Abstract
In this study, we re‐examine the nexus of environmental performance and financial performance by benchmarking firms relative to their industry peers based on environmental performance in a given year to identify best‐in‐class and worst‐in‐class firms. After correcting for distributional issues while using environmental performance scores (i.e., clustering scores around the median and material differences within industries and time) and financial performance ratios (i.e., the potential impact of extreme values), we find that best‐in‐class firms exhibit higher financial performance than their industry peers (i.e., worst‐in‐class and average firms). Our findings are robust to alternative measures of environmental performance (i.e., subdimensions of environmental performance) and financial performance. Finally, our results are robust to different identification strategies. Our findings present important and timely policy implications for firms, ESG fund managers and investors.