Journal of Cleaner Production 404 (2023) 136859

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Journal of Cleaner Production

journal homepage: www.elsevier.com/locate/jclepro

ESG and firm performance: The rarely explored moderation of

sustainability strategy and top management commitment
Haseeb Ur Rahman a, *, Muhammad Zahid b, Mamdouh Abdulaziz Saleh Al-Faryan c, d
a
Interdisciplinary Research Center for Finance and Digital Economy, King Fahd University of Petroleum and Minerals, Dhahran, Kingdom of Saudi Arabia
b
Department of Management Sciences, City University of Science and Information Technology, Peshawar, Pakistan
c
School of Accounting, Economics and Finance, Faculty of Business and Law, University of Portsmouth, United Kingdom
d
Consultant in Economics and Finance, Riyadh, Saudi Arabia

A R T I C L E I N F O A B S T R A C T

Handling Editor: Jian Zuo This study probes the effect of Environmental, Social, and Governance (ESG) (as a composite construct and
separate dimensions) on Firm Performance (FP) measured by ROA and Tobin’s Q directly and through the unique
Keywords: moderation of sustainability strategy and top management commitment. The study uses a stratified random
ESG sample of 255 non-financial companies listed on the stock exchange of a developing country like Pakistan from
Firm performance
2016 to 2020. The study employs a two-stage least squares (2SLS) estimator using the instrumental variable of
Moderation
the industry mean for controlling the potential endogenous nature of the ESG-FP nexus. The estimation unveiled
Sustainability strategy
Top management commitment that ESG and all of its separate dimensions – environmental, social, and governance exert a significant positive
Pakistan impact on ROA. Similarly, ESG and its environmental and social dimensions also have a significant positive effect
on Tobin’s Q. Besides, the findings also disclosed the distinct moderations of sustainability strategy and top
management commitment in the nexus of ESG and each of its separate dimensions with ROA and Tobin’s Q. The
only insignificant nexus between governance and Tobin’s Q also converted into a significant positive association
through the moderation of top management commitment. The study contributes to the literature, theory,
methodology and practice in numerous ways.

1. Introduction their social and environmental performance (Alshehhi et al., 2018;

The drive to promote corporate sustainability has gained substantial
attention in recent years, especially after the initiation of a hot debate on
different environmental concerns. Global warming, climate change,
pollution, emmission, smog and other ecological challenges have
brought organizations under unprecedented pressure to protect the in­
terests of stakeholders, especially society and the environment (Alshehhi
et al., 2018; Khan, 2022; Pulino et al., 2022; Rahman et al., 2021). In this
vein, the United Nation’s Principles for Responsible Investment (PRI)
report introduced a comprehensive concept of ESG (Environmental,
Social, and Governance) that being a meta-construct has a wide scope
covering firms’ ecological, social, and economic performance (Orlitzky
et al., 2003; Paolone et al., 2022; Qureshi et al., 2021; Zhou et al., 2022).
Although PRI was published in 2006, but ESG considerably highlighted
during the last decade, especially when the regulators, investors, cus­
tomers, society, media, and academia started pushing firms to go beyond
the short-term financial benefits and develop strategies for improving
Pulino et al., 2022; Qureshi et al., 2021). At present, ESG is again in
limelight for the expected implementation of “double materiality” in
developed countries, especially Europe, where firms need to report how
socio-environmental issues may affect their value or create financial
risks for them (financial materiality) and how they influence or
complicate socio-environmental concerns (impact/socio-environment
materiality) (Adams, 2020; Adams et al., 2021). However, on contrary,
most of the firms, especially those in developing countries (except
China, Taiwan, and Malaysia) are yet to fully implement the conven­
tional “materiality” concept of ESG as they adopt a “ticking the box”
approach by describing their efforts for social and environmental wel­
fare rather than reporting their actual spending on them (Alshehhi et al.,
2018; Rahman et al., 2021; Zhou et al., 2022). The majority of these
firms avoid ESG due to a fear of increasing operating costs or negatively
affecting their financial performance which is one of their prime con­
cerns. They avoid true or full compliance with voluntary regulations
until having positive implications for their financial performance

* Corresponding author.
E-mail address: drhaseeb@ustb.edu.pk (H.U. Rahman).

