ESG and financial performance: Exploring the impact on environmentally sensitive industries

Abstract

In the context of green and sustainable development becoming a new economic driver globally, the issue of sustainability has emerged as a critical topic, particularly for industries with significant environmental impacts and high demand. This research conducts regression analysis on a dataset of 450 firms operating in environmentally sensitive industries (energy, industrials, materials, and utilities) to examine the relationship between ESG Performance and Financial Performance. Using the S-GMM method, the research finds a positive correlation between ESG scores and financial indicators such as ROA and Tobin’s Q. However, when analyzing individual ESG pillars, their effects on Financial Performance differ. The primary contributors to this positive relationship are the Environmental and Governance scores, whereas the Social score exhibits an ambiguous impact. Additionally, differences arise when comparing firms from developed and developing countries. In developed economies, all ESG components show a positive correlation with Financial Performance, indicating the effectiveness of ESG investments in these firms. In contrast, firms in developing economies exhibit an inconsistent relationship between ESG components and Financial Performance, reflecting varying levels of effectiveness in ESG implementation. The research provides valuable insights by analyzing these relationships from multiple perspectives and offers recommendations tailored to specific contexts, aiming to enhance the economic benefits of corporate social responsibility initiatives