The Impact of ESG Factors on the Firm Performance

Abstract

This paper examines the impact of environmental, social, and governance (ESG) factors on corporate behavior and performance. Amid increasing concerns from stakeholders, companies are pressured to prioritize ESG aspects. This study leverages stakeholder theory, which emphasizes balancing all stakeholder interests over solely maximizing shareholder wealth. A significant shift was noted in 2019 when U.S. business leaders endorsed a "Statement of Purpose" emphasizing societal benefits over shareholder interests, reflecting a broader move towards corporate social responsibility. The paper analyzes ESG's influence on three key areas: investor expectations, risk management, and long-term strategy. It highlights the mixed research findings on the correlation between ESG ratings and stock prices, noting emerging studies that explore behavioral biases in investor decisions. In terms of risk management, ESG practices are increasingly integral, with research showing that higher ESG ratings can reduce default risks. Regulatory risks are also discussed, particularly concerning climate change policies. Furthermore, the paper explores how sustainability, driven by investor and consumer activism, is becoming central to corporate long-term strategies. Models like the ISM and concepts like double materiality are used to demonstrate how ESG factors can optimize corporate performance. Ultimately, the study concludes that ESG elements significantly impact corporate behavior, suggesting a positive correlation with firm performance.