https://doi.org/10.1016/j.jclepro.2023.136859
Received 10 December 2022; Received in revised form 1 February 2023; Accepted 17 March 2023
Available online 27 March 2023
0959-6526/© 2023 Elsevier Ltd. All rights reserved.
H.U. Rahman et al.
(Haniffa and Hudaib, 2006; Rahman et al., 2021). In support, McWil­
liams and Siegel (2011) asserted that it is not important to know only
about firms’ ESG but rather to know how it is used as a strategy for
improving Firm Performance (FP). However, in this regard, the empir­
ical evidence for the impact of ESG on FP is still inconclusive (Alareeni
and Hamdan, 2020; Alshehhi et al., 2018; Orlitzky, 2013; Paolone et al.,
2022; Zhou et al., 2022). For instance, a meta-analysis of 132 papers
published in top-tier journals (Alshehhi et al., 2018) asserted that a
major friction of the prior literature endorses the positive relationship
between corporate sustainability and FP, but, still, there are also studies
showing their no or negative association (Friede et al., 2015; Orlitzky
et al., 2003). Besides the difference in data, sample, timing, and meth­
odology (Rahman and Zahid, 2021; Wang and Clift, 2009), the findings
of the previous studies may also be inconsistent due to the difference in
their contexts – developed and developing countries (Alshehhi et al.,
2018; Paolone et al., 2022). Also, the inconsistency has a plausible
rationale that the majority of the previous studies did not recognize or
address the endogenous nature of the ESG-FP nexus. Waddock and
Graves (1997) and Zahid et al. (2020) inferred that the association be­
tween ESG and FP is bi-directional, influencing each other simulta­
neously, and therefore, needs to be controlled for endogeneity.
Furthermore, the previous findings may also vary as some researchers
used corporate sustainability or corporate social responsibility while
others employed ESG (as a composite construct) or its one or two di­
mensions either in relation with firms’ accounting or market perfor­
mance (Alshehhi et al., 2018; Paolone et al., 2022; Pulino et al., 2022;
Qureshi et al., 2021). For instance, except for (Clark et al., 2015; Kleine
et al., 2013), all other studies included in the two meta-analyses of
Friede et al. (2015) and Orlitzky et al. (2003) overlooked the “gover­
nance” dimension of ESG. Similarly, some studies also noted that ESG
has a positive impact on firms’ accounting performance but a negative
effect on their market performance (Friede et al., 2015; Orlitzky et al.,
2003), while Achim and Borlea (2014) reported that ESG positively
influences firms’ market performance but negatively affects their ac­
counting performance. Alareeni and Hamdan (2020), Paolone et al.
(2022), and Pulino et al. (2022) concluded that the prior studies dis­
playing dissimilar findings have rarely inquired about the impact of
ESG, and all of its three dimensions on FP covering both the accounting
and market performance in the developing countries.
The findings of the previous studies may also lack agreement as they
mostly focused on investigating the direct association between ESG and
FP rather than exploring some other latent factors influencing their
relationship. Many researchers suggest that inconsistent direct re­
lationships may be re-investigated for potential moderation(s) and
mediation(s) (Hair et al., 2007; Rahman et al., 2021; Zhou et al., 2022).
To this end, a systematic review of the literature published in top-tier
journals from 1972 to 2013 revealed that only 32 studies used moder­
ation(s) or mediation(s) in the nexus of ESG and FP. Moreover, these
studies employed only eight moderators and mediators (mostly firm size
or industry type) and paid less attention to others (Grewatsch and
Kleindienst, 2017) like sustainability strategy and top management
commitment. Therefore, this study investigates the impact of ESG (as a
combined construct) and each of its separate dimensions (environ­
mental, social, and governance) on FP measured by both the accounting
(ROA) and market performance (Tobin’s Q) of 255 non-financial listed
companies of a developing country like Pakistan from 2016 to 2020.
Also, the study intends to theorize the distinct moderation of sustain­
ability strategy and top management commitment in the inconsistent
relationship of ESG and its dimensions with FP (ROA and Tobin’s Q).
The proposed moderators which could be rarely investigated in the past
(Grewatsch and Kleindienst, 2017) are drawn upon the descriptive
approach of the stakeholder theory that assumes sustainability strategy
as an effective internal mechanism for the successful implementation of
ESG. Likewise, the descriptive approach also posits that top manage­
ment commitment promotes ESG by allocating the required human and
financial resources for the successful integration of sustainability
2
Journal of Cleaner Production 404 (2023) 136859
strategy into firms’ operations (Asif et al., 2011; Labuschagne et al.,
2005; Rahman and Zahid, 2021; Zahid et al., 2018). Besides, the pro­
posed moderations are also aligned with the recommendation of the
Code of Corporate Governance (CCG) introduced in 2019 which requires
an increase in the integrated strategies, including sustainability strategy
and top management commitment for the successful adoption of ESG
and its reporting in listed companies of Pakistan. Overall, this study aims
to inquire about the “business case” of ESG and its separate dimensions
and check for some potential moderations which may affect their
association.
The study contributes to the literature, theory, methodology, and
practice in numerous ways. Firstly, it contributes to the literature by re-
investigating the impact of ESG and each of its three dimensions on FP
(ROA and Tobin’s Q) in a developing country like Pakistan. Because, the
prior literature mostly related to developed countries focused either on
ESG or some of its dimensions in relation with firms’ accounting or
market performance and produced mixed results which do not apply to
developing countries, due to their context-sensitive nature. Secondly, it
contributes to the theory and methodology by proposing novel moder­
ations drawn upon the rarely tested descriptive approach of the stake­
holder theory as the prior literature mostly concentrated on
investigating the direct association of ESG with FP. Also, it enriches the
methodology by employing a two-stage least squares (2SLS) estimator
using the instrumental variable (IV) of the industry mean for controlling
the potentially endogenous nature of the ESG-FP that has largely been
overlooked in the past. Thirdly, it contributes to the policy and practice
by explaining the importance of CCG 2019 in recommending the sus­
tainability strategy and top management commitment for increasing
ESG and its consequent benefits in Pakistan. It is important in a country
like Pakistan that is neither famous for good compliance with voluntary
regulations nor has strong legal stakeholders’ protection. Lastly, it also
contributes to the literature and practice by explaining “why” and “how”
firms should promote their ESG in developing countries, especially
Pakistan, unlike most of the prior studies which mainly focused on the
“why” only. The remaining of this study is organized as the following
sections explain the theoretical framework, hypotheses development,
and research design. The next sections report the findings and their
interpretation before the conclusion of the study in the last section.
2. Literature review
2.1. Theoretical framework
The stakeholder theory assumes stakeholders important for firms’
success, growth, stability, and better financial performance. Therefore,
the theory posits that firms should focus on serving the legitimate needs
of all stakeholders, including the environment, society, and economy for
improving their performance (Donaldson and Preston, 1995; Paolone
et al., 2022). Donaldson and Preston (1995) explained the stakeholder
theory into three different approaches - the normative, instrumental,
and descriptive. The normative approach assumes that firms should
identify and address the legitimate needs of all stakeholders as an ethical
obligation instead of a strategy for achieving economic benefits. The
approach advocates that firms should pay back to the society and
environment for the negative effects of their operations. The instru­
mental approach assumes that addressing stakeholders’ needs pay off for
the firms by attracting investors and increasing brand image and sales.
The approach suggests that firms should compare the cost of serving
stakeholders’ interests with its subsequent expected benefits. Further­
more, it also posits that overlooking some of the stakeholders’ needs
may endanger the success and survival of organizations by posing
serious problems. Likewise, the descriptive approach that has largely
been overlooked by the prior empirical literature focuses on the suc­
cessful adoption and integration of sustainability and ESG into firms’
DNA. The approach includes firms’ efforts that aim to promote ESG
(Donaldson and Preston, 1995; Zhou et al., 2022). Besides, the
H.U. Rahman et al.
legitimacy theory also assumes that there is a social contract between a
firm and society where the former is supposed to act according to the
beliefs, expectations, norms, standards, and values of the latter for
achieving “legitimacy” and “social license to operate” (Qureshi et al.,
2021; Rahman et al., 2021). “Legitimacy is a generalized perception or
assumption that the actions of an entity are desirable, proper, or
appropriate within some socially constructed system of norms, values,
and beliefs” (Suchman, 1995, p.574). Given that, investment in ESG
positively influence FP by increasing their acceptability and positive
image in the market and society (Qureshi et al., 2021). The study is
mainly based on the stakeholder theory while its unique moderations
are drawn upon the descriptive approach (Donaldson and Preston, 1995;
Rahman et al., 2021; Rahman et al., 2021). Nevertheless, the lens of
legitimacy theory is also borrowed for explaining different hypothesized
relationships, wherever, needed.
2.2. Hypotheses development
2.2.1. ESG and firm performance
The United Nations Global Compact surveyed 1000 chief executive
officers (CEOs) around the world in 2006. About 93% of them consid­
ered ESG indispensable for the success of their organizations (United
Nations Global, 2019). Likewise, the investors also consider ESG
important for generating long-term financial benefits; hence, they assign
value to the firms which extend social and environmental welfare as
reflected by the increase in market price of their shares (Miralles-Quirós
et al., 2018; Pulino et al., 2022). Furthermore, the extant literature
