Assessing Firms’ Environmental, Social and Governance Performance (ESGP) and Its Effect on Financial Performance: Evidence from Pakistan

Abstract

In the recent past, the knowledge of Corporate Social Responsibility (CSR) among practitioners, scholars, and researchers has grown tremendously. Scholars have been trying to find out whether the tradeoff among Corporate Social Performance and Corporate Financial Performance is unavoidable or the association remains positive as well as rewarding for the businesses. This study aims to empirically investigate whether Financial Performance (FINP) of firms is associated with their Environmental, Social, and Governance Performance (ESGP) scores in Pakistan. The study has used the overall ESG and its three constituents (Environmental, Social and Governance) disclosure scores for the ESGP measure and to measure financial performance three accounting ratios were considered, one reflects the market position of firm (i.e. Tobin‘s Q) and the other two measure the business profitability in relation to the firm‘s total assets (i.e. Return on Assets) commonly known as ROA and equity (i.e. Return on Equity) commonly known as ROE. Regression analysis is used to analyze the effects of ESG Performance on firms’ Financial Performance, using cross-sectional data, the sample includes listed companies on the PSX100 index for the year 2018 with a sample size of the 95 companies. The data was hand-collected by the annual reports and publications of the firms. Results indicated that ESG has a significant positive effect on ROA, but not on Tobin Q which remained insignificant for ESG and its dimensions. Among its components, GS and SS also seem to have a significant and positive effect. Among, the control variables, Debt has a negative impact, whereas size seems to have a positive effect on ROA. Most of the variables remained insignificant with regards to Tobin Q Hence, the findings indicate a partial significant association between ESGP and Financial Performance.