Journal of Environmental Management 345 (2023) 118829

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Journal of Environmental Management

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

Research article

Environmental, social, and governance (ESG) performance and financial

outcomes: Analyzing the impact of ESG on financial performance
Simin Chen, Yu Song *, Peng Gao
School of Business, Macau University of Science and Technology, Macau, 999078, China

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

Handling Editor: Lixiao Zhang Background: Environmental Social Governance (ESG) investment had entered a phase of rapid development in the
past few decades as most nations had put forward “carbon neutral” initiatives. ESG would receive more attention
Keywords: from the industry and academia in a global environment full of uncertainties. Companies benefit from the sharing
ESG of ESG data by improving their brand image, which attracts funding, lowers financing costs, and increases
Corporate financial performance
valuation.
ESG performance
Purpose: To explore how ESG drives corporate financial performance. Also, the research examines the interre­
Environmentally sensitive industries
Corporate firm success lation of ESG presentation and corporate presentation.
Design: /methodology/approach: Over an interval of 10 years (2011–2020) using a sample of 3332 listed or­
ganizations worldwide. The theory of the research is on the basis of stakeholder and transmitting signal theory
and multiple regression and categorized regression were applied with STATA 16.0 software.
Results: The study utilizes a large dataset of 24,076 valid observations, providing robust statistical power for the
analysis. The study findings proved that ESG performance is positively interrelated with corporate performance
(p < 0.01). According to the findings of the study, at 1% of the level related to significance (p < 0.01), the
regression coefficient for ESG is considerably positive. Thus, the influence of ESG rating on corporate perfor­
mance is significant for large-scale companies and insignificant for small-scale companies. The results demon­
strate that the positive impact of ESG rating on corporate financial performance is more pronounced in the high
risk case than in the low risk case (p < 0.01). The results highlight the importance of ESG performance in today’s
world. Overall, the study gives precious perception about the interrelation between ESG and corporate financial
performance (CFP).
Policy implications: The researchers believe that the results of this study are beneficial to companies and gov­
ernments in the development of environmentally conscious industries since they demonstrate corporate success
through ESG. More realistically, the ESG can boost corporate firm performance by enabling businesses to
maintain sustainability, establish a solid reputation, win the trust of stakeholders, and contribute to solving
national sustainable development issues. Additionally, the researchers believe that the results of this study can
boost management effectiveness, which in turn can help firms succeed.
Originality/value: In the context of environmentally sensitive industries, this study findings provide empirical
insights to the association between the corporate firms success and ESG performance. In addition, the findings
provide insights to the business organizations development and the significance of ESG integration in the
business organizations.

1. Introduction
In the last few decades the interest towards the growth of environ­
ment and methodologies, citing the global world, social responsibility
and performance of corporate government is gradually increasing (ESG)
(Gao et al., 2022). The concept of ESG has its roots in awareness of
corporate social responsibility. ESG was first coined by the United
Nation in 2004 according to the report “Who Cares Wins”. In 2006 the
United Nations accomplished the Principles for Responsible Investment,
for the investors in gaining the influence of environment, social and
corporate governance factoring the investing decision. The integration
environment by Goldman Sachs, socially responsible and governance

* Corresponding author.
E-mail address: ysong@must.edu.mo (Y. Song).