published during the last two decades also paid substantial attention to
ESG–FP nexus (Khan, 2022; Orlitzky, 2013; Pulino et al., 2022; Qureshi
et al., 2021). A systematic review of the 132 peer-reviewed articles
published between 1984 and 2017 revealed that only 4% of these studies
were published before 2002. From 2002 to 2003, the research in the area
continued with a steady growth until 2010–2011 when all of a sudden it
got momentum and substantially increased by 75% up to 2017 (Alshehhi
et al., 2018). Nevertheless, the nature of the relationship between ESG
and FP is still inconclusive (Khan, 2022). For instance, Sharfman and
Fernando (2008) asserted that firms’ ESG improves their financial per­
formance by reducing equity costs. It is also believed that ESG is a
strategic product of the firms offered to the customers for increasing
their reputation, positive returns, and market share (Pulino et al., 2022;
Waddock and Graves, 1997; Wang and Sarkis, 2013; Zhao et al., 2018).
Many empirical studies concluded that there is a positive relationship
between ESG and FP (Orlitzky, 2013; Paolone et al., 2022; Pulino et al.,
2022). However, some researchers endorse these findings only when FP
is measured by accounting performance and not market performance
(Friede et al., 2015; Orlitzky et al., 2003). Conversely, Achim and Borlea
(2014) reported that ESG positively influences firms’ market perfor­
mance but negatively affects their accounting performance. Besides,
some studies also noted that ESG score (Jain et al., 2017) or society and
environment dimensions of CSR have a significant negative association
with FP (Brammer et al., 2006). Ching et al. (2017) concluded that
sustainability reporting has no significant association with FP, be it ac­
counting or market. A bidirectional analysis unveiled that increasing
firms’ ESG does not necessarily mean to improve their financial per­
formance (Lin et al., 2019). Many other studies also documented that the
ESG-FP nexus is insignificant (Esteban-Sanchez et al., 2017; Lin et al.,
2019), negative (Friedman, 1970; Jain et al., 2017), U-shaped (Barnett
and Salomon, 2012), inverted U-shaped (Lankoski, 2008), or asym­
metric (Jayachandran et al., 2013).
Regarding ESG separate dimensions, several studies noted that firms’
better environmental performance produces positive insinuations for
their financial performance (Buallay, 2019; Pulino et al., 2022; Sharf­
man and Fernando, 2008). However, it is also asserted that firms’
spending on environmental welfare considerably escalates their finan­
cial obligations which have no (Lahouel et al., 2020) or negative effects
on their financial performance (Achim and Borlea, 2014; Garcia et al.,
3
Journal of Cleaner Production 404 (2023) 136859
2017). Apart, a meta-analysis of 52 studies unveiled that firms’ social
performance plays an imperative role in improving their financial per­
formance (Orlitzky et al., 2003) by boosting stakeholders’ trust and
attracting more investors and customers (Cek and Eyupoglu, 2020;
Pulino et al., 2022). On the contrary, it is also found that firms’ social
performance increases cost, and therefore, it has no (Esteban-Sanchez
et al., 2017) or negative association with their financial performance
(Barnett and Salomon, 2012; Buallay, 2019). Besides, some studies also
noted that firms’ better governance positively influences their financial
performance by creating value for the shareholders in the long-run (Cek
and Eyupoglu, 2020; Paolone et al., 2022). Paolone et al. (2022)
declared governance as the strong and most positive predictor of firms’
market performance. Buallay (2019) found that governance improves
banks’ market performance but negatively affects their accounting
performance (ROA and ROE). However, Pulino et al. (2022) found no
significant connection between firms’ governance and their perfor­
mance. To sum up, the prior literature is extremely incongruent may be
due to contextual or methodological differences, or paying less attention
to the endogenous nature of ESG-FP nexus. Hence, the following hy­
potheses are established to be estimated after controlling the
endogeneity.
Hypothesis 1(a). : There is a positive association between ESG and
ROA.
Hypothesis 1(b). : There is a positive association between ESG and
Tobin’s Q.
Hypothesis 2(a). : There is a positive association between the envi­
ronmental dimension of ESG and ROA.
Hypothesis 2(b). : There is a positive association between the envi­
ronmental dimension of ESG and Tobin’s Q.
Hypothesis 3(a). : There is a positive association between the social
dimension of ESG and ROA.
Hypothesis 3(b). : There is a positive association between the social
dimension of ESG and Tobin’s Q.
Hypothesis 4(a). : There is a positive association between the gover­
nance dimension of ESG and ROA.
Hypothesis 4(b). : There is a positive association between the
governance dimension of ESG and Tobin’s Q.
2.2.2. The moderation of sustainability strategy in the nexus of ESG and
firm performance
As discussed in the previous section, the prior studies on the ESG-FP
nexus lack agreement due to several reasons (Alshehhi et al., 2018;
Friede et al., 2015; Khan, 2022; Qureshi et al., 2021). Among these, one
of the plausible reasons is that prior literature mostly inquired about the
direct association of ESG with FP and paid little attention to other po­
tential factors which may affect their relationship. Researchers suggest
that inconsistent direct relationships may be re-investigated for
searching and exploring some latent moderating and mediating effects
(Hair et al., 2007; Rahman et al., 2021; Zhou et al., 2022). In this regard,
a systematic review of the literature published in top-tier journals from
1972 to 2013 revealed that only 32 studies (22 empirical, 8 conceptual,
and 2 literature reviews) used moderation(s) and mediation(s) in the
nexus of ESG and FP. Furthermore, these studies employed only eight
moderators and mediators (mostly firm size or industry type) and
overlooked others (Grewatsch and Kleindienst, 2017) like sustainability
strategy and top management commitment. Given that, this study pro­
poses the rarely explored moderations of sustainability strategy and top
management commitment in the association of ESG and FP.
The effective implementation of a good sustainability strategy assists
firms in the successful integration of ESG into their policies, actions,
decisions, and operations (Asif et al., 2011; Rahman et al., 2021). Be­
sides facilitating balance progress on all the interlinked dimensions of
H.U. Rahman et al.
ESG, the effective enactment of a good sustainability strategy also in­
creases the coordination and collaboration among different departments
of an organization for the accomplishment of various social and envi­
ronmental goals. Effective implementation of the sustainability strategy
also assists firms (Laine, 2005) in reducing their costs, waste, and
resource consumption (materials, energy, and water, etc.). In addition, it
also facilitates firms in increasing their positive image, legitimacy, and
sales which have positive implications for their financial performance.
However, the quality of a strategy and its implementation is largely
associated with the interest, support, and commitment of the top man­
agement (Asif et al., 2011; Porter and Linde, 1995). Russo and Fouts
(1997) asserted that strategy transforms firms’ capabilities into orga­
nizational resources if properly developed and managed. To this end,
firms need to develop and implement sustainability strategies compat­
ible with their internal and external environment as ESG varies with the
size, industry, and location of the organizations (Asif et al., 2011; Porter
and Linde, 1995; Rahman et al., 2021). Given that, this study, based on
the descriptive approach of the stakeholder theory, established the
following hypotheses.
Hypothesis 5(a). : There is a positive moderation of sustainability
strategy in the association between ESG and ROA.
Hypothesis 5(b). : There is a positive moderation of sustainability
strategy in the association between ESG and Tobin’s Q.
Hypothesis 6(a). : There is a positive moderation of sustainability
strategy in the association between the environmental dimension of ESG
and ROA.
Hypothesis 6(b). : There is a positive moderation of sustainability
strategy in the association between the environmental dimension of ESG
and Tobin’s Q.
Hypothesis 7(a). : There is a positive moderation of sustainability
strategy in the association between the social dimension of ESG and
ROA.
Hypothesis 7(b). : There is a positive moderation of sustainability
strategy in the association between the social dimension of ESG and
Tobin’s Q.
Hypothesis 8(a). : There is a positive moderation of sustainability
strategy in the association between the governance dimension of ESG
and ROA.
Hypothesis 8(b). : There is a positive moderation of sustainability
strategy in the association between the governance dimension of ESG
and Tobin’s Q.
2.2.3. The moderation of top management commitment in the nexus of ESG
and firm performance
Top management is widely held responsible for firms’ performance
as their vision, knowledge, and experience substantially influence
organizational strategies and decisions (including those related to ESG)
having definite monetary and non-monetary repercussions (Rahman
and Zahid, 2021; Rahman et al., 2017a). Also, it has a key role in
determining the quality of sustainability strategy and its integration into
firms’ operations. The top management commitment towards ESG is
likely to improve firms’ ecological, social, and economic performance by
allocating the required human and financial resources, providing em­
ployees’ incentives, and transforming organizational culture, among
others (Jahanshahi and Brem, 2017; Kiesnere and Baumgartner, 2022).
Doppelt (2010) asserted that leadership ensures the successful adoption
of ESG by developing a conducive environment and countering the
resistance, if any, in the organization. Besides encouraging innovation,
the commitment of top management also facilitates firms in identifying
the most important stakeholders and determining the nature and level of
engagements and relationships with them. Simply, it uplifts both the
quality and quantity of ESG which have positive implications for FP
4
Journal of Cleaner Production 404 (2023) 136859
(Jahanshahi and Brem, 2017; Kiesnere and Baumgartner, 2022; Labu­
schagne et al., 2005). ESG without top management commitment or in
response to different institutional pressures for avoiding the attention of
regulators and other stakeholders including the media and public is
believed to be cosmetic or superficial having no real value or positive
