ESG Versus Corporate Financial Performance: Evidence from East Asian Firms in the Industrials Sector

Abstract

Given the unsettled ESG-CFP (Environmental, Social, Governance-Corporate Financial Performance) relationship and the scarcity of research covering emerging markets firms and the impact of each of the ESG pillars on CFP while considering the industry sector categories, this paper is pioneer in investigating this relationship for 108 East Asian listed firms operating in the Industrials sector for the period extending from 2011 to 2017. The overall ESG scores together with their components are used to study their impact on CFP while considering accounting (Return on Assets (ROA) and Return on Equity (ROE)), and market measures (Stock Return (RET) and Price-to-Book ratio (PB)). We used panel corrected standard errors to address contemporaneous cross-correlations related to the panel cross-sections. Our findings showed that the ESG-CFP relationship depends on the ESG pillars, the type of CFP measures, and the industry nature. No relationship was detected between ESG and CFP when proxied by accounting measures while a concave relationship with Stock Return and a convex relationship with Price-to-Book ratio were revealed. When ESG pillars were considered separately, a convex relationship was obtained between Environmental and accounting performances and between Governance and Price-to-Book ratio while a concave relationship was depicted between Social and accounting performances. At the industry level, ESG negatively impacted the market performance in the Transportation industry compared to no impact in the Capital Goods industry. Consequently, ESG investment decisions in East Asian firms must be well calibrated and planned out to avoid undesired financial outcomes, while a shift in the mindset of managers toward a better ESG development is necessary to attain short-term gains and sustainable fiscal and social advantages.

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

“…Concave-convex effect and optimal value of ESGG ESGG has no significant impact on Tobin's Q, which suggests hightech firms' investment in ESGG is not well perceived by market participants. This finding agrees with El who reported an insignificant impact on Tobin's Q, but is consistent withNaimy et al (2021) who documented a convex effect on FV (proxied by price-to-book value). The reason for this discrepancy is either the different regions or industry attributes.6 | CONCLUSIONSThe impact of ESG on FV is still changeable.Undoubtedly, this study contributes to the current gap in ESG literature by providing a deeper understanding of the effect ESG has on FV (proxied by Tobin's Q) by proposing the nonlinear ESG-FV relationships in the different Tobin's Q quantiles for high-tech industry firms in Taiwan.…”

“…Other research reports there is no significant ESGG-FV relationship (El Khoury et al, 2021) and some report the ESGG-FV relationship to be a concave (Buallay, Al-Ajmi, & Barone, 2022) or convex (Naimy et al, 2021) pattern. Based on the above discussion, the fourth hypothesis is:…”

“…Studies focusing on the nonlinear ESG‐FV relationship report it as a U‐shaped (convex) or inverted U‐shaped (concave) pattern. For example, Naimy et al (2021) proved the existence of a U‐shaped (convex) ESG–FV relationship, stating that ESG activity in its initial stage negatively affects FV as costs outweigh benefits, whereas at a later stage, the relationship reverts and becomes positive. Nuber et al (2020) evidenced of a U‐shaped relationship between sustainability performance and financial performance.…”

“…One argument suggests there is a positive ESGG‐FV relationship and that engaging in ESGG practices improves FV (Esteban‐Sanchez et al, 2017) by enhancing reputation, strengthening regulation and mitigating mismanagement (Zehri & Zgarni, 2020). Other research reports there is no significant ESGG–FV relationship (El Khoury et al, 2021) and some report the ESGG‐FV relationship to be a concave (Buallay, Al‐Ajmi, & Barone, 2022) or convex (Naimy et al, 2021) pattern. Based on the above discussion, the fourth hypothesis is:Hypothesis There is a nonlinear ESGG‐FV relationship which is either a concave (inverted U‐shaped) or convex (U‐shaped) pattern.…”

Too little or too much? Exploring the inverted U-shaped nexus between voluntary environmental, social and governance and corporate financial performance

“…More recently, some researcher using nonlinear modeling have found U-shaped relationships (e.g., Nuber et al, 2020;Naimy, et al, 2021), and inverted U-shaped relationships (e.g., Buallay et al, 2022;El Khoury et al, 2021). As Pierce and Aguinis (2013) contend, such inconsistent results arise because of the "too-much-of-a-good-thing (TMGT)" effect on the ESG-CFP nexus.…”