https://doi.org/10.1016/j.jenvman.2023.118829
Received 8 June 2023; Received in revised form 11 August 2023; Accepted 13 August 2023
Available online 8 September 2023
0301-4797/© 2023 Published by Elsevier Ltd.
S. Chen et al.
factors which were most concerning for the investors and proposed the
definition of ESG (Martha and Khomsiyah, 2023).
Globally, corporations’ ESG performance is evolving into a metric for
evaluating their commitment to environmental protection and social
responsibility. ESG concerns are taken into account when measuring
ESG performance (Shakil, 2021; Gao et al., 2023). The ESG score of a
corporation reveals if it is ecologically and socially conscious. The
reduction of information asymmetry and market volatility is shown by a
company’s strong ESG performance, which also displays the company’s
social and environmental responsibility. Due to their efforts to lessen
environmental damage, businesses with high ESG are less vulnerable to
litigation risk. ESG aspects are frequently operationalized and used to
assess a company’s corporate social performance (Zhan, 2023; Schom­
mer et al., 2019). Firm risk is generally understood as the potential for a
loss in firm value as a result of uncertainty surrounding potential future
results or events. Due to the cyclical nature of financial performance,
risk is quantified in reference to stock prices, the stock market, or in­
ternal or income accounting risk. An excellent ESG information disclo­
sure provides corporate management and external investors with more
information and serves as a crucial resource for additional investment as
it increases their confidence in the long-term sustainable growth of the
companies (Попов and Макеева, 2022; Alsayegh et al., 2020). The
Guidelines for Environmental Information Disclosure of Listed firms are
followed, however, by the majority of listed firms in China. Some listed
businesses in environmentally sensitive industries selectively report
environmental information in order to retain their competitiveness and
reputation, which not only deceives investors but also raises operational
and financial risks (Wu and Hąbek, 2021).
ESG investment is now entering a phase of rapid development in
which stock exchanges, regulators, and investors are working together.
As of August 2021, 106 stock exchanges worldwide have joined the
Sustainable Stock Exchange Initiative (SSEi). Of these, 26 exchanges
have made ESG disclosure mandatory for listed companies, and 60 ex­
changes have issued guidelines on ESG disclosure (SSEi, 2021). The
influence of the investors are judged by the consideration of ESG related
factors. In 2020, the total size of ESG investable assets was nearly USD
40 trillion, representing around 30% of global asset management. Diab
and Martin Adams (2021) predicted the global ESG assets under the
management will extend up to USD 53 trillion in 2025, with its share of
total projected assets under management exceeding one-third. Meta-­
studies examining the relationship between financial performance and
ESG issues have a long history. Through these analyses, it was found that
ESG performance is related to lower capital costs, stock performance,
and operational efficiency. Nearly 63% of meta-analyses and 48% of
vote-count studies in the largest empirical investigation of ESG and CFP
by Friede et al. (2015) found a positive ESG-CFP, whereas less than 10%
reported a negative conclusion (Fig. 1).
The ESG concept is a powerful tool for implementing the “carbon
neutral” goal. Since the year 2020 many countries and regions are
making plans of achieving carbon neutrality in the middle. The
neutrality in carbon will be achieved by China in the year 2060.
Countries like EU, Canada, South Africa, Japan and South Korea ensured
carbon neutrality by year 2050, followed by the US. New Zealand, Chile,
Denmark, France, Hungary and the UK will try to integrate the law of
carbon neutrality in 2050. It is expected that about two-third of global
emissions and 75% of GDP will be decarbonized in the mid century. The
concept of ESG requires investment institutions to look environmentally,
socially and incorporate the governmental aspects of a company. On the
other hand, it guides companies to implement sustainable concepts in
their business processes. Therefore carbon neutrality can be achieved by
the practicing of ESG.
ESG has received further market attention since the COVID-19
outburst in 2019. According to the KPMG 2020 Global CEO Foresight
Survey, nearly two-thirds (63%) of leaders will place greater emphasis
on ESG amid a volatile global environment (Sanders and Wood, 2019).
Diab and Martin Adams (2021) noted that the size of perpetual funds in
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Journal of Environmental Management 345 (2023) 118829
Fig. 1. ESG and corporate financial performance.
2020 is growing 123% compared to 2019. There are two main reasons
for the market’s preference. On the one hand, COVID-19 has once again
warned of the various risks associated with increased climate change.
Kristalina Georgieva, Managing Director of the International Monetary
Fund (IMF) in the year 2020, has said that all countries are facing
challenges from the risks of climate change. So the countries must take
part in the transformation of climate. From the perspective of a green
economy and sustainable development, ESG investments have a number
of strict risk control “yardsticks” in terms of environmental and social
aspects, which help investors to avoid risk losses due to mountain fires,
hurricanes, etc. Investors’ interest in it has increased. Next to this from
the view of corporations, concern for social responsibility and envi­
ronmental protection is often a “gold brand”. Companies that do better
in this area tend to have better growth potential. So they can also fit in
with asset managers’ quest for long-term stable returns.
In recent years, academic research on the influence of ESG infor­
mation on market value of firms and financial performance has been
quickly rising internationally (Deng and Cheng, 2019; Tarmuji et al.,
2016; Velte, 2017; Duque-Grisales and Aguilera-Caracuel, 2021;
Rodríguez-Fernández et al., 2019; Li et al., 2020). However, studies
conclude differently. In most studies, ESG is supported as improving CFP
and enterprise value. In other studies, ESG was seen to have no associ­
ation with them, or even a negative effect on them. In the content of
Covid-19 it is significant to study the effect of ESG on the representation
of corporations in a wider aspect.
The wealth profile is in association with the show of exterior ESG
whereas firms belong to countries such as Brazil, Russia, India, China
and South Africa, the ESG performance analysis includes systematic
social taboos, moral resolution and pressure related to politics related to
social and environmental damage causes. The CFP related to ESG per­
formance in sustainable management of firm practices adopted in
developing countries (Garcia et al., 2017). Environmental sustainability
along with socio-economic stability recognizes cooperative significance
to sustainable and responsible investments which focus on long-term
sustainability as ESG goals which contribute to maximum profit as
beneficial to ESG goals. The ESG performance leads to successful for­
mation of business that alleviates risks associated with sustainable
returns for investors as countries and industries collaborate with the
methodology of ESG is transparent and sustainable in the world of
business (Naeem and Cankaya, 2022).
Against the proposed background the paper reveals whether ESG
ratings have a significant role in financial shows. In this paper, from an
empirical perspective, the ESG score data and financial data in
2011–2020 of 3332 listed companies worldwide are selected as a sample
S. Chen et al.
to survey the association of ESG and corporate performance. At the same
time, they are differentiated for comparative studies based on exposure
to different levels of risk, different company sizes, and different coun­
tries and industries.
This study provides potential benefits to the governments and firms
economically by promoting export and trade opportunities, identifying
global challenges, forming policies, developing innovative and
competitive strategies, enhancing productivity and efficiency and
improving decision making. This research can provide export and trade
opportunities to both the government and firms by exporting innovative
services and products to the international markets, generating foreign
exchange and enhancing economic growth. To survive in a competitive
market is very crucial to identify the global challenges and this research
addresses g; obal challenges such as climate change, public health, and
sustainable development. Economically, governments can formulate
effective regulations and policies which are well-informed by research
that can promote economic growth, address societal challenges, and
create a conducive business environment. New ideas, technologies, and
business models that emerge from research can help firms create new
products and services, leading to economic growth and job creation.
Findings from research may enhance the efficiency of processes and
technologies, resulting in enhanced efficiency and lower costs for gov­
ernments and firms, enhancing economic output and worldwide
competitiveness in the marketplace. Through market trends, consumer
behavior, and technology innovations, analysis provides essential un­
derstanding for governments and firms, assisting in decision-making.
This aids in the identification of opportunities, the enhancement of the
creation of products, and the optimisation of resource allocation. Thus,
this current research on how corporate success can be driven by ESG
performance is economically very useful for governments and firms.
Based on the prior studies, ESG ratings and financial success were
found to be negatively correlated by Gavin et al. (2022). ESG consid­
erations generally have a favorable impact on credit ratings, according
to Suttipun’s (2023) study of the connection between ESG aspects and
business financial performance. Zakari et al. (2022) did a meta-analytic
evaluation looking at ESG performance and corporate financial risk with
a focus on financial risk. This study examines how businesses in envi­
ronmentally conscious sectors might succeed through their ESG per­
formance. While a significant amount of literature has looked at the
connection between financial risk and ESG (Kim and Li, 2021; Capelli
et al., 2021), very little of it has specifically addressed ESG and noted the
connection with financial risk. Furthermore, the majority of these
research dates from 1975 to 1997. These studies are challenging to
compare because of the various time frames of the various ESG ratings.
The evidence from recent studies on the connection between ESG and
financial success is sparse and unclear. Previous research offers more or
less consistent findings at the overall ESG level. Results from recent
studies regarding various ESG ratings have been equivocal. For instance,
several research (Reber et al., 2022; Whelan et al., 2021) contend that
ESG and financial performance are not compatible. This freshly pub­
lished study also includes a number of other restrictions. To help in­
dustrial businesses increase their understanding of ESG integration and
development, research is required to identify relevant methods and
recommendations. In order to fill this research gap, this study aims to
explore how environmentally sensitive industries can drive corporate
success through ESG performance. According to the findings of this
study, ESG performance is positively interrelated with corporate per­
formance (p < 0.01). Thus, the association of ESG and CFP is significant
for large-scale companies and insignificant for small-scale companies.
Especially, for industrial firms to increase knowledge of ESG integration
and development, this study offers workable techniques and
recommendations.
Determining the relationship between company performance and
ESG has drawn more attention over the past few years. While some
studies show a favorable influence of ESG considerations on corporate
financial performance and credit ratings, previous research has shown
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Journal of Environmental Management 345 (2023) 118829
inconsistent results about the negative association between financial
success and ESG ratings. There is a significant study gap on the rela­
tionship between financial risks and ESG, and just a few studies have
looked at this relationship. However, due to the limitations of ESG rat­
ings and the various time frames, it is difficult to compare the results of
the available research. This study will help close those gaps in under­
standing by providing significant insights on the potential advantages of
ESG integration for environmentally conscious businesses. The signifi­
cance of this research lies in its contribution to the understanding of the
relationship between Environmental, Social, and Governance (ESG)
performance and financial performance of firms. The main objective of
this research is to explore how ESG drives CFP, the impact of ESG per­
formance or corporate performance by using stakeholder theory and the
significance of ESG performance in today’s business landscape, and its
potential to mitigate risks and enhance overall performance for com­
panies. Additionally, the following are the study’s main contributions:
1.1. Contribution and novelty of the study
The major contribution of the study as well as the novelty are as
follows:
★ Research explores the impact of ESG performance on CFP.
★ The research examines the interrelation between ESG presentation
and corporate presentation
★ The research depicts the extent to which ESG performance affects
corporate performance for companies of different sizes, risk levels,
industries, and regions.
★ The study offers a novel contribution to the field of ESG industries by
providing a comprehensive examination of its benefits in business
organizations, broadening its impact on corporate firms’ success, and
providing practical recommendations to integrate ESG in business
sectors.
The study explores the advantageous correlation among ESG per­
formance and company performance by deploying a big dataset of
24,076 observations. In large-scale businesses, the ESG regression co­
efficient is significant, on the other hand, for small-scale ones, it is not. In
high-risk situations, the positive effects of ESG rating on business
financial performance are more significant because all the obtained p
values are less than 0.01. The study highlights the significance of ESG
performance in the modern world and offers insightful information on
how ESG and corporate financial performance (CFP) are related. The
industry with the highest ESG ratio was real estate and development,
with a value of 11.2%, followed by the energy sector at 9.6% and
pharmaceutical production at 6.3%. These findings show the way ESG
performance varies across various industries.
The research is organized as follows: Section 2 examines the relevant
literature. The theoretical analysis and hypothesis development of the
study is discussed in section 3. Section 4 presents the empirical methods
employed in this study. Section 5 presents the findings of the research.
Section 6 presents the discussion of the study. Section 6 presents the
study conclusions and future directions. Section 7 presents the study’s
implications theoretically and practically.
2. Literature review
2.1. ESG and financial performance
In both domestic and overseas academic studies, it has been found
that ESG inputs increase the short-term costs of a company, but improve
medium- and long-term performance. Traditional theory considers the
maximization of shareholders’ interests as the greatest objective of a
company. For example, when a company is involved in a costly envi­
ronmental remediation program that requires a large capital investment,
it can affect the company’s profitability in the short term. According to
S. Chen et al.
previous studies, corporate investment in social responsibility and
environmental protection reduces the economic performance and equity
of spending of listed firms (Dhar et al., 2022). However, according to the
“social impact hypothesis,” ESG inputs can actually improve CFP. Ac­
cording to this theory, an efficient organization that satisfies social re­
sponsibility can experience two benefits: (1) social impact increases,
attracting more clients; and (2) staff members’ feeling of identity and
belonging improves, leading to better performance. By emphasizing the
workplace environment of staff and building a complete talent training
system, businesses can provide a sense of belonging to their workforce
and boost their initiative, thereby enhancing the company’s overall
productivity.
According to the “optimal social responsibility hypothesis,” some
researchers believe the interrelation among companies succeeding
financially and corporate social responsibility is more akin to an inver­
ted U-shaped curve than a simple linear one. If businesses spend
excessively on ESG, their financial performance can be reduced (Liu
et al., 2022) also found in an empirical study of the Middle East and
North America that after a certain threshold of ESG investment, the
financial performance of listed companies no longer increases or may
even decrease.
Recent research has also shown that higher levels of exchange-traded
funds (ETFs) sustainability perform responsible investments during
economic downturns are the results of having Covid-19. By the appli­
cation of ANOVA in collaboration with multivariate regression models,
the researcher named Dugard et al. (2022) surveyed the monetary
returns of EFTs and Eco-Fund rankings when the financial market
collided. In rising multinational markets the rise in financial perfor­
mance is correlated to environment, sociality and governance (ESG).
Surveying of information on the basis of Thomson Reuters Eikon data­
base comprises 104 multinationals such as Brazil, Chile, Colombia,
Mexico, and Peru through 2011 to 2015 proving an unstructured re­
lations between ESG and financial performance, as determined through
linear regression by Duque-Grisales and Aguilera-Caracuel (2021)
(Thomson, 2013).
Businesses have the potential to generate serious economic and
environmental (EE) difficulties; as a result, they must improve their
environmental management and information disclosure (EMID), which
is essential to enhancing both their EE performance. The study examined
the effects of EMID on Chinese enterprises’ EE performance. The anal­
ysis revealed that practices used by businesses to provide environmental
information greatly boost their productivity and profitability (Qing,
2022). Objectively speaking, the cov-19 pandemic has increased the risk
of infection in global trade. All nations on earth are now responsible for
preventing and containing the outbreak. The goal of the study was to
evaluate the potential impact of COVID-19 on trade between China and
countries along the One Belt, One Road. To quantify the economic
impact of trade, a gravity model and speed of convergence technique
based on modifications in trading behavior and the cost of the outbreak
by impacted nations are utilized. According to the estimates, the po­
tential value of commerce between China and the EU will decrease
(Dagestani, 2022). The study examined the methods for controlling and
preventing the transmission of public opinion in social networks during
the pandemic from the standpoint of the emotive qualities of user
messages. The model underwent a mathematical and simulation inves­
tigation. an empirical investigation using content data from microblogs.