effects on firm performance. Given that, top management needs to be
proactive rather than reactive in improving firms’ infrastructure and
internal mechanisms for “greening” their operations (Carter et al., 2010;
Rahman and Zahid, 2021; Zahid et al., 2018). Based on the descriptive
approach of stakeholder theory, the following hypotheses are
established.
Hypothesis 9(a). : There is a positive moderation of top management
commitment in the association between ESG and ROA.
Hypothesis 9(b). : There is a positive moderation of top management
commitment in the association between ESG and Tobin’s Q.
Hypothesis 10(a). : There is a positive moderation of top management
commitment in the association between the environmental dimension of
ESG and ROA.
Hypothesis 10(b). : There is a positive moderation of top manage­
ment commitment in the association between the environmental
dimension of ESG and Tobin’s Q.
Hypothesis 11(a). : There is a positive moderation of top management
commitment in the association between the social dimension of ESG and
ROA.
Hypothesis 11(b). : There is a positive moderation of top manage­
ment commitment in the association between the social dimension of
ESG and Tobin’s Q.
Hypothesis 12(a). : There is a positive moderation of top management
commitment in the association between the governance dimension of
ESG and ROA.
Hypothesis 12(b). : There is a positive moderation of top manage­
ment commitment in the association between the governance dimension
of ESG and Tobin’s Q.
3. Research design
By following the stratified random sampling, this study selected a
sample of 255 companies from a total of 445 non-financial companies
registered on the Pakistan Stock Exchange (PSX) at the end of 2015
(Pakistan Stock Exchange, 2019). The study did not consider the com­
panies in the financial sector due to their different governance structure
and disclosure requirements (Rahman et al., 2021). As the study was
based on secondary data, hence, first, the sustainability, CSR, and
annual reports were downloaded from the websites of the sample
companies for 5 years from 2016 to 2020. The missing or unavailable
reports on these websites were downloaded from the PSX website. Then,
the required data for all variables of the study – ESG, ROA, Tobin’s Q,
and size, age, and leverage of the sample firms was collected through
content analysis from the downloaded reports. Content analysis is the
most popular and widely used approach for data collection, especially in
the studies of corporate governance and sustainability disclosures
(Boesso & Kumar, 2007; Rahman et al., 2021; Rahman et al., 2021;
Zahid et al., 2020). It codifies qualitative information (like data for ESG
and its dimensions), in anecdotal or literary form, to divide it into
different categories for quantitative estimation (Abbott and Monsen,
1979). There are two approaches to collecting data through content
analysis - unweighted and weighted. The unweighted approach assumes
that each disclosure has an equal importance while the weighted
approach assigns different weights to the disclosures based on their
importance (Madi, 2012). Given that, the weighted approach is
considered subjective, and the unweighted approach is believed to be
more appropriate and therefore reliable. Thus, the current study
H.U. Rahman et al.
employed the un-weighted approach like many previous studies in the
area (Gao and Bansal, 2013; Haniffa and Cooke, 2005) and recorded the
data for ESG and its dimensions by giving a value of 1 to a disclosure and
0 otherwise on an adopted index from (Zahid et al., 2018; Zahid et al.,
2020) covering environmental, social and governance dimensions of
ESG. The adopted index is appropriate for being aligned with the Global
Reporting Initiatives (GRI) framework that is recommended by the Se­
curities and Exchange Commission of Pakistan (SECP) for reporting ESG
in Pakistan. Following Rahman, Zahid, and Muhammad (2021), the
value of 1 assigned to the firms having a sustainability strategy and
0 otherwise while the top management commitment is also denoted by 1
for firms having ESG in their mission and vision statements and
0 otherwise.
Firm performance (FP) was measured by both the accounting (ROA)
and market measures (Tobin’s Q) as many prior studies in the area
suggested or used (Gull et al., 2022; Rahman et al., 2021; Rahman et al.,
2021). Using them both is also logical as ROA explains how ESG affects
firms’ efficiency in generating the return on assets while Tobin’s Q il­
luminates how firms’ ESG is perceived by the market in assigning value
to them. Moreover, ROA may be relevant due to the cost incurred on ESG
while Tobin’s Q may reflect its consequent market response if any. Be­
sides, the simultaneous use of both measures is also important as some
researchers support accounting measures for being more reliable since
audited and based on facts while others criticize them for relying more
on historical costs and having no single or a uniform method, especially
in calculating depreciation and inventory that affects the computation of
ROA. These researchers prefer market measures, including Tobin’s Q,
due to following market trends in assigning value to the firms (Bromiley,
1999; Rahman et al., 2017b). Finally, the following panel data models
were developed for estimation.
FPit (ROAit/TBQit) = β0 + β1ESGit + β2STRTGYit + β3FRSIZit + β4FRAGEit
+ β5FRLEVGit + β6LROAit/LTBQit + β7YDit + β8IDit + εit —————————
(Model 1 and Model 2)
FPit (ROAit/TBQit) = β0 + β1ENVit/β1SOCIit/β1GOVit + β2STRTGYit
+ β3FRSIZit + β4FRAGEit + β5FRLEVGit + β6LROAit/LTBQit + β7YDit +
β8IDit + εit ————————— (Model 3 to Model 8)
FP (ROAit/TBQit) = β0 + β1ESGit*STRTGYit + β2FRSIZit + β3FRAGEit +
β4FRLEVGit + β5LROAit/LTBQit + β6YDit + β7IDit + εit —————————
(Model 9 and Model 10)
FPit (ROAit/TBQit) = β0 + β1ENVit/β1SOCIit/β1GOVit*STRTGYit +
β2FRSIZit + β3FRAGEit β4FRLEVGit + β5LROAit/LTBQit + β6YDit + β7IDit
+ εit ————————— (Model 11 to Model 16)
FPit (ROAit/TBQit) = β0 + β1ESGit + β2TMCit + β3FRSIZit + β4FRAGEit +
β5FRLEVGit + β6LROAit/LTBQit + β7YDit + β8IDit + εit —————————
(Model 17 and Model 18)
FPit (ROAit/TBQit) = β0 + β1ENVit/β1SOCIit/β1GOVit + β2TMCit +
β3FRSIZit + β4FRAGEit + β5FRLEVGit + β6LROAit/LTBQit + β7YDit +
β8IDit + εit ————————— (Model 19 to Model 24)
FPit (ROAit/TBQit) = β0 + β1ESGit*TMCit + β2FRSIZit + β3FRAGEit +
β4FRLEVGit + β5LROAit/LTBQit + β6YDit + β7IDit + εit —————————
(Model 25 and Model 26)
FPit (ROAit/TBQit) = β0 + β1ENVit/β1SOCIit/β1GOVit*TMCit + β2FRSIZit +
β3FRAGEit β4FRLEVGit + β5LROAit/LTBQit + β6YDit + β7IDit + εit
————————— (Model 27 to Model 32)
Where:
FPit = Financial performance of the ith firm at time t.
ROAit = The net income divided by average total assets of the ith firm
at time t.
TBQit = The ratio of current liabilities plus the market value of share
capital divided by total assets of the ith firm at time t
5
Journal of Cleaner Production 404 (2023) 136859
β = Beta.
ESGit = A combined construct of environmental, social, and gover­
nance performance of the ith firm at time t.
ENVit = Environmental performance of the ith firm at time t.
SOCIit = Social performance of the ith firm at time t.
GOVit = Governance performance of the ith firm at time t.
STRTGYit = A dummy variable having a value of 1 for the existence
of sustainability strategy and 0 otherwise in the ith firm at time t.
TMCit = Top Management Commitment is a dummy variable having
a value of 1 for ESG inclusion in the vision and mission and 0 otherwise
for the ith firm at time t.
FRSIZit = Log of the value or worth of the total assets (in million
Rupees) of the ith firm at time t.
FRAGEit = Age of the ith firm at time t measured by the number of
years since its listing on the stock exchange.
FRLEVGit = Total debt to assets ratio of the ith firm at time t.
LROAit/LTBQit = One-year lag of ROA/TBQ of the ith firm at time t.
TDit = Dummy variables for controlling time effects of five years on
ith firm at time t.
IDit = Dummy variables for controlling industry effects on ith firm at
time t
εit = Error term of the ith firm at time t.
4. Analysis and results
4.1. Descriptive statistics
Table 1 shows the descriptive statistics for all the variables. The ROA
and Tobin’s Q have average values of 0.046 and 1.976 respectively.
Likewise, ESG has a mean value of 23.10 while its environmental (ENV),
social (SOCI), and governance (GOV) dimensions have average values of
6.56, 24.12, and 9.34 respectively. The comparison of statistics explains
that firms’ social performance is better than governance and environ­
mental performance. This suggests that firms, and probably their
stakeholders as well assign more value to social performance, among
others. Furthermore, the statistics also indicate that firms may be least
interested in the environmental dimension of ESG. Besides, the statistics
of 94.4% and 95.7% represent the average values of sustainability
strategy (STRTGY) and top management commitment (TMC) respec­
tively. This suggests that most of the sample firms develop and imple­
ment sustainability strategies and enjoy the commitment of top
management to peruse their sustainable initiatives. The control vari­
ables of firms’ size (FRSIZ), age (FRAGE), and leverage (FRLEVG) have
mean values of 59.922, 38.63, and 0.734 respectively. Besides, the
Skewness and Kurtosis statistics reported in Table 1 also show no serious
issue of non-normality since all the values are below the suggested
threshold of ±3 (Wooldridge, 2009; Zahid et al., 2020).
4.2. Correlation matrix
Table 2 reports Pearson’s correlation matrix for checking whether
and how two variables are associated or vary with each other. The
bivariate statistics show that ESG, its social and environmental di­
mensions (ENV and SOCI), sustainability strategy (STRTGY), and firms’
size (FRSIZ) and age (FRAGE) have a significant positive while gover­
nance (GOV) and top management commitment (TMC) have an insig­
nificant positive correlation with ROA and TBQ. Firm leverage
(FRLEVG) has a significant negative correlation with ROA while a sig­
nificant positive association with TBQ. Besides, sustainability strategy
(STRTGY) and top management commitment (TMC) have an insignifi­
cant positive correlation with ESG but a significant positive relationship
with environmental and governance dimensions (ENV and GOV) of ESG.
Similarly, sustainability strategy (STRTGY) has a significant positive
while top management commitment (TMC) has an insignificant positive
correlation with firms’ social performance (SOCI). None of the statistics
has a higher value than 0.3 and hence there is no multicollinearity. This
H.U. Rahman et al. Journal of Cleaner Production 404 (2023) 136859

