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Article

Green Transformation in Portfolio: The Role of Sustainable Practices in Investment Decisions

by
Xinyue Li
1,* and
Ikram Ullah Khan
2
1
Business School, Hong Kong Baptist University, 224 Waterloo Road, Kowloon Tong, Hong Kong
2
Institute of Management Sciences, University of Science and Technology Bannu, Bannu 28100, Pakistan
*
Author to whom correspondence should be addressed.
Sustainability 2025, 17(3), 1055; https://doi.org/10.3390/su17031055
Submission received: 29 November 2024 / Revised: 15 January 2025 / Accepted: 22 January 2025 / Published: 27 January 2025
(This article belongs to the Special Issue Sustainability and Financial Performance Relationship)

Abstract

:
Amidst the green transformations around sustainable drives, organizations are striving to integrate green business strategies (GBSs) to enhance their financial viability. This research argues that green strategies promote organizational efficiency that, in turn, improves financial performance and channel investments. Checking the mediating role of organizational efficiency through process improvement, product improvement, and organizational innovation focuses on financial performance and investment decisions. The study further postulates the moderation of management control system on the links between GBS and organizational efficiency parameters. The data were gathered by using surveys of 552 firms’ managers and investors at the Shenzhen Stock Exchange, China. PLS-SEM was applied to check the psychometric properties and analyze the data. The results confirm that GBS improves organizational efficiency and financial performance, exerting significant mediation effects. The study finds that moderation helps transform the green business strategy into tangible financial goals by amplifying the positive impact of GBSs. The study enriches the understanding of GBSs, organizational efficiency and investment decisions. The study also lauds the integration of GBSs that effectively transform financial performance and investment decisions.

1. Introduction

Global sustainability initiatives are prompting industries to go beyond visible design, rethink their products and processes, and focus on improving the environment. In today’s world, companies are making substantial investments in crafting green strategies that attract customers by stimulating their product demands. Companies struggle to increase their market share but disregard the green transformation and execution of the relevant strategies [1]. Previous studies highlighted financial well-being and focused on improving viability, but there was a lack of focus on sustainable practices. Corporations frequently seek financing for different projects, typically through either taking out loans and/or issuing shares [2]. However, firms generally avoid the former because of its related costs [3]. Thus, it is crucial to emphasize the green business strategies (GBSs) that might boost investors’ confidence in buying shares. By devising GBSs leading to organizational effectiveness, firms can better obtain funds for their operations while maximizing their values. Making decisions regarding stock and bond purchases is a crucial and risky financial task; therefore, the lack of investment in securities markets is an enduring puzzle [4]. The two pillars of investment decision-making are the classic battlegrounds where fortunes are earned, aspirations come true, and futures are secured. These financial products are irresistible due to their wealth accumulation and financial security potential. However, because of their complexity and susceptibility to market turbulence, investment decisions require a delicate balance of knowledge, steadfast focus, and unwavering dedication. The literature shows a range of factors investors assess for potential risks and returns when investing in a particular company. These factors include excellent corporate governance [5], competitive position [6], risk-taking behavior [7], earnings per share (EPS) and dividend payout ratio [8], and historical stock performance [9].
In addition to the factors that investors assess before investing in any security, the literature highlights several determinants that can influence their investment selection. For instance, Metawa, Hassan [10] revealed that psychological factors like sentiment, overconfidence, overreaction, under-reaction, and herding behavior play critical roles in shaping investors’ investment decisions. Hervé, Manthé [11] discovered social interaction as a significant determinant of investment decisions in stocks or bonds. Oehler, Wendt [12] reported that investors’ degree of extraversion and neuroticism are significant predictors of investment decisions. Religious aspects, that is, security issued based on particular religious principles, such as Sukuk and experts’ opinions and motivations, affect investors’ intentions [13,14]. Considering investors’ point of view regarding the escalating environmental issues in the current era, Sultana, Zulkifli [15] argued that environmental, social, and governance issues are significant identifiers of investment decisions.
Although early research has identified numerous factors which significantly predict investment decisions, there has been little focus on green practices which have the potential to mold individual decisions, particularly those of investors. Nevertheless, we argue that adopting green practices not only appeals to investors who are concerned about the environment but also can attract conventional investments, i.e., investors who are primarily motivated by profit-seeking. Kularatne, Wilson [16] assert that green strategies boost operational efficiency within an organization, which, according to Walker (2018), positively influences a firm’s profitability. Highly profitable firms exhibit stable earnings per share and dividend payout ratios—factors that investors assess before embarking on a journey with a particular company [8]. This finding suggests a complex and interesting process wherein green business strategies initially boost efficiency, leading to subsequent financial prosperity. This affluence, in turn, holds the competence to entice more investment in the company. Although this connection is important, prevailing research suggests a lack of thorough examination of such intricate interaction. Hence, this study seeks to fill this gap by investigating the mediating effects of organizational efficiency, including process improvement, product improvement, and organizational innovation between green business strategies (GBSs) and firm financial performance and firms’ financial performance connection with investors’ investment decisions.
Previous studies substantiated that organizational control plays a crucial role in achieving outcomes that are aligned with the fundamental aims of corporations [17]. When top management devises and implements a strategy, its successful execution depends on a strong control system to assure compliance with specified standards [18]. Given the benefits of starting green initiatives, such as enhancing organizational efficiency [19], it is clear that such benefits can be achieved by devising, executing and controlling the systems. Within this particular context, it is expected that the influence of GBSs will be more noticeable and enduring when combined with a well-functioning organizational control structure. Therefore, incorporating a management control system as a moderator in the correlation between green initiatives and organizational outcomes is investigated to assess its effectiveness and attain long-term success. Hence, the second objective of this study is to test the interaction effects of management control systems in the relationships between GBSs and organizational efficiency parameters.
The underlying framework for the study is the signaling theory, which is a crucial concept in business that elucidates how organizations strategically convey information about their operations, products, or brands to consumers [20]. The concept relies on the notion that in the context of unequal information asymmetry, where users lack complete knowledge about a product’s quality or characteristics, companies employ signals to establish credibility and distinguish themselves from rivals [21]. These signals might manifest in different ways, including brand reputation, product characteristics, pricing methods, a well-structured management control system, or dedication to environmental sustainability. Companies invest in these signals to showcase their dedication to excellence in quality, operation, and control systems, as well as to promote environmental responsibility. This helps to establish trust and shape perceptions among stakeholders [22].
Amid the revolutionary trends in environmentally friendly business practices, this research attempts to spotlight the connection between green business strategies and organizational efficiency that ultimately enhances financial performance and wise investment decisions. The study uniquely explains how green business strategies boost organizational efficiency, moderated by the management control system, focusing on specific dimensions like process improvement and innovation, which are often overlooked in similar research. Creating a holistic framework, the study extends the previous analysis and explores its ripple effects on companies’ financial performance, leading to effective investment decisions. The study integrates sustainable strategies with operational efficiency and effective investment decisions, thereby bridging the gap between the literature on environmental management and corporate finance. Moreover, the study innovatively applies the signaling theory to explain how green business strategies function as encouraging signals to stakeholders, demonstrating managerial efficiency, financial stability, and a commitment to sustainability. The study provides rich guidance for organizations, informing the development of green strategies that will help them improve their efficiency, financial management and market appeal to investors. Policymakers may apply the insights to stimulate sustainable practices by underlining their financial and strategic benefits.