studied the elements that influence and obstruct public support for the
pandemic. The results showed that when positive emotion is higher, the
spread of unfavorable public opinion can be prevented (You et al., 2022;
Chen et al., 2023). The study conducted a review of previous research on
environmental exposure in populations. Found peer-reviewed books,
reviews, and articles on the topics of EMID in African human commu­
nities by searching PubMed and Google Scholar. The PRISMA standards
were used to evaluate the quality of the retrieved publications, and as a
consequence, 40 papers were excluded, leaving 49 studies for the final
analysis. The public is not adequately informed about EMID related to
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Journal of Environmental Management 345 (2023) 118829
home injuries, like pesticides in agriculture, industry-related diseases
and vectors, laboratory chemical exposure, industrial exposure, and
epigenetic variables (Dagestani et al., 2022).
Corruption has an impact on company investment and takes money
away from things that boost growth, which lowers productivity. Ac­
cording to the findings (Tao et al., 2023; Chen, 2023), the boosting effect
was most pronounced in non-state-owned businesses, companies
without a political affiliation, and companies located in areas with lib­
eral legal systems. The study used improved time series estimate tech­
niques and the enlarged dataset, which spans the years 1985 through
2021. The results of three long-run estimators showed that the country’s
energy transition is facilitated by economic growth and the production
of renewable electricity. However, the extraction of natural resources
has an unbalanced impact on the energy transition, with coal and forest
rents having a negative impact and mineral and oil rents having a pos­
itive one (Zhang et al., 2023). The study investigated whether the pilot
program for carbon emission pricing promotes low-carbon industry
restructuring. According to the report, the pilot carbon emission trading
policy’s shock strongly discourages energy-intensive industries in the
industrial sector and encourages low-carbon industrial structure rear­
rangement (Shen et al., 2023).
The study’s goal was to understand how the board of directors relates
to business value and greenwashing. Through the use of a two-way fixed
effects model and a number of robustness tests. The study offered
innovative theoretical ideas to advance substantive CSR and board
governance in developing nations like China and produced rich empir­
ical evidence for boards and greenwashing behaviour (Chen and Dag­
estani, 2023). To investigate how research and development factors
impact regional total factor productivity, a stochastic frontier analysis
model was developed and research and development factors were
calculated. The findings demonstrated that R&D staff and R&D capital
stock may both considerably advance regional TFP (Zhao and Tian,
2022). The success of an organization’s digital transformation is crucial
to its competitiveness in the digital age. The organization’s strategic
vision and resource readiness, in turn, have a significant impact on the
effectiveness of such change. Both structural equation modeling and
fuzzy set qualitative comparative were used to empirically test the
model. The significance of resource orchestration was emphasized by
the study (Cheng et al., 2023).
2.2. Enterprise risk, ESG and corporate performance
The increasing prevalence of COVID-19 has created severe economic
consequences (Hasan et al., 2021). Due to the increase of Covid-19 strict
restriction is being posed on many countries along with social distancing
(You et al., 2022). These limitations have had an extraordinary tangible
economic impact on enterprises in a variety of ways, including
decreased product demand, reduced operations owing to preventative
and control procedures, and disruptions in supply chains. The ESG
gained an ample of attention by the market participants in the ongoing
surge of Covid-19 because companies see their commitment to stake­
holders as a means of enhancing corporate value (Ferrell et al., 2016;
Bae et al., 2021). The consequence of Covid-19 and performance of ESG
in the crisis is quite noticeable. Corruption has an impact on company
investment and takes money away from things that boost growth, which
lowers productivity. According to the findings (Tao et al., 2023), the
boosting effect was most pronounced in non-state-owned businesses,
companies without a political affiliation, and companies located in areas
with liberal legal systems. The study used improved time series estimate
techniques and the enlarged dataset, which spans the years 1985
through 2021. The results of three long-run estimators showed that the
country’s energy transition is facilitated by economic growth and the
production of renewable electricity. However, the extraction of natural
resources has an unbalanced impact on the energy transition, with coal
and forest rents having a negative impact and mineral and oil rents
having a positive one (Zhang et al., 2023).
S. Chen et al.
Many of the previous studies prove that the sound ESG ratings are
capable of handling risks efficiently. Companies holding high ESG rates
are unlikely to experience litigation disputes and regulatory penalties,
thereby reducing the retracement of the company’s share price and tail
risk (Hoepner et al., 2017). Companies having higher ESG rates are
likely to suffer huge losses and have systematic losses. Zhang et al.
(2023) and Garel and Petit-Romec (2021) explored that companies with
higher ESG ratings have high term risk management system capabilities
in a study of the event performance of COVID-19 in China and the US
region, respectively. As a result, they fell less than other listed com­
panies in markets that pulled back sharply after COVID-19.
In the study by Eccles and Stroehle (2019), companies with a good
ESG profile are considered less vulnerable to systemic risk shocks.
Therefore, they exhibit lower risk. In terms of risk transmission mech­
anisms, Godfrey et al. (2009), Oikonomou et al. (2012), and others have
found that firms having strong ESG properties have minimal risk,
adjusted capabilities and compliance standard in corporate governance
and management of supply chain. Keeping the risks under control,
companies with good ratings of ESG are not exposed to negative sce­
narios, such as fraudulent activity, corruption or litigation cases. So, the
reduction in risk events ultimately reduces the tail risk of a company’s
share price.
The increasing environmental and risk problems have led companies
and regulatory agencies to realize that ESG activities are important. ESG
activities that scale the firm performance are promoted or reduced,
which correlates that ESG activities are not up the mark with regular
measures represented by the country’s emerging markets. The study
reflected that ESG activities cooperate significantly with firm perfor­
mance with negative impact (Ruan and Liu, 2021). ESG factors char­
acterized with pressure more than utilities implement the Data
Envelopment Analysis (DEA) model that led to an increase in utilities
efficiency of companies. ESG factors are not associated with the
improvement of utilities efficiency or complementary criteria related to
credit lending managers (Veltri et al., 2023).
In order to calculate confidence intervals for the coefficient of vari­
ation of a log-normal distribution as well as the difference between the
coefficients of variation of two log-normal distributions, Thangjai et al.
(2021) developed a Bayesian technique. Initially, a Monte Carlo simu­
lation was used to compare the Bayesian approach with the
large-sample, Chi-squared, and approximation fiducial approaches. In
the second instance, a Monte Carlo simulation was used to compare the
Bayesian methodology to the MOVER (“method of variance estimate
recovery”), modified MOVER, and approximation fiducial approaches.
The findings demonstrated that the Bayesian approach was the most
effective method for constructing confidence intervals for a log-normal
distribution’s coefficient of variance. The majority of nations have
revised their organizational and operating models in their financial
systems in response to the COVID-19 epidemic, climate change, and the
global financial crisis of 2008. Long-term economic growth in Vietnam
must be based on sustainable practices. A basis for a green economy and
sustainable development, green banking represents the best possible
paradigm for the financial sector in the future. The study examined the
current environment and a few obstacles to the growth of green banking
in Vietnam. The study collected data by using a convenient sample
procedure on 700 commercial bank managers. The study examined five
variables with a significant level that affect the growth of green banks
(Hang, 2022).
2.3. Research review
Generally the experimentation in this arena holds both expansion in
breadth and depth. Scholars have surveyed the influential reasons and
financial problems of corporate ESG on the basis of transmitting signals
theory. The research samples involve listed companies in the US, Can­
ada, Germany, the UK, Malaysia, and China. From the perspective of
research methods, statistical analysis, deductive reasoning, and
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Journal of Environmental Management 345 (2023) 118829
regression analysis were adopted to construct a variety of indicators to
measure variables such as ESG disclosure, ESG performance, CFP, and
corporate risk.
Secondly, there is wide divergence in research findings. With regard
to the impact of ESG on companies, in most studies, ESG ratings were
shown to have a beneficial effect on company finances. However, in a
few studies, it has also been shown to have a positive or no effect. This
may be due to the large heterogeneity in the institutional backgrounds of
the samples selected by scholars, the different contexts of the times, and
the different ESG rating criteria.
Thirdly, there is a shortage of research samples and focus areas. From
the current state of domestic and overseas academic studies, ESG scores
are rated by different organizations, and research data is not easily
accessible, especially specific data on scores for environment, social
responsibility, and corporate governance. As a result, studies often do
not delve into internal line items. In addition, the sample sizes of current
studies are generally small, and most of them focus on only a few
countries or environmentally sensitive industries.
In this paper, the gaps in the above literature studies are attempted to
be filled. The link among ESG and CFP is first compared based on
different risk scenarios, different company size scenarios, and different
countries and industries, which is somewhat innovative. At present,
there are some country and industry comparisons for ESG-related
studies. However, this paper expands on this aspect. In addition, three
sub-sections of ESG are less frequently analyzed in current research,
which include environment, social responsibility and corporate gover­
nance. This paper is a breakthrough in this area. Thus, this study ex­
amines the bond between ESG and CFP.
2.4. Research gap
From the last few years, there has been observed an increasing in­
terest in determining the correlation among the corporate performance
and ESG. Previous studies consist of mixed outcomes regarding the
negative correlation among the financial success and ESG rating
whereas some of the studies indicate the positive impact of ESG con­
siderations on business financial performance and credit ratings. In
addition to these studies, few studies have examined the correlation
among the ESG and financial risks, and there exists a considerable
research gap with respect to the correlation of financial risks and ESG.
On the other hand, it is challenging to compare the findings across the
existing studies since there exists a limitation of ESG ratings and the
different time frames. Few studies also claim that the financial perfor­
mance and ESG are not compatible, in a contradiction to that, recent
studies have provided inconclusive evidence on the association between
ESG and financial success. To fill these research gaps this study would
provide a valuable insight on the potential benefits of ESG integration
for the environmentally sensitive firms, succeedingly the study will
explore the relationship between ESG performance and corporate
financial performance, using stakeholder theory.
3. Theoretical framework
The theoretical framework of the study gives a conceptual founda­
tion and principle. ESG investing refers to a set of standards for corpo­
rate behavior that socially conscious investors use to assess potential
investments. Environmental criteria consider a company’s environ­
mental protection efforts, including corporate climate change policy, as
well as the value of ESG to businesses and investors. As part of the ESG
valuation process, ESG issues are considered. ESG refers to a set of
guidelines used to evaluate a company’s operations and hazards in the
private sector. (Chouaibi et al., 2022). Businesses working morally and
responsibly to advance society’s well-being are the cause of the increase
in firm value. This theoretical perspective would explore how entre­
preneurial activity and innovation are fostered or constrained within the
context of high-tech entrepreneurship in Chinese universities. It might
S. Chen et al.
examine factors such as the presence of an entrepreneurial culture,
support for innovation, and the role of academic entrepreneurship in
promoting technological advancements. As a result, a successful com­
pany is a part of a wider society. Although companies that prioritize
making a profit are not held solely accountable for society’s and the
environment’s problems, their contribution to fostering economic and
societal ideals that are sustainable in the long run is crucial. ESG dis­
closures can help a company gain a competitive edge, improve its
reputation among investors, and boost performance in the long run. The
actions taken by a company through its ESG disclosure ought to rise
together with its performance and value.
Fig. 2 illustrates the conceptual framework of the study, which in­
dicates how the ESG rating influences the CFP (corporate financial
performance). However, affordability theory implies that without
enough resources, ESG disclosures may not materialize for small and
developing businesses, despite the fact that businesses seek to engage in
them. In response to the query of whether it is well rewarded, substantial
scholarly attention has been given over the last few decades to the as­
sociation between ESG performance and CFP. This close connection
between CFP and ESG performance is especially significant in the
context of global business (Bruna et al., 2022). ESG performance has an
impact on risk, which has an impact on capital cost. During financial
crises, high-ESG-performing companies have been observed to do better
than low-ESG-performing companies.
4. Hypothesis development
ESG can lower systemic risks and increase a firm’s shock resilience.
The inverted U-shape of the link between ESG activities and CFP shows
that it is initially good before beginning to have a negative impact
(Baran et al., 2022). The ESG evaluation complements traditional
financial research by evaluating a company’s ESG risks and opportu­
nities, or the money they stand to lose by neglecting ESG risks and the
money they stand to make by taking advantage of ESG possibilities.
Financial gains remain the primary objective of ESG investments.
Research depicts the productive correlation among the CFP and sus­
tainability might be because of the development in the generated trust
by ESG factors (Carlin et al., 2009), which is one of the best arrangement
with the business individuals or the institutional logic applied for the
betterment of legitimacy (Ioannou and Serafeim, 2017). The fulfillment
of ESG by a company to fulfill the expectations of the business in­
dividuals would leads to a better reputation for the firms which is
soundly correlated with CFP. The rewards of ESG will far outweigh the
costs incurred. As an outcome positive existence is obtained from the
CFP and CSR. This leads to the following hypothesis.
H1. ESG rating positively affects CFP
According to the theory of stakeholder and signal transmission, the
more stakeholders value a company’s ESG during a crisis, the more
Fig. 2. Conceptual framework.
6
Journal of Environmental Management 345 (2023) 118829
important it becomes to them. Companies with better ESG ratings are
better able to communicate positive messages to their stakeholders,
enabling them to engage more effectively with their stakeholders and
enhance their business robustness, particularly at the period of shortage
(Ahmad et al., 2021). When a company is facing a crisis, stakeholders
are more concerned about whether the company is fulfilling its corpo­
rate environmental responsibility, fulfilling its social responsibility, and
whether corporate governance is operating efficiently and reasonably. If
all three aspects of corporate governance are well-performed, i.e., with a
high ESG rating, stakeholders will have a higher level of trust in the
company. Shareholders will have more confidence that the company
will survive the crisis. Employees will be more satisfied and engaged in
their work, which is likely to increase their productivity. External
recognition of the company’s products or services will also be higher,
resulting in increased revenue (Shakil, 2021). The government will also
have more confidence in the company to meet its legal obligations. This
will result in the company having greater control over its operations and
cost control during a crisis, and its available resources and financial
relief will be greater. As a result, its operations will be more robust, and
its financial position is likely to remain healthy. This leads to the
following hypothesis.
H2. The positive impact of ESG rating on CFP is more pronounced in
the high risk case than in the low risk case.
According to signal transmission theory, managers and stakeholders
benefit from ESG efforts because they help to eliminate information
asymmetry. The study concludes that large companies are more con­
cerned about ESG because they are more socially visible. Due to their
greater resources and lower costs, larger organizations are also more
likely than smaller ones to apply ESG. As a result, large companies are
relatively more effective in communicating their CSR commitments to
stakeholders (Ting, 2021; Baumann-Pauly et al., 2013). Smaller busi­
nesses, on the other hand, may have expertise in engaging in CSR ac­
tivities but relatively fewer resources. Even if they do communicate their
ESG messages to society, the effectiveness of the messaging may be
lower due to their lower visibility. Moreover, the aforementioned higher
ESG rating has a positive impact on CFP, leading to the following
hypothesis.
H3. The positive impact of ESG rating on CFP is more significant for
larger companies than for smaller companies.
The impact of ESG ratings on CFP may also be influenced by
geographical location. Wang et al. (2016) noted that the link between
CFP and corporate sustainability is holding potentiality in the developed
nations. This may be due to information validity across nations and
varied stakeholder perspectives (Lu et al., 2020). The current study
demonstrates a positive link between mandatory CSR reporting and
corporate sustainability and performance (Ioannou and Serafeim, 2017).
In developed countries such as Europe and the US, there are high
S. Chen et al. Journal of Environmental Management 345 (2023) 118829