Table 1
Descriptive statistics.
Variables Min Max Mean S.D Skewness Kurtosis Statistic S.E

Statistic Statistic Statistic Statistic Statistic S.E

ROA − 3.162 3.243 .046 .994 0.000 .071 − .076 .123

TBQ .740 2.027 1.976 2.765 0.000 .071 − .080 .123
ESG 20 43 23.10 6.234 0.567 .071 .597 .123
ENV 3 11 6.56 2.124 0.718 .071 − .946 .123
SOCI 11 30 24.12 3.771 0.062 .071 − .003 .123
GOV 7 11 9.34 1.000 1.821 .071 2.021 .123
FRSIZ .025 2100 59.922 208.419 .000 .071 − .057 .123
FRAGE 8 161 38.63 23.17 .004 .071 − .087 .123
FRLEVG .013 4.745 0.734 0.994 .005 .071 − .097 .123
Frequencies Yes No %Yes %No Cum.% Yes/No
STRTGY 0 1 1203 72 94.4 5.6 94.4 100
TMC 0 1 1220 55 95.7 4.3 95.7 100

Table 2
Pearson’s correlation matrix.
Variables VIF (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11)

ROA (1) – 1
TBQ (2) – 0.298** 1
ESG (3) 1.32 0.135** 0.210** 1
ENV (4) 1.68 0.148** 0.257** 0.646** 1
SOCI (5) 1.14 0.233** 0.243** 0.694** .442** 1
GOV (6) 1.25 0.016 0.035 0.616** .080** .238** 1
FRSIZ (7) 1.49 0.136** 0.251** 0.456** .319** .322** .340** 1
FRAGE (8) 1.12 0.106** 0.071* 0.032 .160** .091** − .077** .218** 1
FRLEVG (9) 1.25 − 0.423** 0.361** 0.094** 0.042 − 0.012 .154** .227** − .056* 1
STRTGY(10) 1.08 0.136** 0.096** 0.054 .142** .104** .077** .156** .190** 0.040 1
TMC(11) 1.05 0.020 0.028 0.022 .117** 0.016 .094** − 0.050 − .150** − 0.032 − 0.002 1

**. Correlation is significant at the 0.01 level (2-tailed).

*. Correlation is significant at the 0.05 level (2-tailed).

is further endorsed by the Variance Inflation Factor (VIF) test showing
values below the recommended threshold of +3 for all predictors
(Table 2). Checking multicollinearity is important as its existence un­
dermines the statistical significance of a predictor or increases the
variance of the coefficient estimates which reduces the reliability of the
derived statistical inferences (Wooldridge, 2009; Zahid et al., 2020).
4.3. Selection of appropriate regression estimator
Regression is a statistical estimation that computes the strength and
character of the relationship of the outcome variable(s) with one or
more predictors. However, the correctness and reliability of this esti­
mation are associated with the selection and use of an appropriate
regression estimator that is determined by different characteristics of the
data (Zahid et al., 2020). To this end, the Breusch-Pagan/Cook-Weisberg
test for heteroscedasticity showed an inconstant variance of the error
terms across observations and thereby heteroscedasticity in all models of
the study as reported in Table 3 to Table 6 (Wooldridge, 2013). Simi­
larly, the Durbin–Wu–Hausman test revealed endogeneity while the
Ramsey test disclosed the issue of omitted variables in all models of the
study which is one of the reasons for endogeneity that is addressed by
incorporating appropriate instrumental variable (IV) in regression esti­
mation. A valid IV should neither exist in the model already nor be
associated with its error. Thus, this study employed the industry mean as
IV like many other studies in the area (Rahman et al., 2018; Zahid et al.,
2020). The post-estimation tests provided evidence for the validity of
the employed IV – industry mean (Table 3 to Table 6). Given that, the
ordinary least squares (OLS) which is one of the most strong and
commonly used regression estimators remained no more an appropriate
choice as it produces potentially biased and inconsistent results, espe­
cially in the presence of endogeneity (Wooldridge, 2013; Zahid et al.,
2020). Thus, this study, like many previous researchers in the area, also
employed a two-stage least squares (2SLS) estimator which is a preferred
choice for asymptotically unbiased estimation of the models using
instrumental variable(s) to address endogeneity mainly caused by
omitted variables or simultaneity (Gull et al., 2022; Zahid et al., 2020).
Theil (1953) recommended 2SLS for estimating the models having
instrumental variables. Antonakis et al. (2014) consider 2SLS as one of
the strongest, nifty, and most efficient techniques for consistent esti­
mation of the simultaneous equations with endogenous predictors. Be­
sides, the heteroscedasticity was addressed by applying the “robust”
option in Stata 13.0 after 2SLS estimations. Like many previous studies,
this inquiry also employed both the OLS and 2SLS estimators, but mainly
relied on the latter; thereby, used its estimations for discussion and
drawing conclusions (Rahman et al., 2018; Wooldridge, 2013; Zahid
et al., 2020).
4.4. Findings and discussion
The findings show that ESG and its environmental (ENV) and social
(SOCI) dimensions have a significant positive impact on firm perfor­
mance (FP) measured by ROA (Tables 3 and 4) and Tobin’s Q (Table 5
and Table 6) which support hypotheses H1 (a) (b), H2 (a) (b), and H3 (a)
(b) of the study. Similarly, the governance dimension (GOV) of ESG also
has a significant positive association with ROA (Tables 3 and 4) which
support H4 (a) of the study. However, GOV has a significant (Table 5)
and an insignificant positive association with Tobin’s Q (Table 6). These
findings which do not fully support H4 (b) of the study may differ due to
the inclusion of different variables in these models i.e. sustainability
strategy (Table 5) and top management commitment (Table 6). These
findings are aligned with the instrumental approach of the stakeholder
theory that firms’ endeavors for the welfare of stakeholders including
the environment, society, and economy pay off by attracting more in­
vestors and customers having positive implications for their financial
performance (Donaldson and Preston, 1995; Paolone et al., 2022).
Aligned with legitimacy theory, the findings suggest that firms’ social

6
 H.U. Rahman et al.
Table 3
Regression analysis.
(OLS) (2SLS) (OLS) (2SLS) (OLS) (2SLS) (OLS) (2SLS) (OLS) (2SLS) (OLS) (2SLS) (OLS) (2SLS) (OLS) (2SLS)

ROA ROA ROA ROA ROA ROA ROA ROA ROA ROA ROA ROA ROA ROA ROA ROA

ESG .516*** .442**

(.135) (.187)
STRTGY .335*** .334*** .333*** .336*** .301*** .31*** .33*** .417***
(.116) (.115) (.117) (.117) (.114) (.113) (.116) (.129)
ESG-STRTGY .538*** .454**
(.134) (.183)
ENV .029*** .03**
(.008) (.013)
ENV- STRTGY .074** .129**
(.03) (.052)
SOCI .132*** .09**
(.024) (.036)
SOCI- STRTGY .089*** .144**
(.015) (.061)
GOV .033** .271**
(.013) (.129)
7