2. Theoretical Background and Hypotheses Formation

2.1. Signaling Theory

Signaling theory clarifies how firms send signals to stakeholders to convey information about the firms’ strengths, quality, capabilities, achievements, and intentions, particularly in asymmetrical settings. The application of signaling theory is very useful in elucidating interactions between two entities, regardless of whether they are individuals or organizations with differing degrees of information. Within this particular framework, a singular entity, commonly referred to as the sender, is confronted with the deliberation of whether to transmit and how to communicate or indicate information. By contrast, the recipient, commonly known as the receiver, is tasked with making decisions about interpreting the transmitted signal. Consequently, signaling theory plays a prominent role in various management areas, including strategic management, entrepreneurship, and marketing. The application of the signaling theory has recently experienced a notable increase. Connelly, Certo [23] endeavored to provide a concise summary of this theory, encompassing its fundamental concepts.
Connelly, Certo [23] outlined four fundamental concepts within the framework of signaling theory: signaler, receiver, signal, and feedback. Signalmen have classified information that is not readily available to the public. They include company’s internal management, existing shareholders, entrepreneurs, or insiders that set and send the signals to new investors through various channels like financial statements disclosures, dividends announcements, or insider trading, and reducing information asymmetry [24]. Signals are how information is transmitted from the signaler to the receiver, disclosing aspects that would otherwise remain hidden from the receiver, such as information regarding the quality of the venture. Consequently, feedback functions as the basis upon which signalers can modify or enhance their signals and retransmit them to potential investors. Therefore, signaling can be viewed as a dynamic process in which signals are transmitted, received, interpreted, and rejected or acted upon [25]. Within this theoretical framework, the primary emphasis is on addressing the asymmetry of knowledge between entrepreneurs and investors. This is achieved by utilizing informational signals to minimize this imbalance. Consequently, investors seek reliable indicators of company performance and quality when making investment decisions to reduce uncertainty.
Moreover, socially responsible initiatives undertaken by a company can attract investors to start their financial journey as new investors [15]. In recent years, there has been a noticeable surge in the attention devoted to socially responsible investment (SRI), both among individual and private investors, and within the academic sphere. SRI encompasses a set of concepts that prioritize ethical considerations, environmental preservation, societal well-being enhancement, and good governance practices [26]. According to Renneboog, Ter Horst [27], SRI stands out from more conventional investing methods because it uses a different set of criteria—ones that consider environmental, social, corporate governance, and ethical concerns—to choose and reject investments. The impact of socially responsible investment on investment decisions and performance has been further validated by [28,29,30]. This evidence suggests that companies that adopt green business strategies have the potential to attract socially responsible investors by effectively communicating their dedication to environmental protection measures as part of their overall business strategies. This implies that providing transparent and effective communication regarding environmentally conscious practices might be a compelling force in recruiting investors who prioritize social responsibility and sustainability when making investment choices.
Investors make different basis for their investments; some investors pay attention to financial metrics like profitability, dividend payouts, or expansion strategies, while others highlight companies’ social responsibility initiatives. By implementing environmentally friendly methods and effective control systems within the firms, organizations provide reassurance to investors that they are not just addressing ecological issues but also positioning themselves for improved financial performance. Companies demonstrate their dedication to sustainability, which indicates to investors that they are taking proactive measures to address environmental concerns and take advantage of possibilities in the expanding green economy. Furthermore, these environmentally friendly activities can indicate effective utilization of resources, creativity, and exceptional operational performance, all of which contribute to improved financial results [19]. By incorporating environmentally friendly practices along with a strong management control system into their operations and marketing of these strategies, organizations can successfully convey their capacity to achieve both financial profitability and environmental sustainability. This appeals to investors who prioritize both economic gain and ecological preservation.