requirements, which allows ESG information to be communicated more missing data on key variables were excluded. The final dataset included
effectively to stakeholders. As mentioned earlier, the effectiveness of 3332 listed companies with approximately 24,076 observations.
ESG rating information transmission affects stakeholders’ association to Continuous variables in this study were adjusted at 1% to avoid the
the company’s development, the effectiveness of the company’s actions impact of outliers, and empirical analysis was conducted using STATA
such as resource allocation, product sales, cost control, etc., and thus 16.0 analysis software. To determine the level of risk faced by com­
affects CFP. Therefore, the following hypothesis can be developed. panies, we used the index scores of the risks faced by listed companies in
2019 and 2020 from Hassan et al.’s study. They analyzed the negative
H4. Companies in wealthy countries experience the benefits of ESG
sentiment of listed companies under risks such as natural disasters, ep­
rating on CFP more so than those in developing countries.
idemics, and economic crises using quarterly conference call texts and
Industries that are environmentally sensitive tend to be more sus­
estimated an analytical index of formation. When the index is higher, the
ceptible to government regulations, and their environmental costs have
risk faced by the company is greater. To classify company size, we used
a greater impact on their profits. Intelligently managing the environ­
asset size corresponding to companies in the Thomson Reuters ESG
mental consequences of the firms are related to sensitivity of the envi­
database. For classification of developed and less developed countries,
ronment. Overcoming the regular pressure of these companies and
we mainly followed the classification of developed and developing
minimizing their exposure to adverse action of government enabling to
economies in the “UN World Economic Situation and Prospects in 2020″
an extent to reach greater range of freedom. According to a McKinsey
report, pages P165-166. To have a classification of an environmentally
report (2020), due to intervention one third of the profit costs. The value
sophisticated environment, we used the “North American Industry
at risk in industries such as automobiles, defense, aerospace, and tech­
Classification System” (NAICS) classification of environmentally sensi­
nology, where government incentives are dominant, can be as high as
tive industries. In order to have a classification of business establish­
60%. Moreover, environmentally sensitive industries often have high
ments NAICS came into the picture by the US (Hoffmann, 2019).
ESG ratings, and higher environmental scores. The research displays a
positive interrelation between the efficiency of company resource effi­
ciency and financial performance, indicating that reducing resource
5.2. Variable definitions
costs could increase operating profit by up to 60%. This leads to the
following hypothesis.
5.2.1. Predicted variable
Corporate presentation is judged by the dimension of various in­
5. Methodology
dicators such as return on total assets (ROA), return on equity (ROE),
operating profit margin, and Tobin’s Q value. In this paper, we chose
The major objective of the study is to examine the correlation of ESG
ROA to represent CFP, based on the study by Su et al. (2023). A higher
and corporate presentation and to understand how the ESG influences
ROA indicates greater profitability and higher business performance.
the corporate financial performance. This systematic and quantitative
The evaluation criteria for firm financial performance includes six inner
study analyzes the impact of ESG rating on ROA. The study used a
corporate government systems components: “1. ownership concentra­
sample of 3332 listed organizations worldwide ranging from the years
tion, 2. institutional ownership, 3. board independence, 4. board size, 5.
2011–2020. The data was collected on various financial and ESG per­
CEO duality, and 6. CEO tenure”. In addition, the performance of busi­
formance indicators to examine the relationships between these vari­
ness units can be measured using two indicators: ROA and stock return
ables. This study uses multiple regression to analyze the influence of the
(R). The relative importance of industries is associated with focus and
explanatory variables like ESG rating and the control variables such as
share effects in determining firm performance and firm value, measured
price to book value ratio, revenue growth capacity on predicted vari­
by Tobin’s Q. For instance, displaying advertisements and paid search
able, ROA which represents the corporate financial performance. A
advertising have a positive consistency with actual purchase decisions
heterogeneity test is conducted to examine how the relation varies
and enhanced targeted abilities. In contrast, the long-term effects con­
across other factors like different risk levels, company sizes, countries,
sistency for the positive effect of Tobin’s Q is exhibited for displaying
and industries. To check the validity and reliability of the result the
advertising (Bayer et al., 2020).
study deployed robustness tests and discussed the potential endogeneity
issues using instrumental variables. For exploring these kinds of corre­
5.2.2. Explanatory variable
lations the regression analysis is well suitable since quantitative
ESG rating. In this paper, research is referenced and Thomson Reu­
methods are efficient and effective in handling large datasets and
ters’ ESG scoring system is primarily used. When this score is higher, it
analyzing the relationships between multiple variables. The degree to
shows a better ESG performance.
which and importance of the associations among the variables may be
evaluated by the study using regression analysis. They may determine
5.2.3. Control variable
the influence of the explanatory variable (ESG rating) on the predicted
In this paper, studies by scholars such as Garel and Petit-Romec
variable (ROA) by using regression to account for the impacts of addi­
(2021) and Díaz et al. (2021) are drawn upon in order to set six con­
tional variables (control variables). The study incorporates ESG ratings,
trol variables, which include the Price to Book Value Ratio (PB), revenue
control variables, heterogeneity analysis, robustness and endogeneity
development capacity (GR), cash flow capacity (OCFA), financial
tests, a large sample size, and latest data to enhance the rigor and
leverage (LEV), mortgage ability (TANG), and times interest earned
credibility of its findings. It also incorporates control variables, conducts
(TIE).
robustness and endogeneity tests, uses a large sample size, and utilizes
The specific definitions of the above variables are shown in Table 1.
sophisticated statistical software, such as strata 16.0, for empirical
In Table 1, the key variables of financial performance and ESG rating
analysis. These improvements aim to improve the rigor and credibility of
are categorized as predicted variables, explanatory variables, and con­
the research. The following subsection provides a description of the data
trol variables. The predicted variable is assigned to CFP, which is asso­
and sample collections.
ciated with the return on assets (ROA) profit ratio that is provided
relative to the total assets of firms. The explanatory variable is assigned
5.1. Data and sample to the ESG rating, which is associated with the risks and opportunities
associated with performance, as the Thomson Reuters ESG combined
This research selected companies from the Thomson Reuters ESG scores for existing assets are enhanced and replaced to better score assets
database that are listed on major stock markets worldwide. ESG and according to the data provided based on ASSET4 by the companies.
financial data were collected from 2018 to 2022, and samples with The control variables are categorized as follows:

