The Relationship between Environmental Management and Financial Performance: Mediating Role of Environmental, Social and Governance and Competitive Advantage.

Abstract

This paper investigates the relationship between environmental management and organizational financial performance mediated by environmental, social, and governance (ESG) and competitive advantage in hotels in the Southern Province of Sri Lanka. Despite extensive research on these topics, there is considerable debate and conflicting arguments regarding the relationship between environmental management, ESG disclosure, competitive advantages, and financial performance. Six hypotheses were developed based on the constructed conceptual framework. The data were collected using a self-administered survey technique from 110 respondents of Star category hotels, Boutique hotels, Boutique villas, and Tourist hotels in the Southern Province, Sri Lanka, through purposive sampling. Structural equation modelling was performed to explore the relationship between environmental management and the financial performance of the hotels, mediated by ESG disclosure and competitive advantages. The results of LM tests indicate adding a path between environmental management (EM) and financial performance (FP), showing that ESG is fully mediated in the relationship between EM and FP. It would be good if future research selects hotels in different tourist destinations to see where the same relationship exists between environmental management and financial performance. The contribution made in this study has been stated explicitly and tests the relationship between environmental management and financial performance by mediating ESG disclosure and competitive advantage in one model. The selected variables are interconnected, and environmental management practices undoubtedly cause organizations to modify processes and procedures to consider environmental matters across all operations functions; thereby, environmental management activities enhance financial performance. Another research finding is a positive and direct relationship between ESG disclosure and financial performance. Future research can focus on studying environmental management and performance in different industries with different mediating variables that may explain the relationship more precisely.