ESG factors and corporate financial performance

Abstract

The current study investigates the effect of environmental, social, and governance (ESG) factors on corporate financial performance (CFP), and considers an initial sample of all non-financial listed firms in 35 countries for the period 2012-2020. The final balanced sample comprises 7,081 firms, leading to 63,729 firm observations. This study finds that ESG factors play a vital role in enhancing CFP both for market (Tobin's Q) and accounting (return on assets and return on equity) indicators. This suggests that a firm with higher environmental and governance factors tends to increase its Tobin's Q in order to satisfy stakeholders' decision-making needs. The social factor has a negative and significant effect on CFP for market indicators and a negative but not significant effect on CFP for accounting indicators. This suggests that social factor drains the firm's resources, influence the firm's reputation, and may lead to competitive disadvantage. This study provides international comprehensive empirical evidence by investigating the impact of ESG's three factors separately as well as overall ESG disclosures' effect on CFP.