Paper: arXiv 2509.08450

Authors: Probowo Erawan Sastroredjo, Marcel Ausloos, Polina Khrennikova

Abstract

Through its initiative known as the Climate Change Act (2008), the Government of the United Kingdom encourages corporations to enhance their environmental performance with the significant aim of reducing targeted greenhouse gas emissions by the year 2050. Previous research has predominantly assessed this encouragement favourably, suggesting that improved environmental performance bolsters governmental efforts to protect the environment and fosters commendable corporate governance practices among companies. Studies indicate that organisations exhibiting strong corporate social responsibility (CSR), environmental, social, and governance (ESG) criteria, or high levels of environmental performance often engage in lower occurrences of tax avoidance. However, our findings suggest that an increase in environmental performance may paradoxically lead to a rise in tax avoidance activities. Using a sample of 567 firms listed on the FTSE All Share from 2014 to 2022, our study finds that firms associated with higher environmental performance are more likely to avoid taxation. The study further documents that the effect is more pronounced for firms facing financial constraints. Entropy balancing, propensity score matching analysis, the instrumental variable method, and the Heckman test are employed in our study to address potential endogeneity concerns. Collectively, the findings of our study suggest that better environmental performance helps explain the variation in firms tax avoidance practices.

Complexity vs Empirical Score

  • Math Complexity: 2.5/10
  • Empirical Rigor: 8.0/10
  • Quadrant: Street Traders — practical and empirical, lighter on theory

Why this score: The paper relies primarily on applied empirical econometrics (entropy balancing, propensity score matching, Heckman selection, IV) rather than mathematical proofs, fitting the ‘Street Traders’ classification well. It offers a strong empirical setup and novel, counter-intuitive insights into how high corporate environmental performance paradoxically drives tax avoidance practices, particularly under financial constraints.

Research Flowchart

  flowchart TD
    A[Research Goal: Examine Impact of Environmental Performance on Tax Avoidance] --> B[Data Input: 567 FTSE All-Share Listed Firms 2014-2022]
    B --> C[Methodology: Panel Data Regression Analysis]
    C --> D[Robustness & Endogeneity Checks: Entropy Balancing, PSM, IV Method, Heckman Test]
    D --> E[Key Finding 1: Higher Environmental Performance Increases Tax Avoidance]
    D --> F[Key Finding 2: Tax Avoidance Effect is More Pronounced in Financially Constrained Firms]