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S. Chen et al. Journal of Environmental Management 345 (2023) 118829

Table 1 factor in this study is ESG. The random error term is represented by, and
Definition of key variables. the other variables are control variables.
Variable type Variable name Variable Variable description
symbol 6. Estimation results
Predicted Corporate ROA Total profit/total assets
variable performance 6.1. Statistical analysis
Explanatory ESG rating ESG Thomson Reuters ESG
variable combined score The selected variables were statistically analyzed in this paper. In
Control Price to Book PB Price to book ratio of market
variable Value Ratio value (share price) to book
Table 2, Fig. 3 and descriptive statistics for the data were reported. The
value of equity continuity variables that were applied in the research were gradually
Revenue GR Revenue growth rate reduced for the extremes and outliers. A total of 24,076 valid observa­
development tions were obtained. Subsequently, strata 16.0 software was used to
capacity
conduct the empirical analysis.
Cash flow capacity OCFA Net operating cash flow/
total assets Table 2 the variables interrelated with predicted, explanatory, and
Financial leverage LEV Total liabilities/total assets control variables have 24,076 observations, and the risk variable has
Mortgage ability TANG Net fixed assets/total assets 12,450 observations. The explanatory variable ESG is associated with
Interest Coverage TIE EBIT/INTEREST classes ESG1, ESG2, and ESG3, which determine the worth of systematic
Ratio
social taboos, discussion on moral things and pressure in relation with
politics related to social and environmental damage causes. The CFP
• Price to Book Value Ratio (PB), which is associated with the variable assigned with ESG values includes mean, standard deviation,
comparative ratio of the value in the stock market of the firm’s shares minimum, and maximum (42.642, 18.823, 6.230, and 84.000). The ESG
to its book ratio, which consists of the share price, the count of classes assigned as ESG1, ESG2, and ESG3 are the highest, middle, and
outstanding shares, total assets, and reliability towards investments. low ratings associated with values (35.525, 27.262, 0, 92.090), (44.245,
• Revenue development capacity, which is related to the revenue 22.877, 2.387, 92.720), and (48.906, 21.002, 4.630, 91.430), respec­
growth of firms and contributes to managing financial planning and tively. ESG ratings provide useful investor tools for making investment
analysis along with monitoring attempts towards improving business decisions on green, social, and sustainability debt instruments and
operations, as the revenue growth rate (GR). sustainability-linked debt instruments, assigned as DEBT with values
• Cash flow capacity (OCFA), which is described as the liquid assets of (0.067, 0.119, 0.003, 1.004). The ROA analysis performance related to
firms that enable them to cover obligations, investments in business financial performance of firms that have profitable assets of firms and
along with returns provided to stakeholders and prepared for future ROA is assigned with values (0.032, 0.091, − 0.447, 0.256). The control
financial challenges. variable consists of statistics such as PB, GR, OCFA, LEV, TANG, TIE, and
• Financial leverage (LEV), which is the extension for fixed-income SIZE. The PB variable is the price-to-book ratio of the market value
securities along with the firm’s capital structure, including shocks
and share prices.
• Mortgage ability, which is associated with the ability of the firm to
acquire loans and manage debt financing.
• Interest Coverage Ratio, which is associated with the firm’s ability to
pay off its debt interest payments based on the operating income
generated.

