Too Much of a Good Thing? Two-Sided Effect of ESG on Corporate Financial Performance

Abstract

The purpose of this research is to clarify the curvilinear link between Environmental, Social and Governance (ESG) and corporate financial performance (CFP), and draws upon the “too much of a good thing” (TMGT) theory to verify whether the curvilinear relationship supports the conflicting results of previous studies. The sample comprises 69 listed companies in Taiwan with ESG disclosures over 2005 to 2020. The findings reveal that ESG impacts CFP in an inverted- U shaped, which is predominantly evident in the environmental and social pillars. This study validates the rising popularity of ESG investments. To enhance CFP, businesses must meticulously assess the allocation of capital to ESG to prevent under or over-investment. Managers should be aware of the TMGT effect and ensure the threshold of ESG is identified, as this is essential to balancing the cost/value trade-off, improving the CFP, and maintaining sustainable development.