GOV- STRTGY .009 .323**

(.03) (.138)
FRSIZ .108*** .114*** .095*** .102*** .12*** .119*** .124*** .109*** .101*** .115*** .112*** .089** .133*** .008* .14*** .04*
(.03) (.032) (.03) (.032) (.028) (.03) (.027) (.031) (.028) (.029) (.027) (.038) (.028) (.077) (.029) (.054)
FRAGE .001 .001 0.001 .001 .001 0.001 .001 .001 0.001 .001 0.001 − .001 0.001 − .001 0.001 .001
(.001) (.001) (.001) (.001) (.001) (.001) (.001) (.001) (.001) (.001) (.001) (.001) (.001) (.001) (.001) (.001)
FRLEVG − .299*** − .299*** − .303*** − .304*** − .296*** − .295*** − .304*** − .30*** − .296*** − .299*** − .298*** − .295*** − .307*** − .346*** − .305*** − .322***
(.035) (.035) (.034) (.034) (.035) (.035) (.034) (.034) (.034) (.034) (.034) (.033) (.035) (.041) (.034) (.036)
LROA .443*** .444*** .436*** .437*** .439*** .438*** .437*** .434*** .432*** .435*** .43*** .42*** .444*** .417*** .441*** .45***
(.033) (.033) (.033) (.033) (.033) (.033) (.033) (.033) (.032) (.032) (.033) (.034) (.033) (.039) (.033) (.034)
Constant − .17*** − .123** − .447*** − .399*** − .231*** − .184*** − .411*** − .328** − .425*** − .387*** − .542*** − .715*** − .398*** − 1.919** − .463*** − .62***
(.059) (.062) (.119) (.125) (.06) (.063) (.121) (.13) (.116) (.124) (.087) (.25) (.109) (.852) (.118) (.161)
Observations 1275 1275 1275 1275 1275 1275 1275 1275 1275 1275 1275 1275 1275 1275 1275 1275
R-squared .422 .422 .428 .428 .421 .421 .423 .421 .435 .434 .433 .426 .418 .222 .42 .365
Heteroscedast 6.82** – 8.88** – 7.33 – 9.87** – 10.74** – 8.24** – 9.69** – 10.56** –

Journal of Cleaner Production 404 (2023) 136859

Ovtest Ramsey test 4.27** – 4.49** – 4.58** – 5.12** – 4.47** – 3.67 – 4.91** – 5.18 –
Durbin (score) chi2(1) – 0.545 – 0.495 – 0.901 – 0.195 – 0.122 – 0.359 – 0.066 – 0.135
Wu-Hausman F – 0.546 – 0.497 – 0.901 – 0.196 – 0.127 – 0.361 – 0.067 – 0.135
Industries Dummies Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Years Dummies Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes

Robust standard errors are in parentheses ***p < .01, **p < .05, *p < .1.
 H.U. Rahman et al.
Table 4
Regression analysis.
Variables (OLS) (2SLS) (OLS) (2SLS) (OLS) (2SLS) (OLS) (2SLS) (OLS) (2SLS) (OLS) (2SLS) (OLS) (2SLS) (OLS) (2SLS)

ROA ROA ROA ROA ROA ROA ROA ROA ROA ROA ROA ROA ROA ROA ROA ROA

ESG .568*** .454**

(.136) (.192)
TMC .184* .181* .166 .171 .136 .143 .163 .35**
(.104) (.104) (.105) (.106) (.103) (.102) (.105) (.141)
ESG-TMC .542*** .466**
(.135) (.186)
ENV .027*** .032**
(.007) (.013)
ENV- TMC .073** .131**
(.03) (.052)
SOCI .135*** .091**
(.024) (.036)
SOCI- TMC .075*** .178**
(.014) (.078)
GOV .007 .348**
(.03) (.148)
8

GOV- TMC .014 .768**

(.013) (.638)
FRSIZ .101*** .111*** .101*** .108*** .124*** .119*** .131*** .116*** .107*** .121*** .124*** .088** .148*** .041* .145*** .155*
(.03) (.032) (.03) (.032) (.028) (.03) (.028) (.031) (.028) (.03) (.027) (.039) (.029) (.056) (.028) (.257)
FRAGE .001 .001 .001 .001 .001 .001 .001 .001 .001 .001 .001 .001 .001 .002 0.002 .01
(.001) (.001) (.001) (.001) (.001) (.001) (.001) (.001) (.001) (.001) (.001) (.001) (.001) (.001) (.001) (.009)
FRLEVG − .299*** − .3*** − .298*** − .299*** − .295*** − .294*** − .299*** − .298*** − .292*** − .295*** − .292*** − .278*** − .301*** − .316*** − .302*** − .313***
(.035) (.035) (.035) (.035) (.035) (.035) (.035) (.035) (.035) (.035) (.035) (.036) (.036) (.037) (.035) (.049)
LROA .442*** .443*** .444*** .445*** .44*** .439*** .445*** .442*** .439*** .442*** .443*** .437*** .448*** .461*** .449*** .505***
(.033) (.033) (.033) (.033) (.033) (.033) (.033) (.033) (.032) (.033) (.033) (.033) (.033) (.034) (.033) (.067)
Constant − .163*** − .118* − .356*** − .306** − .241*** − .208*** − .304** − .222* − .312** − .276** − .554*** − 1.024*** − .353*** − .646*** − .295** − 6.449
(.059) (.062) (.124) (.126) (.06) (.067) (.126) (.132) (.123) (.126) (.09) (.392) (.127) (.204) (.118) (5.26)
Observations 1275 1275 1275 1275 1275 1275 1275 1275 1275 1275 1275 1275 1275 1275 1275 1275
R-squared .424 .424 .424 .424 .421 .421 .418 .417 .431 .43 .427 .404 .416 .352 .415 .

Journal of Cleaner Production 404 (2023) 136859

Hetero 6.27* – 5.89** – 6.52* – 6.90** – 8.24** – 4.92* – 7.72** – 7.77** –
Ovtest Ramsey test 4.24** – 4.06** – 4.77** – 4.95** – 4.37** – 3.21* – 4.92** – 4.95** –
Durbin (score) chi2 – 0.606 – 0.307 – 0.203 – 1.880 – 2.519 – 1.933 – 6.320 – 5.347
(1)
Wu-Hausman F – 0.597 – 0.303 – 0.203 – 1.868 – 2.458 – 1.933 – 6.340 – 5.366

Robust standard errors are in parentheses ***p < .01, **p < .05, *p < .1.
 H.U. Rahman et al.
Table 5
Regression analysis.
(OLS) (2SLS) (OLS) (2SLS) (OLS) (2SLS) (OLS) (2SLS) (OLS) (2SLS) (OLS) (2SLS) (OLS) (2SLS) (OLS) (2SLS)

TBQ TBQ TBQ TBQ TBQ TBQ TBQ TBQ TBQ TBQ TBQ TBQ TBQ TBQ TBQ TBQ

ESG .464*** .686***

(.112) (.166)
STRTGY .004 .007 .003 .01 − .024 − .03 − .007 .13
(.084) (.084) (.085) (.087) (.082) (.081) (.082) (.104)
ESG-STRTGY .505*** .697***
(.113) (.168)
ENV .031*** .048***
(.007) (.012)
ENV- STRTGY .110*** .195***
(.026) (.048)
SOCI .034*** .136***
(.013) (.033)
SOCI- STRTGY .107*** .235***
(.02) (.062)
GOV − .002 .420***
9