2.2. Hypotheses

2.2.1. Green Business Strategies and Organizational Efficiency

Green business strategy can be defined as a prominent inclination towards integrating environmental concerns into strategic business plans across the divisions inside organizations [31]. Numerous studies have demonstrated that adopting environmentally friendly practices can yield various advantages and opportunities for businesses, such as enhancing a firm’s reputation [32], improving performance and profitability [33], lowering the cost of equity capital [34], enhancing competitive position [35], yielding environmental performance [36], and boosting green innovation [37]. Darnall, Jolley [38] indicates that implementing green business strategies enhances organizational efficiency by reducing the operational costs of a corporation. The incremental effects of green business plans on organizational efficiency in terms of organizational processes, production, and organizational innovation are further validated by [39]. In addition to the aforementioned perceived benefits, green business strategies positively affect skilled employee recruitment and attract talent [40]. According to Zeriti, Robson [41], there is a growing need for businesses to prioritize environmental preservation in both local and international markets, not only due to escalating demands and regulatory pressure from diverse stakeholders, but the aforementioned benefits, i.e., achieving efficiency, compelled businesses to implement green business strategies. Consequently, we argue that green business strategies have incremental effects on organizational efficiency, which Roy and Khastagir [19] divided into three categories, including process improvement, production improvement, organizational innovation, and formulate the following hypotheses:
H1. 
Green business strategies positively influence firms’ process improvement.
H2. 
Green business strategies positively influence firms’ product improvement.
H3. 
Green business strategies positively influence organizational innovation.

2.2.2. Organizational Efficiency and Financial Performance

Organizational efficiency denotes the capacity of an organization to attain its goals and objectives with the least amount of resources in terms of time, costs, and effort [42]. It involves optimizing an organization’s processes, systems, and operations to maximize output and reduce costs. Organizational efficiency is characterized in several ways within the existing literature, encompassing productivity, quality, cohesiveness, flexibility and adaptability, information management and communication, growth, planning and goal setting, human resource development, as well as stability and control [43]. Organizational efficiency offers numerous advantages to businesses, contributing to improved performance. These benefits include reduced costs [44]; the ability to achieve higher levels of productivity by utilizing the same or fewer resources, e.g., employees [45], which positively contributes to a business’s competitive advantage [46]; reduced employee stress and improve mental health [47], and so on. The positive incremental effects of organizational efficiency on the factors described above ultimately result in superior financial success across industries. According to Kleindorfer, Singhal [48], optimization of internal processes, effective resource allocation, and waste reduction lead to enhanced profitability and long-term success. Organizational efficiency enables firms to accomplish more with fewer resources, effectively respond to dynamic environments, manage costs, meet consumers’ expectations, and allocate resources toward expansion. Consequently, organizations that demonstrate efficiency exhibit strong financial stability and possess a heightened capacity to flourish within the contemporary, dynamic, and competitive corporate environment. Thus, we present the following hypotheses:
H4. 
Process improvement positively influences firms’ financial performance.
H5. 
Product improvement positively influences firms’ financial performance.
H6. 
Organizational innovation positively influences firms’ financial performance.

2.2.3. Mediating Effects of Organizational Efficiency

Green business strategies involve initiatives that focus on improving energy and resource efficiency while minimizing negative environmental impacts. These strategies provide many benefits, including reducing operating costs, enhancing productivity, cultivating business reputation, and attracting environmentally sensitive consumers [16]. Green and lean practices have positive effects on operational performance in U.S manufacturing companies, as reported by [49]. Similarly, Khan, Idrees [50] asserts that green management practices lead to technological innovations within organizations, enhancing their operational performance. Environmental strategies’ significant influence on green innovations at firm levels is confirmed by [51]. Consistent with this evidence, we argue that green business strategies enhance organizational efficiency, manifesting in various forms such as operational efficiency, production efficiency, or organizational innovativeness. In his doctoral dissertation, Walker [52] presented numerous pieces of evidence contending that firms with higher efficiency levels achieve maximum profits. Enhanced organizational efficiency helps lower different operational costs, enhance productivity, and increase customer satisfaction, which in turn improves financial performance metrics. This suggests that organizational efficiency has a mediating effect on the relationship between green business strategies and firm financial performance. Green strategies initially boost efficiency in this process, leading to subsequent financial prosperity. The mediation happens because the green strategies improve the financial outcomes which amplify operational efficiency. This led us to propose the following hypotheses:
H7a. 
Process improvement positively mediates between green business strategies and firm financial performance.
H7b. 
Product improvement positively mediates between green business strategies and firms’ financial performance.
H7c. 
Organizational innovation positively mediates between green business strategies and firms’ financial performance.

2.2.4. Financial Performance and Investors’ Investment Decision

The literature reveals various factors that affect investors’ investment decisions. Chang and Wei [5]) examined the impact of corporate governance on investment decisions in Taiwan and discovered that excellent governance is a vital predictor of intelligent investment decisions. Palepu, Healy [6] considered the industry and competitive situation of a company, indicating that investors should consider themselves as actors in the industry that have a pivotal role in company’s position. This view provides a clearer picture and helps investors choose their investments more wisely. Similarly, the risk-taking behavior of a company and debt levels also significantly predict investors’ investment decisions with regard to a particular company [7,53]. Metawa, Hassan [10] revealed that psychological factors like sentiment, overconfidence, overreaction, under-reaction, and herding behavior also play critical roles in shaping investors’ investment decisions. Bustani, Kurniaty [8] stated that savvy investors focus closely on a company’s EPS and dividend payout ratio, as these financial measurements serve as valuable tools that aid investors in maximizing their returns. Investors’ decisions are guided by better financial performance, as it is symbolizes profitability, stability, and market value. Financial metrics improve stocks’ credibility, indicate the firm’s ability to generate good returns, reduce investment risks, and demonstrate sustainable operations. Additionally, they influence valuation, dividend payouts, and future growth prospects, providing investors with reliable data to make informed and confident investment choices. Trust in companies’ management leads to stock trading behavior [54]. In the complex world of investing decisions, the company’s financial health is considered a torchlight for investors [55]. This celestial element is the primary muse, motivating investors to begin their financial journeys with wisdom and confidence. Hence, the following hypothesis is posed.
H8. 
Prudent financial performance has a positive influence on investors’ investment decisions.

