The impact of environmental, social, and governance performance on financial performance: Evidence from Japanese companies

Abstract

This study examines the impact of environmental, social, and governance (ESG) performance on the financial performance of companies using the Stakeholder Theory. Sustainability is recognized as one of the most significant concepts for all nations and organizations worldwide. The Japanese government, its corporations, and its culture are not exempt from delivering their nation's sustainability goal with the utmost support. Their initiatives taken towards sustainability include introducing Society 5.0, the 'improved society' concept Japan has contemplated before the rest of the world. Society 5.0 for Sustainable Development Goals (SDGs), which originated in Japan, is an aspiring concept that views changes and challenges as opportunities and proceeds to associate them with medium-to long-term development, which leads to the resolution of global challenges. Financial performance focuses on accounting performance through the Return on Equity (ROE). The ESG scores and financial data of 351 listed companies in Japan from 2018 to 2022 were collected from the Thomson Reuters Eikon data stream to study its impact. The regression analysis shows that all environmental performance (EP), social performance (SP), and governance performance (GP) positively and significantly affect profitability, or the Return of Equity (ROE). Meanwhile, the control variable, firm size (SIZE), does not support the study. The findings also found that all ESG performances positively correlate with each other. These results highlight the importance of ESG policy adoption by companies to improve their financial performance. The study’s contributions add value to Japan’s industry practitioners and stakeholders and highlight the importance of ESG to their nation.