(.01) (.149)
GOV- STRTGY − .013 .473***
(.024) (.131)
FRSIZ .030 .010 .030 .014 .045** .020 .038* .020 .038* .032 .056*** .029 .076*** − .079 .072*** − .158
(.022) (.025) (.021) (.023) (.02) (.023) (.02) (.023) (.02) (.035) (.02) (.022) (.021) (.048) (.02) (.092)
FRAGE .002 0.002 .001 .002 .001 .001 .002 .001 .001 − .001 0.002 .001 0.001 .002 0.002 − .003
(.001) (.001) (.001) (.001) (.001) (.001) (.001) (.001) (.001) (.001) (.001) (.001) (.001) (.001) (.001) (.002)
FRLEVG .146*** .149*** .148*** .151*** .147*** .153*** .154*** .162*** .155*** .184*** .147*** .159*** .142*** .106*** .141*** .094***
(.021) (.021) (.021) (.021) (.021) (.022) (.022) (.022) (.021) (.027) (.021) (.022) (.021) (.025) (.021) (.035)
LTBQ .676*** .67*** .675*** .67*** .677*** .667*** .673*** .665*** .668*** .628*** .678*** .664*** .686*** .702*** .687*** .673***
(.028) (.028) (.027) (.028) (.028) (.028) (.028) (.028) (.028) (.035) (.028) (.028) (.027) (.03) (.027) (.037)
Constant .045 .237*** .042 .234*** .102 .344*** − .02 .137*** .057 − .742*** − .099 .254*** .059 − .084 .063 − 2.546***
(.089) (.088) (.047) (.048) (.089) (.092) (.05) (.051) (.087) (.26) (.073) (.085) (.089) (.136) (.084) (.984)
Observations 1275 1275 1275 1275 1275 1275 1275 1275 1275 1275 1275 1275 1275 1275 1275 1275
R-squared .611 .61 .612 .611 .61 .605 .613 .61 .615 .517 .608 .614 .605 .474 .605 .601

Journal of Cleaner Production 404 (2023) 136859

Hetero 11.01*** – 10.47** – 10.65** – 11.24*** – 11.26** – 11.26** – 12.36** – 12.58** –
Ovtest Ramsey test 7.19*** – 7.26** – 7.22*** – 7.65*** – 8.44*** – 8.44*** – 8.65*** – 8.66** –
Durbin (score) chi2(1) – 3.474 – 2.497 – 3.511 – 6.237 – 13.624 – 13.624 – 18.671 – 17.520
Wu-Hausman F – 3.495 – 2.503 – 3.527 – 6.328 – 13.701 – 13.701 – 18.814 – 17.743

Robust standard errors are in parentheses ***p < .01, **p < .05, *p < .1.
 H.U. Rahman et al.
Table 6
Regression analysis.
(OLS) (2SLS) (OLS) (2SLS) (OLS) (2SLS) (OLS) (2SLS) (OLS) (2SLS) (OLS) (2SLS) (OLS) (2SLS) (OLS) (2SLS)

TBQ TBQ TBQ TBQ TBQ TBQ TBQ TBQ TBQ TBQ TBQ TBQ TBQ TBQ TBQ TBQ

ESG .467*** .696***

(.112) (.167)
TMC .049 .06 .037 .046 .01 .005 .02 .3**
(.089) (.09) (.09) (.094) (.09) (.091) (.088) (.129)
ESG-TMC .505*** .717***
(.114) (.173)
ENV .1*** .05***
(.026) (.012)
ENV- TMC .031*** .197***
(.007) (.048)
SOCI .107*** .137***
(.02) (.033)
SOCI- TMC .038*** .294***
(.013) (.082)
GOV − .012
10

(.025) 1.183
GOV- TMC (.901) − .003 .503***
(.01) (.141)
FRSIZ .03 .009 .028 .009 .045** .02 .041** .021 .037* − .029 .058*** .028 .075*** − .085 .072*** − .384
(.021) (.024) (.021) (.024) (.02) (.023) (.019) (.023) (.02) (.034) (.019) (.022) (.02) (.05) (.019) (.349)
FRAGE .002 .001 .001 .002 .001 .001 .001 .001 .001 .002 0.002 .001 0.001 .002 0.002 .016
(.001) (.001) (.001) (.001) (.001) (.001) (.001) (.001) (.001) (.001) (.001) (.001) (.001) (.001) (.001) (.014)
FRLEVG .147*** .15*** .148*** .151*** .147*** .154*** .156*** .165*** .155*** .201*** .148*** .159*** .142*** .106*** .141*** .081
(.021) (.021) (.021) (.021) (.021) (.022) (.022) (.022) (.021) (.032) (.021) (.022) (.021) (.025) (.021) (.072)
LTBQ .675*** .67*** .674*** .669*** .676*** .667*** .671*** .662*** .668*** .628*** .679*** .663*** .686*** .704*** .686*** .714***
(.028) (.028) (.028) (.028) (.028) (.028) (.028) (.028) (.028) (.036) (.027) (.028) (.027) (.03) (.027) (.071)
Constant − .003 .179* .048 .241*** .067 .305*** − .036 .097* .026 − 1.26*** − .146* .224** .031 − .302 .071 − 9.511
(.106) (.108) (.047) (.048) (.106) (.113) (.051) (.055) (.106) (.419) (.081) (.109) (.108) (.19) (.1) (7.446)
Observations 1275 1275 1275 1275 1275 1275 1275 1275 1275 1275 1275 1275 1275 1275 1275 1275
R-squared .611 .61 .612 .611 .61 .605 .613 .61 .615 .466 .608 .614 .605 .46 .605 .

Journal of Cleaner Production 404 (2023) 136859

Hetero 10.94*** – 10.81** – 10.39** – 11.22*** – 9.27** – 10.91** – 12.31** – 12.55** –
Ovtest Ramsey test 7.09*** – 6.91*** – 6.57*** – 7.59*** – 6.52*** – 7.83*** – 8.62** – 8.68*** –
Durbin (score) chi2(1) – 3.645 – 2.728 – 3.906 – 6.507 – 1.534 – 13.771 – 18.868 – 17.129
Wu-Hausman F – 3.659 – 2.734 – 3.935 – 6.571 – 1.523 – 13.866 – 18.953 – 17.332

