Circular economy orientation, environmental innovation, and corporate carbon performance: evidence from European listed firms

Abstract

This study examines how environmental innovation and circular-economy orientation are associated with corporate carbon performance in a fiscal-year-2025 cross-section of 1,468 European listed firms from 33 countries, drawn from Refinitiv/LSEG environmental, financial, and emissions data. The objective is to test whether these two environmental capabilities carry differential associations with two distinct carbon-performance metrics—absolute emissions and carbon intensity—using heteroskedasticity-robust ordinary least squares models with country fixed effects, complemented by sector-fixed-effects, alternative-denominator, and subsample robustness checks. Three findings emerge. First, circular-economy orientation is positively associated with absolute emissions, and this association attenuates—but does not reverse—when emissions are expressed in intensity terms; sector-composition evidence shows that circular-economy leaders concentrate in structurally high-emitting sectors. Second, environmental innovation is negatively associated with carbon intensity in the baseline specification, but this association is sensitive to specification: it does not survive sector fixed effects, alternative intensity denominators (emissions over revenue or market capitalisation), or the exclusion of financial firms, and should therefore be read as suggestive rather than robust. Third, specific environmental indicators jointly outperform the aggregate environmental, social, and governance score in explaining carbon performance (incremental \documentclass[12pt]{minimal} \usepackage{amsmath} \usepackage{wasysym} \usepackage{amsfonts} \usepackage{amssymb} \usepackage{amsbsy} \usepackage{mathrsfs} \usepackage{upgreek} \setlength{\oddsidemargin}{-69pt} \begin{document}$$F=6.47$$\end{document}, \documentclass[12pt]{minimal} \usepackage{amsmath} \usepackage{wasysym} \usepackage{amsfonts} \usepackage{amssymb} \usepackage{amsbsy} \usepackage{mathrsfs} \usepackage{upgreek} \setlength{\oddsidemargin}{-69pt} \begin{document}$$p=0.002$$\end{document}), and the aggregate score loses significance once specific indicators are included. The results imply that measurement choice fundamentally alters the interpretation of corporate sustainability efficacy: managers should anchor circular-economy strategies in measurable process indicators and rigorous carbon accounting, and policymakers should reward verified intensity improvements rather than treating circular positioning as evidence of decarbonisation.