5.3. Model

To have deeper clarity on the impact of explanatory variable ESG

gave prediction on variable ROA, the model was set up as follows.
ROAi,t = β0 + β1 ESGi,t + β2 PBi,t + β3 GRi,t + β4 OCFAi,t + β5 LEVi,t
+β6 TAN Gi,t + β7 TIEi,t + εi,t

i is for the business in the equation above, and t stands for the year.
Fig. 3. Different proportions of ESG contribution in the world.
The expected variable is represented by ROA. The main explanatory

Table 2
Descriptive analysis.
VARIABLES OBSERVATIONS MEAN SD MINIMUM MAXIMUM

ESG 24,076 42.642 18.823 6.230 84.000

ESG1 24,076 35.525 27.262 0.000 92.090
ESG2 24,076 44.245 22.877 2.387 92.720
ESG3 24,076 48.906 21.002 4.630 91.430
DEBT 24,076 0.067 0.119 0.003 1.004
ROA 24,076 0.032 0.091 − 0.447 0.256
PB 24,076 3.171 3.944 0.247 26.787
OCFA 24,076 0.097 0.107 0.000 0.576
LEV 24,076 0.544 0.199 0.087 0.966
TANG 24,076 0.323 0.277 0.001 0.964
TIE 24,076 105.811 758.720 0.000 6830.655
SIZE 24,076 16.119 2.662 10.938 23.653
GR 24,076 0.117 0.351 − 0.592 2.289
RISK 12,450 0.500 0.500 0.000 1.000

8
S. Chen et al.
(share price) to the book value of equity, assigned with values (3.171,
3.944, 0.247, 26.787). OCFA is a control variable that is related to the
financial status for operating assets to improve performance, assigned
with values (0.097, 0.107, 0.000, 0.576). LEV is a control variable
associated with total liabilities of assets with investments, assigned with
values (0.544, 0.199, 0.087, 0.966). TANG is related to financial assets
for purchase or investments, assigned to values (0.323, 0.277, 0.001,
0.964). TIE relates to the interest coverage ratio with investment and
interest pay rate by the firm, assigned by values (105.811, 758.720, 0,
6830.655). SIZE is related to negotiating input values along with the
average reduction cost based on firm size leading to increased profit­
ability, assigned values (16.119, 2.662, 10.938, 23.653). GR relates to
the growth rate of firm revenue, assigned values (0.117, 0.351, − 0.592,
2.289). RISK relates to the risk factors of a firm for growth, investment,
and performance, assigned values (0.500, 0.500, 0, 1.000).
ESG is contributed by countries around the world in different pro­
portions. The contribution of countries varies in percentage, on the basis
of performance in maintaining superior environmental, social, and
governance standards across various industrial functions. The gross
financial performance ratios (in percentage) of different continents and
countries are as follows: USA (28.5), Europe (24.3), China (including HK
and Taiwan) (14.9), Canada (5.1), Australia (4.6), Japan (4.4), and other
countries (including India, Sri Lanka, etc.) (18.3), as shown in Fig. 3.
The main objective of ESG is to determine the security or funds along
with ESG issues that vary with specific evaluation criteria assigned as
rating platforms (See Fig. 4). The major categories of raters, such as
external and internal stakeholders, generate the ESG rating. The distri­
bution of ESG ratios is based on different industries, such as real estate
and construction (11.2%), energy industry (9.6%), pharmaceutical
manufacturing (6.3%), finance (6.2%), industrial machinery (5.7%),
wholesale and retail trade (3.9%), electronic equipment manufacturing
(3.8%), food industry (3.2%), chemical industry (2.7%), communica­
tion, aviation (1.4%), lease (1.3%), and others (43.7%).
6.2. Correlation test
Strong correlations between explanatory variables may make the
conclusions artifactual. Therefore, a Pearson correlation analysis was
performed in order to exclude co-linearity between the explanatory
variables. The results in Table 3 present the correlation coefficients
between the variables separately (odd row significance level). It can be
generally considered that a correlation coefficient of less than 0.8 be­
tween variables can be considered as not having a strong correlation.
The regression coefficients between all explanatory variables are virtu­
ally all less than 0.8. As a result, it is possible to conclude that multi­
collinearity does not exist.
Fig. 5 demonstrates the heat map of the variables where the data are
denoted by colors. This heat map gives each variable’s correlation
Fig. 4. Distribution of the sample by industry.
9
Journal of Environmental Management 345 (2023) 118829
coefficients individually. A correlation coefficient across two factors that
is less than 0.8 can often be regarded as being without a significant
relationship. Almost all of the explanatory variables’ regression co­
efficients are smaller than 0.8.
6.3. The effect of ESG on CFP
Table 4 demonstrates the connection between ESG and ROA.
Regression (1)-regression (2) represented the regression results with and
without the inclusion of the control variable respectively. At the 1%
level of significance, it can be observed that ESG is always considerably
positive. As a result, there is a favorable association between ROA and
ESG performance. This regression result is consistent with hypothesis
H1.
6.4. Analysis of the ESG sub-dimensions
The Refinitiv ESG Rating System is a comprehensive scoring system.
The secondary indicators of this comprehensive scale consist of 1.
Environment, 2. Social responsibility, and 3. Corporate governance are
the three dimensions. Therefore, this paper regresses each of the three
dimensions on ROA in order to find out which dimension of ESG has a
more significant impact on ROA, and to provide reference for how
companies can better fulfill ESG to improve ROA.
The results of the fixed effects regressions were shown in Table 5. The
overall regression results for all three groups are significant, and all
three dimensions had a significant positive impact on ROA. This suggests
that the implementation of environmental responsibility, social re­
sponsibility and good corporate governance can increase ROA. This
further study is consistent with the previous paper.
6.5. Heterogeneity analysis: different levels of risk
In Table 5 the heterogeneity of the association between ESG and ROA
across risks was reported. Regression (1)-regression (2) represents the
regression results in the high-risk and low-risk samples, respectively.
The mean value of the risk variable (RISK) in Table 6 is used as a cut-off,
with those above the mean set as high risk and those below the mean set
as low risk. The regression coefficient for ESG may be observed to be
considerably favorable at the 1% level of importance in regressions (1)
and (2), but the former is more significant. Because of this, the high risk
case has a stronger connection than the low risk case. The outcomes of
this regression support Hypothesis 2.
6.6. Heterogeneity analysis: Company sizes
In Table 7, heterogeneity in the association between ESG and ROA
across company size was reported. The mean value of the logarithm of
company size (SIZE) in Tables 5–1 is used as the boundary. Those above
the mean are set as large scale and those below the mean are set as small
scale. Regression (1) - regression (2) represent the regression results in
the large scale and small scale samples respectively. At 1% the level
related to significance, the regression coefficient for ESG is considerably
positive (1)–(2), but it is more significant in (1). Thus, the association is
significant for large scale companies and insignificant for small scale
companies. This regression result is consistent with hypothesis 3.
6.7. Heterogeneity analysis: Countries
In Table 8, heterogeneity in the association between ESG and ROA
across countries was reported. The heterogeneity analysis was carried
out according to the criteria for classifying developed and developing
countries in Section 4 in Chapter 4. Regression (1)-regression (2) rep­
resents the regression results in the developed and developing country
samples respectively. At the 1% level of significance, the regression
coefficient for ESG is considerably positive (1) and not significant in
S. Chen et al. Journal of Environmental Management 345 (2023) 118829

