Abstract
Building on recent extensions of stakeholder value-based strategy and findings linking higher Environmental, Social and Governance (ESG) performance by corporates to better intermediate accounting outcomes (i.e., revenue growth, cost margins and labor productivity), we use piecewise structural equation modeling to further unpack the relationship across industries and to link ESG, intermediate accounting outcomes and end-state financial performance in the same model. More formally, we test the degree to which the effects of ESG on financial performance are mediated by sales growth, employee productivity, and cost reductions in the panel of S&P 1500 firms inclusive from 2007-2018. We find evidence that ESG has both direct impacts on end-state corporate financial performance (CFP) and indirect impacts mediated via each of these three pathways. Critically, the pattern of these direct and indirect pathways differs dramatically by industry.
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