Does Going Green Pay Off? Environmental Investment and Financial Performance in European Firms

This paper investigates the relationship between green investment and firm financial performance using a firm-level panel dataset of European publicly listed companies from 2000 to 2025. We examine both linear and nonlinear effects of environmental capital expenditures on profitability, employing fixed effects and system GMM estimators to address endogeneity concerns. Our findings reveal an inverted U-shaped relationship, indicating that moderate green investment enhances profitability through efficiency gains and reputational benefits, while excessive investment may reduce returns due to higher costs. The optimal green investment threshold is approximately 0.9% of total assets, with larger firms able to absorb higher investment levels. Extended analyses incorporating ESG scores, CO₂ emissions, and renewable energy adoption demonstrate that sustainability performance amplifies the positive impact of green investments. The study provides empirical evidence supporting the business case for “going green” and highlights policy and managerial implications for strategic capital allocation in sustainability initiatives. JEL Classification : G30, M14, Q56.