2.2.5. Moderation Effects of Management Control

Management control involves setting performance standards inside an organization to ensure that employee actions are aligned with the organization’s goals. It also involves monitoring and acknowledging the extent to which these standards are met [56]. Control techniques might consist of a combination of formal and informal measurements. Formal controls are based on codified regulations that are usually imposed by management, whereas informal controls are based on social norms and are generally enforced by peers [57]. In addition, control measures focus on several aspects. Outcome controls prioritize the achievement of goals and results, while process controls emphasize compliance with procedures [58]. In general, control methods have the objective of providing employees with relevant performance standards, correcting deviant behavior, and encouraging effective performance [59]. Control is initiated when managers carefully examine performance with predefined targets to identify significant deviations and exceptions from designed strategies [56]. The evaluation of progress on strategic initiatives is conducted by measuring performance against a set of metrics. These metrics include a combination of short and long-term indicators, financial and non-financial objectives, and comparative data on competitors [60]. Managers can use feedback on performance to adjust their activities when the outcomes do not meet expectations. Diagnostic procedures make the specific tasks that employees need to perform to achieve the strategic goals of the firm clear and observable [61]. Diagnostic techniques are essential for effectively accomplishing objectives, since green initiatives without measurable results are likely to be overlooked in favor of traditional business [62]. Based on this evidence, we argue that a firm with green initiatives will be able to achieve a better financial performance through organizational efficiency if there is a well-functioning control system, and we propose the following moderation hypotheses:
H9a. 
Management control system positively moderates between green business strategies and process improvement. Specifically, the relationship will be stronger when organizational control is higher.
H9b. 
Management control system positively moderates between green business strategies and product improvement. Specifically, the relationship will be stronger when organizational control is higher.
H9c. 
Management control system positively moderates between green business strategies and organizational innovation. Specifically, the relationship will be stronger when organizational control is higher.

2.2.6. Green Business Strategies and Investment Decisions

Green business strategies focus on sustainable practices like working for renewable energy, reducing carbon emissions and developing eco-friendly products, while investment decisions considers profitability by prioritizing environmental goals with ROI, risk reduction, and increasing market demand. Sustainable practices of firms and investment decisions end at long-term value creation. Firms’ sustainable practices, like using reducing waste, producing environment-friendly products, and utilizing renewable energy, validate responsible management. The critical investment decision process entails careful selection from a wide range of stocks in different markets. Traditional finance assumes that investors make logical judgements based on information, experience, and financial factors such as return, risk, and liquidity [63]. Alternatively, behavioral finance acknowledges that investors’ decisions are influenced by psychological factors such as herding and overconfidence [64]. Today’s pressing issues, such as environmental contamination, highlight the necessity of conscious decision-making. According to the stakeholder literature, investors are prioritizing environmental factors at an increasing rate. They are more commonly beginning investment journeys in stocks and bonds of firms recognized for strict green practices, demonstrating a greater commitment to sustainable and responsible investing [15].
Environmental factors are important in the investment decision-making process. These elements cover factors like greenhouse gas emissions, climate change, and associated factors as well as pollution of the air, water, or resources [15]. In light of the interrelated consequences of social change, economic growth, resource scarcity, and population expansion, a careful assessment of the environment and climate change is important for the effective operation of the economy and of society. Ye and Dela [65] stated that environmental factors and investment decision-making process are interlinked. Sustainability factors also help with portfolio screening and shareholder engagement [65]. Given the increased global awareness among investors about the impact of environmental concerns on investment decisions, this study argues for a trend in the consideration of environmental aspects in investors’ investment decisions. Thus, the following hypothesis is formulated.
H10. 
Green business strategies positively influence investment decisions.
The following Figure 1 describes the conceptual model of this study.