Table 3
Correlation analysis.
ROA ESG DEBT PB GR OCFA LEV TANG TIE

ROA 1.0000

ESG − 0.0108 1.0000

0.1631
DEBT 0.0404 0.1827 1.0000
0.0000 0.0000
PB 0.2358 0.0171 − 0.1790 1.0000
0.0000 0.0272 0.0000
GR 0.0620 − 0.1197 − 0.0406 0.0989 1.0000
0.0000 0.0000 0.0000 0.0000
OCFA − 0.0778 − 0.0609 − 0.2458 0.1959 0.0639 1.0000
0.0000 0.0000 0.0000 0.0000 0.0000
LEV 0.0109 0.1572 0.3231 0.1669 − 0.0515 − 0.1402 1.0000
0.1583 0.0000 0.0000 0.0000 0.0000 0.0000
TANG − 0.0736 0.0229 0.1360 − 0.1644 − 0.0335 − 0.3240 − 0.0729 1.0000
0.0000 0.0031 0.0000 0.0000 0.0000 0.0000 0.0000
TIE 0.0056 − 0.0762 0.0443 − 0.0143 0.0077 − 0.1679 0.0260 0.0612 1.0000
0.4708 0.0000 0.0000 0.0640 0.3190 0.0000 0.0008 0.0000

Table 5
ESG and ROA (sub-dimensions).
(1) (2) (3)

VARIABLES ROA ROA ROA

ESG-E 0.0003***
(14.076)
ESG-S 0.0003***
(12.780)
ESG-G 0.0002***
(8.490)
PB 0.0040*** 0.0039*** 0.0040***
(26.115) (25.597) (25.900)
GR − 0.0127*** − 0.0132*** − 0.0137***
(-8.199) (-8.486) (-8.786)
OCFA − 0.1531*** − 0.1543*** − 0.1552***
(-26.440) (-26.638) (-26.731)
LEV − 0.1216*** − 0.1208*** − 0.1191***
(-39.266) (-39.020) (-38.448)
TANG − 0.0125*** − 0.0108*** − 0.0119***
(-4.240) (-3.675) (-4.040)
Fig. 5. Heatmap of correlation analysis. TIE − 0.0000*** − 0.0000*** − 0.0000***
(-5.164) (-5.106) (-5.202)
Constant 0.1119*** 0.1041*** 0.1047***
(12.141) (11.240) (11.239)
Table 4 Observations 24,076 24,076 24,076
ESG and ROA. R-squared 0.194 0.193 0.190
(1) (2) Number of year 10 10 10

VARIABLES ROA ROA t-statistics in parentheses.

***p < 0.01, **p < 0.05, *p < 0.1.
ESG 0.0003*** 0.0004***
(11.195) (13.859)
PB 0.0039*** regression (2). Therefore, the association between ESG performance and
(27.435) ROA is significant in developed country companies and insignificant in
GR − 0.0134***
developing countries. The results of this regression are consistent with
(-9.190)
OCFA − 0.1196*** hypothesis 4.
(-22.004)
LEV − 0.1162***
(-40.333)
6.8. Heterogeneity analysis: Industries
TANG − 0.0106***
(-3.876) In Table 9, the heterogeneity of the association between ESG and
TIE − 0.0000*** ROA across industries was reported. The category of sophisticated and
(-4.137)
unsophisticated industries is based on the North American Industry
Constant 0.0521*** 0.1036***
(5.914) (12.095) Classification System (NAICS) mentioned in Section 4 in Chapter 4 as the
Observations 23,941 23,941 criterion. Regression (1)-regression (2) represents the regression results
R-squared 0.110 0.187 in the environmentally sensitive sample and the non-environmentally
Number of year 10 10 sensitive industries sample respectively. At the 1% level of signifi­
t-statistics in parentheses. cance, the regression coefficient for ESG is considerably positive (1)-
***p < 0.01, **p < 0.05, *p < 0.1. regression (2), but the former is more significant. Therefore, the nega­
tive association between ESG performance and ROA is more significant
in environmentally sensitive industries companies than in non-

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S. Chen et al. Journal of Environmental Management 345 (2023) 118829

Table 6 Table 8
ESG and ROA heterogeneity analysis (high risk vs. low risk). ESG and ROA heterogeneity analysis (by country).
(1) (2) (1) (2)

VARIABLES ROA ROA VARIABLES ROA ROA

ESG 0.0006*** 0.0005*** ESG 0.0005*** 0.0000

(10.587) (8.177) (14.055) (1.200)
PB 0.0042*** 0.0042*** PB 0.0036*** 0.0049***
(14.637) (16.208) (19.431) (24.368)
GR − 0.0190*** − 0.0193*** GR − 0.0199*** 0.0047***
(-5.736) (-5.302) (-10.348) (2.578)
OCFA − 0.2005*** − 0.1370*** OCFA − 0.1467*** 0.0228***
(-17.141) (-11.985) (-20.744) (2.989)
LEV − 0.1251*** − 0.1163*** LEV − 0.1129*** − 0.1249***
(-19.960) (-18.810) (-28.611) (-34.531)
TANG − 0.0147*** − 0.0036 TANG − 0.0109*** − 0.0155***
(-2.587) (-0.623) (-2.974) (-4.305)
TIE − 0.0000 − 0.0000 TIE − 0.0000 − 0.0000
(-1.355) (-0.373) (-1.371) (-0.965)
Constant 0.1071*** 0.1187*** Constant 0.1105*** 0.0786***
(5.121) (8.339) (10.552) (3.753)
Observations 6202 6205 Observations 16,129 7812
R-squared 0.239 0.218 R-squared 0.179 0.348
Number of year 10 10 Number of year 10 10

Note: t-statistics in parentheses. t-statistics in parentheses.

***p < 0.01, **p < 0.05, *p < 0.1. ***p < 0.01, **p < 0.05, *p < 0.1.

Table 7 Table 9
ESG and ROA heterogeneity analysis (sub-scale). ESG and ROA heterogeneity analysis (by industry).
(1) (2) (1) (2)

VARIABLES ROA ROA VARIABLES ROA ROA

ESG 0.0004*** 0.0001*** ESG 0.0006*** 0.0003***

(7.497) (5.327) (12.389) (6.916)
PB 0.0053*** 0.0031*** PB 0.0037*** 0.0040***
(34.584) (14.049) (15.681) (22.858)
GR 0.0026* − 0.0179*** GR − 0.0122*** − 0.0145***
(1.760) (-7.912) (-5.450) (-7.723)
OCFA 0.0193*** − 0.1492*** OCFA − 0.1621*** − 0.0814***
(3.287) (-17.676) (-18.760) (-11.845)
LEV − 0.1212*** − 0.1181*** LEV − 0.1405*** − 0.0977***
(-43.506) (-24.161) (-29.848) (-27.249)
TANG − 0.0155*** − 0.0110** TANG − 0.0240*** − 0.0010
(-5.982) (-2.371) (-5.024) (-0.314)
TIE − 0.0000 − 0.0000 TIE − 0.0000*** − 0.0000
(-0.847) (-0.398) (-4.317) (-0.604)
Constant 0.0889*** 0.1237*** Constant 0.1140*** 0.0895***
(8.093) (10.186) (11.348) (16.940)
Observations 12,027 11,914 Observations 11,225 12,716
R-squared 0.344 0.214 R-squared 0.232 0.151
Number of year 10 10 Number of year 10 10

Note: t-statistics in parentheses. t-statistics in parentheses.

