-sectional setting.
ESG Scores: Aggregate ESG scores show a positive association with emissions in some specifications, likely driven by size effects, whereas granular environmental indicators offer greater explanatory power when richer controls are introduced.

Significance and Claims
The paper claims that its primary significance lies in clarifying how sustainability-oriented capabilities translate into measurable environmental outcomes under different performance metrics. It argues that circular economy strategies should not be conflated with automatic decarbonization.

Theoretical Implication: The research highlights that circularity does not inherently move in tandem with decarbonization; a firm can be circular yet have a high carbon footprint if it is simultaneously growing.
Managerial Implication: Managers are encouraged to align circular economy strategies with measurable process innovation and rigorous carbon accounting systems, rather than treating circularity as a reputational layer detached from operational climate performance.
Policy Implication: Policymakers should complement waste-policy ambitions with reporting architectures that incentivize intensity reduction rather than scale alone, and support environmental innovation capacity to ensure circularity is operational rather than rhetorical.

Limitations
The authors modestly acknowledge that the cross-sectional design prevents causal inference and the estimation of dynamic adjustments or firm fixed effects. Endogeneity remains a concern, as better-managed firms may invest more in innovation and disclose more information. Additionally, the circular economy index is a composite proxy based on available data and partially overlaps with the Environmental Innovation Score, meaning the regression coefficients represent conditional associations among related indicators rather than effects of fully independent constructs. Future research is suggested to extend to panel data and distinguish systematically across Scope 1–3 emissions.