Business Strategies and Carbon Emissions: The Role of Direct and Indirect Carbon as Mediators

Abstract

The increasing insistence of climate change has made carbon emissions a decisive factor in business strategy, affecting financial performance and business competitiveness. This study explores the relationship between business strategies and carbon emissions, focusing on mediating the roles of direct and indirect carbon emissions. This study is based on Miles and Snow’s (1978) classification of business strategies, which is Defend and Prospect which affects carbon emissions. The study employs structural equation modeling (SEM) regression to examine the influence of firm size, profitability, and cash flow stability and leverage their relation with carbon emissions. Prospect takes a value of 1 if the business’s strategy score is between 24 and 30; otherwise, it is 0. Whereas the Defend variable equals 1 when the strategy score is between 6 and 19; otherwise, 0. As larger businesses release more carbon emissions hence, firm size is incorporated into the regression. The role of CO2 emissions work as a mediator in strategies of businesses, which remains an important and central area of research. By successfully reducing direct emissions; firms may frequently gain efficiency and cost advantages, whereas addressing indirect emissions improve sustainability across the value chain. The study uses the main dependent variable, the natural logarithm of total CO₂ equivalent emissions (Scope 1 and Scope 2), to determine the direct and indirect discharges. As major operations are the main characteristic of the prospector hence, the findings suggest that they release more carbon emissions, contrary to defenders. Low CO2 emissions are positively linked to profitability and stable cash flows as businesses with strong monetary positions engage in more sustainability initiatives. Though, leverage has a negative connection with carbon exposure, highly leveraged firms prioritize financial commitments over environmental concerns (Yasin et al., 2023). Besides this, firm size plays a crucial role, as huge firms generate more emissions due to high operational systems. Reducing carbon emissions could be essential for businesses aiming to adopt a more aggressive (prospect) From a policy and stakeholder perspective, these insights hold significant implications. Policymakers must establish regulatory frameworks that encourage carbon reduction initiatives while maintaining financial viability for firms.