Robust standard errors are in parentheses ***p < .01, **p < .05, *p < .1.
H.U. Rahman et al.
and environmental welfare enhance their positive image which leads to
an increase in sales and thus, better financial performance (Qureshi
et al., 2021; Suchman, 1995).
Besides, the findings are also consistent with many empirical studies
showing that ESG and its dimensions are effective mechanisms for
increasing firms’ positive returns and improving their accounting and
market performance (Orlitzky, 2013; Paolone et al., 2022; Pulino et al.,
2022). However, on contrary, the findings are not inconsistent with
some studies showing no, or negative association of ESG or its di­
mensions with firms’ accounting or market performance (Brammer
et al., 2006; Jain et al., 2017). Besides the difference in sample and
methodology, the findings of this study may also be different due to its
context i.e. Pakistan, as markets and societies having no-to-low aware­
ness of ESG or expectations from the corporations assign more value
even to firms’ little efforts for stakeholders’ welfare (Rahman and Zahid,
2021; Wang and Clift, 2009).
The statistics show that sustainability strategy (STRTGY) has a sig­
nificant positive moderating role in the nexus of ESG and all of its di­
mensions - environmental (ENV), social (SOCI), and governance (GOV)
with firm performance (FP) measured by ROA (Table 3) and Tobin’s Q
(Table 5). The statistics show that the significant positive association of
ESG with ROA slightly increased from (β = 0.442**) to (β = 0.454**)
while the significant positive relationship of ESG with Tobin’s Q
marginally improved from (β = 0.686***) to (β = 0.697***) after
introducing the moderation of STRTGY in the regression estimations (as
simplified in Appendix 01 and Appendix 02). Likewise, the findings for
the significant positive nexus of ENV with ROA and Tobin’s Q have also
been somewhat pronounced from (β = 0.03**) and (β = 0.686***) to (β
= 0.048***) and (β = 0.195***) after incorporating the moderation of
STRTGY in the regression estimations. Similarly, the statistics also
provide support to the positive moderation of STRTGY in the significant
positive association of SOCI with ROA and Tobin’s Q that slightly
amplified from (β = 0.03**) and (β = 0.686***) to (β = 0.048***) and (β
= 0.195***) after its inclusion in their direct associations. Furthermore,
the estimation also exhibits that the significant positive connection of
GOV with ROA and Tobin’s Q marginally augmented from (β = 0.271**)
and (β = 0.420***) to (β = 0.323**) and (β = 0.473***) when the
STRTGY introduced as a moderator in their direct association. All these
findings reported in Tables 3 and 5 support hypotheses H5 (a) (b), H6 (a)
(b), H7 (a) (b), and H8 (a) (b) of the study. The findings also support the
unique moderation of STRTGY in all the hypothesized direct relation­
ships as the significant positive direct effects of ESG and its dimensions
on FP (ROA and Tobin’s Q) further amplified after its incorporation in
regression estimations.
The findings are consistent with the descriptive as well as the
instrumental approach of the stakeholder theory in that the develop­
ment and implementation of a comprehensive sustainability strategy
assist firms in the effective integration of ESG and its dimensions into
their DNA that has positive consequences for their financial performance
(Asif et al., 2011; Laine, 2005; Rahman et al., 2021). Likewise, the
findings are also consistent with the legitimacy theory that STRTGY
facilitates firms in increasing their acceptability, legitimacy, and soft
image for improving their economic prospects through signaling a suc­
cessful and balanced integration of ESG and its dimensions into their
business models (Rahman et al., 2021). Besides, the findings also
endorse those few studies which assume sustainability strategy vital for
improvingESG by increasing coordination among different departments
and reducing the cost or resource consumption of an organization
(Laine, 2005; Russo and Fouts, 1997). Given that, firms need to develop
and effectively implement strategies compatible with their internal and
external environment for improving their financial performance by
promoting ESG and its different dimensions (Asif et al., 2011; Porter and
Linde, 1995).
The findings also explain that the top management commitment
(TMC) has a significant positive moderation in the relationship of ESG
and its dimensions - environmental (ENV), social (SOCI), and
11
Journal of Cleaner Production 404 (2023) 136859
governance (GOV) with firm performance (FP) measured by ROA
(Table 4) and Tobin’s Q (Table 6). The statistics show that the significant
positive association of ESG with ROA has marginally amplified from (β
= 0.454**) to (β = 0.466**) while the significant positive relationship
between ESG and Tobin’s Q has somewhat improved from (β =
0.696***) to (β = 0.717***) after incorporating TMC as a moderator in
the regression estimations (as simplified in Appendix 03 and Appendix
04). Similarly, the statistics show a little improvement for the significant
positive connection of ENV with ROA and Tobin’s Q from (β = 0.032**)
and (β = 0.05***) to (β = 0.131**) and (β = 0.197***) after introducing
the TMC as a moderator in their direct relationships. Besides, the find­
ings also unveil a positive moderation of TMC as the significant positive
link of SOCI with ROA and Tobin’s Q slightly pronounced from (β =
0.091**) and (β = 0.137***) to (β = 0.178**) and (β = 0.294***) after
its inclusion in their direct relationships. Likewise, the computation also
exhibits that the significant positive connection between GOV and ROA
improved a little from (β = 0.348**) to (β = 0.768**) while the insig­
nificant association (β = 1.183) between GOV and Tobin’s Q converted
to a significant positive (β = 0.503***) after including the TMC
moderation in the regression estimations. All these findings reported in
Tables 4 and 6 support hypotheses H9 (a) (b), H10 (a) (b), H11 (a) (b),
and H12 (a) (b) of the study. By supporting the distinct moderation, the
findings explain that the commitment of the top management amplifies
the significant positive effect of ESG and its ENV and SOCI dimensions
on FP (ROA and Tobin’s Q). Furthermore, top management commitment
also converts the insignificant role of GOV into a significant positive in
improving Tobin’s Q. Overall, the findings reported in Tables 4 and 6
show consistency with the descriptive approach of the stakeholder
theory that commitment of the top management facilitates firms in the
successful implementation of ESG and its dimensions by allocating the
required human and financial resources and developing a conducive
organizational environment (Asif et al., 2011; Laine, 2005; Rahman
et al., 2021). Consistent with the legitimacy theory and instrumental
approach of the stakeholder theory, the findings also suggest that ESG
and its dimensions when supported by the top management provide
more strong and effective signals to the investors and customers which
have positive consequences for FP measured by ROA and Tobin’s Q
(Kiesnere and Baumgartner, 2022; Rahman et al., 2017a; Rahman et al.,
2021). The findings also endorse the prior studies which consider TMC
as an effective mechanism for the successful implementation of volun­
tary regulations like ESG, especially in the countries like Pakistan having
weak legal stakeholders’ protection (Jahanshahi and Brem, 2017;
Kiesnere and Baumgartner, 2022; Labuschagne et al., 2005). Among the
control variables, the statistics show that firm size (FRSIZ) and lag ROA
(LROA) have a significant positive; firm age (FRAGE) has an insignifi­
cant while firm leverage (FRLEVG) has a significant negative association
with ROA in all models of the study (Tables 3 and 4). The statistics show
that FRSIZ and FRAGE have nowhile FRLEVG and lag Tobin’s Q (LTBQ)
have a significant positive association with Tobin’s Q in all models of the
study reported in Tables 5 and 6 respectively.
5. Conclusion and limitations of the study
This study inquired about the incongruent relationship of ESG and its
separate dimensions with FP (ROA and Tobin’s Q) directly and through
the unique moderation of sustainability strategy and top management
commitment in Pakistan. The findings revealed that ESG and its envi­
ronmental and social dimensions have a significant positive impact on
ROA and Tobin’s Q respectively. Similarly, the governance dimension of
ESG also has a significant positive association with ROA but a significant
and insignificant positive relationship with Tobin’s Q. Besides, the
findings also support the positive moderation of sustainability strategy
and top management commitment in boosting ESG and its dimensions
and increasing their consequent positive effects on FP (ROA and Tobin’s
Q).
The study contributes to the literature, theory, and methodology.
H.U. Rahman et al.
First, unlike most of the prior studies, this inquiry contributes to the
literature by investigating the association of ESG and its separate di­
mensions with FP measured by both the accounting (ROA) and market
performance (Tobin’s Q) in a developing country like Pakistan, where
research in the area is still nascent. Second, it explores the distinct
moderation of sustainability strategy and top management commitment
in the nexus of ESG and its dimensions which contributes to the
descriptive approach of the stakeholder theory that has rarely been
empirically tested in the past. Third, in addition to addressing the
endogenous nature of the ESG-FP nexus, this study also contributes to
methodology by exploring the unique moderations in their relationship,
unlike most of the prior studies which overlooked these aspects. Fourth,
the study also contributes to the practice by examining the “business
case” of ESG that may persuade firms for increasing its integration into
their business operations. Also, the findings contribute to the practice by
updating the key stakeholders about the positive role of sustainability
strategy and top management commitment in promoting ESG and
increasing its effects on FP in developing countries, especially Pakistan,
where there is low compliance with voluntary regulations and weak
legal stakeholders’ protection. Lastly, the study also contributes to the
policy and regulation by updating the policymakers and regulators
about the importance of CCG 2019 which recommends an increase in
integrating strategies – sustainability strategy and top management
commitment for amplifying their positive effects on the ESG-FP nexus.
The study is not free of limitations. First, it codifies the qualitative
information - descriptive nature of ESG disclosures for purely
Appendix 01. Moderation of Strategy in ESG and FP (ROA)
Financial Performance (ROA)
Appendix 02. Moderation of Strategy in ESG and FP (TBQ)
12
Journal of Cleaner Production 404 (2023) 136859
quantitative analysis; hence, future studies may not only look for real
data but also focus on the qualitative aspects of this research. Further­
more, these studies may also search for some other latent variables –
moderators and mediators in the inconsistent nexus of ESG and its
separate dimensions with FP. Due to the non-availability of the required
data, this study could not follow the “double materiality”; therefore,
studies in the future, especially those carried out in the countries or
regions where the required data is available, may also focus on “finan­
cial materiality” and “impact/socio-environment materiality” of ESG.
CRediT authorship contribution statement
Haseeb Ur Rahman: Conceptualization, Methodology, Writing –
original draft, Idea generation and write-up of the manuscript.
Muhammad Zahid: Formal analysis, Tables and Formatting. Mamdouh
Abdulaziz Al-Faryan: Data Collection.
Declaration of competing interest
The authors declare that they have no known competing financial
interests or personal relationships that could have appeared to influence
the work reported in this paper.
Data availability
Data will be made available on request.
H.U. Rahman et al. Journal of Cleaner Production 404 (2023) 136859

Appendix 03. Moderation of TMC in ESG and FP (ROA)

Financial Performance (ROA)

Appendix 04. Moderation of TMC in ESG and FP (TBQ)

Financial Performance (TBQ)

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