3. Methodology

3.1. Data Collection

Using cross-sectional design, we collected firsthand data to assess the proposed model. This study targeted the managers of manufacturing corporations and individual investors for data collection, as they were appropriate respondents for meeting the objectives. Table 1 clarifies that 552 managers took part in the survey. This study focuses on the relationship between green business strategies and investment decisions. Therefore, we employed two questionnaires for data collection. The first questionnaire was administered to managers of manufacturing companies in China and the second was distributed to individual investors on the Shenzhen Stock Exchange, China. Self-administered questionnaires were distributed to the respondents. In this study, a hybrid sampling methodology that combines purposive and convenience sample approaches was employed. Specifically, we targeted individuals for data collection who met specific criteria—that is, those who held a managerial position in a manufacturing company—which is the main feature of “certain criteria” of purposive sampling. According to [66], purposeful sampling is the intentional identification and selection of individuals or groups with in-depth expertise and experience in a particular topic of interest. Purposive sampling focuses on individuals with specific characteristics who are more likely to assist with the relevant study [67]. Our study focused on organizational efficiency and business strategies in which the company’s managers have great expertise. Therefore, purposive sampling was used. We gathered data from individual investors using convenience sampling by distributing self-administered questionnaires at the Shenzhen Stock Exchange, China. Out of 700 questionnaires, we received 552 complete and valid responses, which were used for the final analysis.
To establish the optimal sample size, we used G*Power as a tool and considered the standardized significance threshold (α), effect size (E.S.), statistical power (1-β), and the number of indicators. A minimum of 263 respondents were required to provide significant results when a two-tailed test with five predictors, a medium effect size (0.05), a significance level (α) of 0.05, and a power level (1-β) of 0.80 was conducted using G*Power. However, the researcher decided to increase the sample size to 552 to obtain more trustworthy and solid results.
To reduce the impact of social desirability bias (SDB) in the survey, we followed strict ethical guidelines during the data collection period, which extended from 10 June 2024 to 10 August 2024. SDB occurs when respondents express opinions or give responses that are inconsistent with their actual behaviors, attitudes, or beliefs, affecting the statistical results. Early studies have suggested several strategies for mitigating the SDB problem, such as recommending anonymous, self-administered surveys, since they are less likely to cause SDB [68]. Additionally, encouraging honesty among respondents by guaranteeing the privacy of their answers can help mitigate SDB [69]. However, several academics have raised concerns regarding the length and antiquated nature of the questions on some of these scales [70]. Our survey presented no SDB issue because we maintained the full confidentiality of the respondents, questions were asked indirectly, we avoided leading language, and we emphasized honest responses. Our survey was self-administered, and we ensured the privacy of the respondents.

3.2. Measures

The questionnaires were divided into two categories. Before evaluating the measuring items of the latent variables, respondents’ demographic data were gathered in the first stage. We evaluated our model using previously approved and reliable measures with slight modifications. We employed seven questions on green business strategies, as defined by [71]. Questions about organizational efficiency (processes, product improvement, and organizational innovation) were considered based on [19]. Financial performance items were taken from [72]. Investors’ investment decisions were adopted from [73]. Management control system measuring items were considered [74]. A seven-point Likert scale, spanning from “strongly disagree” to “strongly agree,” was employed in the study.

3.3. Analytical Approach

The study utilized structural equation modeling (SEM) using Smart-PLS 4, emphasizing maximum likelihood, to investigate the relationships among the constructs and assess the model’s predictive power. The analysis using PLS-SEM, version 4, was performed in two phases: first, we executed the measurement model, which clarified the soundness of constructs and their indicators. Subsequently, a structural model was tested to determine the relationships between the variables.

3.4. Ethical Considerations

In conducting this study, we followed the guidelines of the American Psychological Association’s Ethical Principles and Code of Conduct (APA). We obtained proper approval from the institutional review board prior to conducting the study. Each company’s HR department was accessed and informed that all participants were willing and had given their free consent. In addition, we also collected data from individual investors at Shenzhen Stock Exchange, Shenzhen, China. All the participants were informed that participation in the survey was entirely voluntary and that their data would be carefully handled with secrecy. There were no questions in the questionnaire that could cause harm or depress the respondents. They were properly thanked for providing data and participating in the survey.

4. Results and Discussion

4.1. Common Method Bias

Cross-sectional research is vulnerable to common method bias (CMB), which causes inflated relationships between the constructs and arises when data are gathered with the same evaluation instrument and at the same time [75]. To ensure reliable results, the CMB must be addressed. Harmon’s one-factor test, which is usually used for CMB, was used. The variance of the first element in the results was 29.67%, which is less than the 50% recommended by [75]. This finding suggests that CMB was not a problem in our study.

4.2. Measurement Model

We examined internal consistency, item reliability, and convergent and discriminant validity in the measurement model. All constructs produced composite reliability (C.R.) scores ranging from 0.854 to 0.96, above the suggested 0.70 [76]. Table 2 specifies that the C.R. scores show a good internal consistency. Acceptable measuring item reliability and convergent validity were confirmed by the average variance extracted (AVE) and factor loadings (F.L.s), which were found to be larger than 0.60 and 0.50, respectively [76,77]. A few of the items were dropped due to low factor loadings. Table 2 and Figure 2 illustrate the suitable measuring items’ reliability and convergent validity, as the results fell within the suggested standard threshold.
In the last phase of the measurement model, the heterotrait–monotrait (HTMT) correlation ratio approach [78] and Fornell and Larcker [79] techniques were used to assess discriminant validity. The degree to which one construct is distinct from the other is known as discriminant validity. The results in Table 3 demonstrate that all constructs had HTMT values of less than 0.85, as suggested by [78], demonstrating strong discriminant validity. Table 4 demonstrates acceptable discriminant validity based on the square root values exceeding the correlation values, adhering to Fornell and Larcker’s [79] approach.

