Exploring the role of sustainable finance in enhancing operational efficiency: evidence from firms listed on the London Stock Exchange

Abstract

Abstract Sustainable finance improves operational efficiency by directing capital toward environmentally responsible investments that reduce costs, optimize resource use, and enhance long-term productivity, while supporting firms’ transition toward greener, more efficient operations. This study applied the Resource-Based View (RBV) theory to examine how sustainable finance practices influence operational efficiency. It utilizes 17 years of data (2007–2023) from 143 non-financial companies, sourced from Thomson Reuters Eikon DataStream. To address endogeneity in the dataset, the study employs the Generalized Method of Moments (GMM) estimation model. Findings indicate that green bond issuance, environmental expenditures, emission reduction policies, and environmental investment initiatives have a significant impact on operational efficiency. Additionally, the interaction between green bond issuance and firm size significantly influences operational efficiency. These results suggest that corporations should prioritize green financing and environmentally sustainable strategies, while carefully assessing the cost-effectiveness of environmental expenditures. Aligning green initiatives with firm size can further enhance operational efficiency and support long-term environmental and performance objectives.