How ESG performance impacts corporate financial performance: a DuPont analysis approach

Abstract

Purpose This study aims to investigate the impact of environmental, social and governance (ESG) performance on financial capabilities and strategic decision-making within enterprises. It seeks to provide clarity on how fulfilling ESG responsibilities influences financial performance, while examining differential effects across firm types. Design/methodology/approach This study analyzes the relationship between ESG performance and financial metrics using data from Chinese listed companies (2013–2022) and DuPont’s analytical framework. Findings First, while ESG practices enhance financial stability and market appeal, they also incur additional operating costs. Second, companies tend to increase their investments in innovation and capital expenditure as a result of better ESG performance. While capital expenditure boosts financial performance significantly, innovation investment, though promising, yields uncertain outcomes and has less influence compared to capital expenditure. Furthermore, the financial performance of nonstate-owned and nonpolluting firms is more susceptible to fluctuations in ESG performance. Research limitations/implications The findings are context-specific and may not universally apply to all industries and regions. Further research is needed to validate the study’s propositions in diverse economic environments. Practical implications Policymakers should consider incentivizing ESG compliance to bolster market competitiveness. Enterprises are advised to optimize internal processes to balance ESG practices with operational efficiency and innovation for sustainable growth. Originality/value This paper introduces an innovative use of DuPont analysis in economics to explore how ESG affects financial and operational performance, showing it can boost corporate results and prompt ESG responsibility. It also distinguishes innovation outcomes with “Innovation Investment” and “Capital Expenditure,” offering enhanced investment guidance.