4.3. Structure Model

Following the evaluation of the measurement model, we moved on to the structural model. The results in Table 5 and Figure 2 showed that our model explained a variance (R-square) of 0.389 in organizational innovation, 0.197 in product improvement, 0.380 in process improvement, 0.522 in financial performance, and 0.611 in investment decision.
Table 6 and Figure 3 demonstrate bootstrapping results of 5000 interactions which indicate that green business strategies (β = 0.552; p < 0.001, β = 0.377; p < 0.001, β = 0.655; p < 0.001) have positive significant effects on processes, product improvement, and organizational innovations, respectively. Thus, H1 to H3 are accepted. Process improvement (β = 0.356; p < 0.001) and organizational innovations (β = 0.497; p < 0.001) have positive significant effects on financial performance. Thus, H4 and H6 are accepted. Financial performance (β = 0.658; p < 0.001) positively affects investors’ investment decisions. Thus, H8 is accepted. Green business strategies (β = 0.179; p < 0.001) are positively related to investment decisions. Hence, H10 is accepted. The interaction effects of the management control system (β = 0.101; p < 0.05, β = 0.175; p < 0.001) between process improvement, product improvement, and GBSs are significant. Thus, H9a and H9b are accepted. In addition, we found an effect size ( f 2 ) of 0.05 for green business strategies and 0.673 for financial performance in relation to investors’ investment decisions, respectively, which made it clear that most of the investors embrace a financial journey with a particular company based on that company’s financial performance.
H7a, H7b, and H7c proposed that organizational efficiency (processes, product improvement, and organizational innovations) mediates the relationship between green business strategies and financial performance. The mediation results shown in Table 7 indicate that processes improvement (CI.95 = 0.2489, 0.3578), product improvement (CI.95 = −0.0279, 0.0008), and organizational innovations (CI.95 = 0.1231, 0.2172) play significant roles in the relationship between green business strategies and financial performance.

4.4. Discussion

The current study has discovered the mechanism and marketing strategies that explain how a corporation could attract both environmentally conscious as well as profit-seeking investors to invest in their firms. The study argued that through the marketing of green business practices, firms can not only entice environmentally conscious investors, as evidenced by [15], but can also attract conventional investment. Based on signaling theory, we investigated the exciting and complex connection between green business strategies and investment decisions, wherein GBSs boost financial performance through organizational efficiency. In addition, we tested the moderation effects of the management control system in the relationships between green business strategies and organizational efficiency parameters. Financial performance, in turn, affects individuals’ investors’ investment decisions. The f 2 values have confirmed that if a corporation effectively uses signaling theory by properly highlighting green practices and well-structured management control system in their operations to investors, then they could attract not only environmental-conscious investors, who are normally fewer in number but to a large extent, profit-seeking investors, who are typically more plentiful, as evidenced by the results.
Sustainability initiatives are crucial for augmenting organizational efficiency, as evidenced by the positive effects of green business strategies on organizational efficiency in terms of process, product improvement, and organizational innovation. These findings are consistent with those reported by [19]. These results are consistent with the notion that green business strategies regularly encompass sustainable procedures. These procedures can lower waste, energy use, and resource consumption, which might result in increased process efficiency. Green strategies can nurture an innovative culture within businesses. Emphasis on environmental responsibility frequently stimulates employees to use their imaginations to develop greener solutions, improving processes and products. Green business practices can potentially encourage innovation. The rationale is that the implementation of sustainable practices frequently necessitates the creation of environmentally friendly items or the improvement of current products to adhere to environmental regulations. Furthermore, organizations that emphasize sustainability often favor embracing novel technologies and methodologies, cultivating an environment conducive to ongoing enhancement.
The significant effects between these parameters of organizational efficiency and financial performance evidenced in our results are consistent with the notion that dedication to environmentally sustainable practices may result in concrete economic advantages. Implementing enhanced processes has the potential to mitigate costs effectively [80], while the development of sustainable goods may significantly augment market share, which is considered a key to profitability [81] and reputation [82]. Furthermore, the cultivation of organizational innovation can yield a competitive edge crucial for profitability [83].
The essential aspect of our results is the significant mediating effects of the parameters of organizational efficiency in the relationship between green business strategies and financial performance. This suggests that these intermediary factors mediate the beneficial effects of green strategies to some extent. In essence, the focus is not only on the development of environmental strategies but also on their real implementation and ability to enhance operational procedures, product development, and organizational innovation, thereby facilitating financial prosperity.
Our research has revealed noteworthy positive moderation effects that provide important insights into the complex interactions between management control mechanisms and green business strategies (GBSs). These interactions are especially evident when GBSs affect process and organizational innovation, which in turn affect financial performance. Through the identification of a management control system as a moderator in the associations between GBSs and financial performance, process improvement, and organizational innovation, our research emphasizes the vital function of structured controls in enhancing the effects of environmentally sustainable practices on organizational outcomes. This implies that GBSs act as a conduit for process and product improvements, channeling their effects through organizational control in addition to directly contributing to it. This moderation suggests that the effectiveness of GBSs in promoting improvements in processes and products depends on the organization’s control structures. Our results thus provide useful information to stakeholders and decision-makers, highlighting the necessity of combining complete control systems with GBSs to maximize their impact on the financial performance of the firm.
The results of our study indicate a significant relationship between financial performance and investors’ decision-making processes. This conclusion is consistent with the hypothesis that investors choose organizations that demonstrate profitability and stability. A company’s robust financial performance resulting from green business strategies and subsequent improvements will likely generate increased investor interest. Companies prioritizing environmental sustainability and adopting green practices are frequently regarded as more progressive and adaptable when confronted with environmental and market-related obstacles.

5. Implications

5.1. Theoretical Implications

This study establishes a strong association between green business strategies and investors’ investment decisions, providing substantial insights into the extant literature on sustainable strategy and company performance. This study uses signaling theory to broaden the theoretical comprehension of how companies’ commitment to sustainability functions as a reliable signal, impacting investors’ decisions and consequential choices in the stock markets. Secondly, this study enriches the findings of existing studies, such as [19] and [15], by verifying and further expanding on the idea that organizational efficiency metrics, namely process improvement, product improvement, and organizational innovations, play a mediating role in the association between sustainable strategies and a company’s financial success. Incorporating process improvement, product enhancement, and corporate innovation as critical mediators highlights the diverse mechanisms by which sustainable practices have a beneficial impact on financial outcomes. Our research adds to the body of knowledge on moderation models by identifying organizational control as a moderator in the relationship between GBS and performance outcomes like financial performance, process enhancement, and product enhancement. By providing insights into the significance of control mechanisms in moderating these effects, this enhanced moderation framework advances the theoretical understanding of the mechanisms by which GBSs impact organizational performance. Finally, based on the signal theory, this study highlights the importance of effective marketing of green signaling strategies. These findings imply that companies might significantly influence investors’ decisions by clearly conveying their commitment to sustainability. Theoretically, this opens doors for future research to explore the subtleties of signal precision and how particular components of sustainable strategies function as strong signals in investor decision-making.

