Do ESG Endeavors Assist Firms in Achieving Superior Financial Performance? A Case of 100 Best Corporate Citizens

Abstract

Increasing interest in sustainability performance (environmental, social, and governance pillar performance [ESGP]) and corporate financial performance (CFP) is noteworthy. However, we do not find any all-inclusive study that employs both individual components of environmental, social, and governance pillars (ESG) as well as the cumulative ESG score on both the accounting and market performance of firms. Furthermore, we do not find any study that puts forth “best practices” in the ESGP-CFP nexus. Therefore, our study intends to provide additional empirical evidence in this debate by including all three pillars of ESG as well as the overall ESG score by employing a unique sample of “100 best corporate citizens” in the United States declared by 3BL Media during 2009 to 2018. For this purpose, we employ panel vector auto regression (PVAR) that allows us to overcome the methodological challenges faced by some earlier empirical studies. The core findings are: (a) for market-based financial performance (market-to-book ratio [MTB] and Tobin’s Q), our results only confirm ESGP–CFP relationship and suggest that sustained higher commitment to the environmental pillar, consistent socially responsible conduct, and rationalized governance mechanism of the sampled firms are perceived value additive by the market players. (b) For accounting-based financial performance (return on equity [ROE] and return on assets [ROA]), we find a mix of ESGP–CFP and CFP–ESGP relationship for ROE only. Furthermore, factor error variance decomposition (FEVD) analysis reveals that environmental, social, and overall ESG performances of the sampled firms are quite good predictors of future CFP in the market. These findings assert that actively pursuing ESG endeavors can assist firms in achieving superior financial performance.

Sustainability disclosure and its impact on telecommunication and information technology sectors' performance: worldwide evidence

“…Finally, the effect of ESG on TQ was also negative. This is further supported by evidence of a non-significant and negative correlation in relation to market performance using TQ (Landi and Sciarelli, 2019; Qureshi et al. , 2021).…”

“…Finally, the effect of ESG on TQ was also negative. This is further supported by evidence of a non-significant and negative correlation in relation to market performance using TQ (Landi and Sciarelli, 2019;Qureshi et al, 2021). Some studies have attributed this to the increased costs associated with ESG, which, in turn, lower market value (Marsat and Williams, 2011).…”

Theconcave–convexeffects of environmental, social and governance onhigh‐techfirm value: Quantile regression approach

“…Conversely, the trade‐off theory believes there is a negative link between ESG and FV. It suggests that ESG investments and other business opportunities must compete for the same available resources (Azmi et al, 2021), and that funds spent on ESG activities (such as investment in pollution reduction, donations, and community sponsorships) meaninglessly increase operating costs, resulting in reduced profitability (Azeem Qureshi et al, 2021) and reduced competitive advantage (El Khoury et al, 2021; Galant & Cadez, 2017).…”

Environmental performance and financial performance during COVID-19 outbreak: Insight from Chinese firms

“…Empirically, the literature has produced mixed results when examining the relationship between CSR and FP (Gillan et al, 2021). The majority of the literature has reported a positive effect of CSR on FP (Brogi and Lagasio, 2019;Long et al, 2020;Okafor et al, 2021;Qureshi et al, 2021). In an extensive review of more than 250 academic studies, Margolis et al (2009) concluded that the effect of CSR on FP is positive.…”