5.2. Practical Implications

The study results have several compelling implications. First, the results emphasize that sustainability should be a strategic component of companies’ business operations. Given the association between green strategies and improved organizational performance, it stands to reason that integrating environmental sustainability into core company operations can boost overall organizational productivity and creativity. Second, the noticeable effects of organizational efficiency components, namely processes, product improvements, and organizational innovations, on firms’ financial performance reveal the need for continuous adaptability and monitoring of sustainable strategies. Developing a green strategy will not work correctly; however, the beneficial outcomes lie in the actual implementation of such strategies and their constant monitoring and control. Third, given the importance of green systems in influencing investor decisions, corporations should prioritize communicating their commitment to environmental sustainability transparently. Accurate and clear marketing communication of green initiatives can encourage and attract socially responsible investments and conventional investments. Our substantial moderation suggests that when strong organizational control systems are combined with GBSs, the returns on investment are higher. Thus, to optimize their influence on process optimization, product enrichment and, eventually, earnings, businesses must strategically deploy their resources in order to improve environmental sustainability practices and control infrastructures. Fourth, the results encourage socially responsible investments among individuals and institutional investors. The findings suggest that companies that strategically incorporate green initiatives can attract both socially responsible and conventional investments. Therefore, investors, whether they be individuals or institutions, should consider sustainability a key investment decision criterion. Finally, this study educates individual investors to help them make informed investment decisions, emphasizing that they should interpret companies’ signals regarding their green practices in operations properly. These green practices will enable a company to demonstrate its efficiency and achieve financial prosperity, which will enhance investors’ returns on their portfolios.

6. Conclusions, Limitations, and the Way Forward

Based on the signaling theory, this study examined the impact of green business strategies and organizational efficiency on financial performance and investor decisions. Specifically, this study investigated the intricate relationship between green business strategies, process improvement, product enhancement, corporate innovation, financial performance, and investors’ investment decisions. In addition, the moderating role of the management control system between GBSs and organizational efficiency parameters was tested. For the collection of the required data, two comprehensive questionnaires were administered to the managers of manufacturing companies in China and investors at the Shenzhen Stock Exchange, China. Using PLS-SEM, the study found significant positive effects between green business strategies and organizational efficiency parameters (process improvement, product enhancement, and organizational innovation) and between organizational efficiency parameters and firms’ financial performance. In addition, it was determined that organizational efficiency parameters significantly mediate green business strategies and financial performance. Management control systems positively affect the links between GBSs and organizational efficiency parameters.
Moreover, the data indicate that a firm’s financial performance has a positive impact on investors’ investment decisions. This research adds significant knowledge to the literature by empirically examining the complex relationships between green business strategies, operational improvements, financial success, and investor preferences. The results imply that green practices can drive overall organizational progress as businesses struggle globally with the twin challenges of environmental responsibility and financial success. The practical ramifications of these findings extend to firms aiming to satisfy ecological objectives while improving their financial position and investor appeal in a market that is becoming increasingly concerned with sustainability.
This study has a few limitations. The first limitation is the cross-sectional design, which suggests the collection of data at a specific time. This design constrains the capacity of the study to establish causal links and record changes and dynamics over time. Longitudinal research may provide more thorough knowledge of the explored connections. Secondly, the questionnaire data may not comprehensively address certain nuances and perspectives if it is the only tool used for gathering data. To gain a deeper understanding of participants’ experiences and perspectives, further studies should focus on combining qualitative methodologies or interviews. Future studies can use the data from the Shanghai Stock Exchange and Beijing Stock Exchange to obtain more insightful results. Finally, this study used self-administered surveys and guaranteed participants’ privacy to mitigate social desirability bias. Future studies can incorporate more precise strategies or develop scales for reducing SDB. Future research could use these scales to obtain accurate results, which will be utterly free from the issue of social desirability bias. More external variables like crypto-assets [84] can be considered in the proposed model; these variables might include policy changes, sustainability disclosures, or market conditions. Similarly, future studies can consider testing alternative theoretical models or conducting sensitivity analyses to examine how assumptions or different variable specifications affect the results. The investment decisions can also be viewed as exploring investor psychology or green behavioral intentions that may enhance green investments.

Author Contributions

X.L.: methodology, data curation; project administration, funding acquisition, resources, software, conceptualization, validation, writing—review and editing. I.U.K.: conceptualization, validation, writing—review & editing. All authors have read and agreed to the published version of the manuscript.

Funding

This research received no external funding.

Institutional Review Board Statement

The study was conducted in accordance with the Declaration of Helsinki, and approved by the Institutional Review Board at IMS, University of Science and Technology Bannu, Pakistan.

Informed Consent Statement

Informed consent was obtained from all subjects involved in the study.

Data Availability Statement

Data are available upon reasonable request.

Conflicts of Interest

The authors declare no conflicts of interest.

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Figure 1. Conceptual model.
Figure 1. Conceptual model.
Sustainability 17 01055 g001
Figure 2. Measurement model.
Figure 2. Measurement model.
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Figure 3. Model with results.
Figure 3. Model with results.
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Table 1. Demographics information.
Table 1. Demographics information.
Company Managers’ DemographicsInvestors’ Demographics
ParticularsFrequencyPercentageParticularsFrequencyPercentage
Gender: Gender:
Male
Female
323
229
58.51
41.49
Male
Female
338
214
61.23
38.77
Age: Age:
<30
30–40
41–50
>50
55
122
300
75
10.0
22.1
54.3
13.6
<25
25–35
36–50
>50
37
153
250
112
6.7
27.7
45.3
20.3
Industry: Education:
Textile
Sugar
Cement
Electronic
Leather
Pharmaceutical
Other
55
62
70
110
75
128
52
9.9
11.2
12.68
19.92
13.6
23.2
9.4
Bachelor’s
Master’s
<Master’s
47
415
90
8.5
75.2
16.3
Investment:
<100,000
100,000–500,000
600,000–1,500,000
>1,500,000
28
200
231
93
5.1
36.2
41.8
16.8
Experience: Experience:
<10
10–15
15–25
>25
78
235
180
59
14.1
42.6
32.6
10.7
<5
5–10
11–20
>20
133
172
186
61
24.1
31.2
33.7
11.1
Table 2. Measurement model.
Table 2. Measurement model.
ConstructsItems FLArho_aCRAVE
Financial Performance (FP)FP20.7580.7840.8010.8540.543
FP30.554
FP40.793
FP50.811
FP60.738
Green Business Strategies (GBSs) GBS10.8110.8910.8940.9150.606
GBS20.852
GBS30.83
GBS40.692
GBS50.731
GBS60.793
GBS70.726
Investment Decision (ID)ID10.670.8920.8930.9110.507
ID100.726
ID110.702
ID20.714
ID30.743
ID50.702
ID60.715
ID70.692
ID80.749
ID90.702
Management control system (MCS)MCS10.7760.9090.9160.9270.614
MCS20.787
MCS30.742
MCS40.82
MCS50.842
MCS60.84
MCS70.817
MCS80.621
Organizational innovation (OI)OI10.5980.9030.9020.9210.539
OI100.714
OI20.61
OI30.79
OI40.771
OI50.775
OI60.724
OI70.792
OI80.803
OI90.734
Products improvements (PDIs)PDI10.9010.9480.9490.960.827
PDI20.904
PDI30.924
PDI40.906
PDI50.912
Processes improvement (PI)PI10.8580.8770.880.9110.672
PI20.839
PI30.821
PI40.767
PI50.811
Table 3. HTMT results.
Table 3. HTMT results.
ConstructsFPGBSIDMCSOIPDIPI
FP
GBS0.739
ID0.8140.656
MCS0.4850.3570.284
OI0.7590.6440.5950.361
PDI0.2290.2580.2920.2550.222
PI0.6820.6650.630.0720.510.402
Table 4. Fornell and Larcker’s approach.
Table 4. Fornell and Larcker’s approach.
ConstructsFPGBSIDMCSOIPDIPI
FP0.737
GBS0.6290.778
ID0.710.590.712
MCS0.4090.3170.250.784
OI0.6560.5940.5540.3330.734
PDI0.2020.2420.269−0.2370.2110.91
PI0.5750.5920.5630.0490.4660.3670.82
Note: The diagonal bold values represent discriminant validity.
Table 5. Model variance.
Table 5. Model variance.
ConstructsR-SquareR-Square Adjusted
FP0.5240.522
ID0.6130.611
OI0.3920.389
PDI0.2020.197
PI0.3820.379
Table 6. Path coefficient.
Table 6. Path coefficient.
HypothesisOriginal SampleSample MeanStandard DeviationT Statisticsp ValuesDecision
FP → ID0.6580.6580.03717.9230Supported
GBS → ID0.1790.180.0414.3130Supported
GBS → OI0.5220.5210.03813.6440Supported
GBS → PDI0.3770.3780.0389.8360Supported
GBS → PI0.6550.6560.03220.7390Supported
OI → FP0.4970.4960.0412.2960Supported
PDI → FP−0.034−0.0330.031.130.258Not Supported
PI → FP0.3560.3570.04480Supported
MCSx GBS → OI−0.13−0.1290.0324.1070Not Supported
MCSx GBS → PDI0.1750.1740.0394.5270Supported
MCSx GBS → PI0.1010.10.0442.3160.021Supported
Table 7. Mediation results.
Table 7. Mediation results.
Processes ImprovementEffectS.E.CIsDecision
GBS0.14810.0283(0.2489, 0.3578)Supported
Products improvement
GBS−0.01340.0071(−0.0279, 0.0008)Not Supported
Organizational innovations
GBS0.1670.0238(0.1231, 0.2172)Supported
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Li, X.; Khan, I.U. Green Transformation in Portfolio: The Role of Sustainable Practices in Investment Decisions. Sustainability 2025, 17, 1055. https://doi.org/10.3390/su17031055

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Li X, Khan IU. Green Transformation in Portfolio: The Role of Sustainable Practices in Investment Decisions. Sustainability. 2025; 17(3):1055. https://doi.org/10.3390/su17031055

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Li, Xinyue, and Ikram Ullah Khan. 2025. "Green Transformation in Portfolio: The Role of Sustainable Practices in Investment Decisions" Sustainability 17, no. 3: 1055. https://doi.org/10.3390/su17031055

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Li, X., & Khan, I. U. (2025). Green Transformation in Portfolio: The Role of Sustainable Practices in Investment Decisions. Sustainability, 17(3), 1055. https://doi.org/10.3390/su17031055

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