***p < 0.01, **p < 0.05, *p < 0.1. ***p < 0.01, **p < 0.05, *p < 0.1.

environmentally sensitive industries companies. The results of this
regression are consistent with hypothesis 5.
6.9. Robustness test
In order to test the robustness of ESG to ROA, ROE to represent ROA
in the regressions is used by this paper. In Table 10, the association
between ESG and ROE was reported. Regression (1)-regression (2) de­
picts the regression results with and without the addition of control
variables at the 1% level of significance, it can be observed that ESG is
always considerably positive. Therefore, there is a negative association
between ESG performance and ROE. In view of this, the previous find­
ings are robust.
6.10. Endogeneity test
In order to rule out endogeneity issues between ESG and ROA, an
endogeneity test is conducted using a one-period lagged variable of ESG
as the instrumental variable. This result was reported in Table 10, which
showed that the regression coefficient for ESG is still significantly pos­
itive. Therefore, the conclusions are robust after excluding endogeneity
issues in Table 11.
Based on the analysis conducted in this present study, as shown in
Fig. 6, the study finds that ESG performance can drive corporate finance
successfully. The following section provides a detailed discussion of this
study.
7. Discussion
The potential to raise cash at reasonable costs is a major factor in
why businesses turn to capital markets. The ability of businesses to
effectively compensate investors is a prerequisite for this, though, as
investors favor businesses that offer higher returns relative to the level of
risk they are willing to take. For businesses, the effectiveness of

11
S. Chen et al. Journal of Environmental Management 345 (2023) 118829

Table 10
ESG and ROA (robustness).
(1) (2)

VARIABLES ROE ROE

ESG 0.0013*** 0.0014***

(13.479) (14.670)
PB 0.0139***
(28.967)
GR 0.0111**
(2.287)
OCFA − 0.3661***
(-20.204)
LEV − 0.1729***
(-18.006)
TANG − 0.0294***
(-3.233)
TIE − 0.0000***
(-3.157)
Constant 0.0802*** 0.1430***
(2.787) (5.008)
Observations 23,941 23,941
R-squared 0.091 0.135
Number of year 10 10

t-statistics in parentheses.
***p < 0.01, **p < 0.05, *p < 0.1. Fig. 6. Results of the analysis.

improves with increasing financial profitability, which suggests that

Table 11 investments in ESG initiatives depend on the financial success of the
ESG and ROA (endogeneity). organization. With the exception of Deng et al.’s findings from 2022,
(2) which demonstrate how capital market opening procedures affect
VARIABLES ROA business ESG performance. To examine the implications of ESG on
financial performance, market value, and underlying risk, the majority
ESG 0.0004***
(10.540)
of earlier studies incorporated ESG criteria into their investment stra­
PB 0.0041*** tegies. (Melinda and Wardhani, 2020; Xie et al., 2019; Chouaibi et al.,
(26.299) 2022; Bahadori et al., 2021; Ahmad et al., 2021; Tampa et al., 2021;
GR − 0.0016 Gibson et al., 2021). The contribution and integration in the ESG sectors
(-0.944)
increase in proportion to CFP. In actuality, there is a two-way connec­
OCFA − 0.1151***
(-19.354) tion between ESG scores and CFR. One way or another, a company’s
LEV − 0.1228*** level of ESG approach participation is determined by its CFP. ESG, on the
(-40.079) other hand, plays a significant role in determining the CFP, but a com­
TANG − 0.0131***
pany that experiences a loss cannot set aside funds specifically for
(-4.584)
TIE − 0.0000***
sustainability-related issues. More realistically, the ESG can boost
(-3.206) corporate firm performance by enabling businesses to maintain sus­
Constant 0.2095*** tainability, establish a solid reputation, win the trust of stakeholders,
(2.758) and contribute to solving national sustainable development issues.
Observations 20,191
R-squared 0.191
7.1. Theoretical Implications
z-statistics in parentheses.
***p < 0.01, **p < 0.05, *p < 0.1.
This research substantially increases the body of literature. Rela­
tively little earlier research has looked at how ESG performance affects
institutional communication with the market through reports offering
business firms, particularly in times of crisis. Strong ESG propositions
precise, in-depth, and trustworthy information is crucial (Eesley et al.,
can assist businesses in attracting and retaining top talent, enhancing
2016). Additionally, during the past ten years, investors as well as
employee motivation by fostering a sense of purpose, and boosting
governments and the general public have begun to place a greater
overall productivity. According to the study’s conclusions, effective
emphasis on corporate governance procedures and social and environ­
corporate governance, social responsibility, and the environment may
mental performance. As a result, the pursuit of increasing profits is likely
all be implemented to boost the return on assets. Businesses that adopt
to coexist with actions that improve governance, society, and the envi­
ESG standards gain advantages over rivals in the market, better corpo­
ronment. There is still a lack of consensus on the associations between
rate reputations with stakeholders and employees, higher returns on
financial success and ESG factors. Business size moderates the correla­
investments, competitive advantage over rivals in the industry, appeal
tions between ESG performance and stock market volatility and corpo­
to investors and lenders, improved financial performance, and increased
rate financial success, respectively, based on Shakil (2021) and Ahmad
customer loyalty. The data shows that different countries throughout the
et al. (2021). After accounting for firm size and debt, Bahadori et al.
world contribute to ESG in varying amounts. Depending on how well
(2021) found that organizations with higher ESG scores had greater
they succeed in upholding high ESG standards across various industrial
levels of profitability. ESG disclosure has a major detrimental effect on a
functions, different countries contribute at different percentages. Busi­
CFP and businesses with higher ESG performance outperform their
nesses can expand into new markets, expand in existing ones, and cut
competitors in terms of CFP and market value (Ahmad et al. (2021);
costs with the help of an effective ESG proposition. Companies can also
Aboud and Diab, 2018; Chouaibi et al., 2022; Deng et al., 2022; Melinda
exercise more strategic freedom because of a strong external value
and Wardhani, 2020; Xie et al., 2019). A company’s ESG performance
proposition, which lessens regulatory pressure. Companies with good

12
S. Chen et al.
ESG performance are more resilient to risk and have higher growth
potential and financial health. Larger companies have more resources to
fulfill ESG criteria, which allows them to better communicate their
positive messages to society, leading to greater social acceptance of their
products or services. Developed countries require more ESG disclosure
and pay more attention to their ESG performance than developing
countries.
7.2. Practical Implications
Regardless of the result, the economic consequences of this work
support the promotion of ESG initiatives. This makes it possible for the
company to maintain its sustainability, build a strong reputation, gain
the trust of its stakeholders, and contribute to national sustainable
development concerns. The study suggests that firms use the ESG ma­
teriality approach as a starting point for locating and quantifying
pertinent data, revealing data, and benchmarking their performance.
Then, by concentrating on inclusiveness, communication, and team­
work, businesses may take the required actions to address flaws. In fact,
a positive feedback loop appears to exist between CFP and ESG perfor­
mance. The earnings of the company are improved by investing in ESG
activities, but the results also influence how committed the organization
is to these initiatives. From a tilt and momentum perspective, higher
stock returns are associated with a strong ESG proposal. A decrease in
downside risk is also correlated with better ESG performance. The study
suggests that integration of ESG in corporate firms definitely improves
CFP, Because a strong ESG proposition enables companies to expand
into new markets as well as existing ones. ESG can also drastically
reduce costs. A better external value proposition, which lessens regu­
latory pressure, may allow companies to have greater strategic inde­
pendence. A rise in productivity among employees (i) improves
excellent financial performance, (ii) reduced organizational risk, and
(iii) less information asymmetry are all characteristics of businesses with
excellent ESG performance, which all help to allay external investors’
concerns about a company’s ability to grow and, as a result, lessen the
financial limitations that businesses must deal with. ESG enhances the
CFP.
8. Conclusions
With the concept of sustainable development and responsible in­
vestment being increasingly valued and accepted by economies around
the world, the emergence and flourishing of ESG investment concepts is
inevitable. In this paper, a sample of 3321 listed companies worldwide
over the 10-year period 2011–2020 was used, and Refinitiv’s ESG rat­
ings and financial data were used to construct a panel regression model.
ESG and CFP were taken as the objects of study. The research contributes
to this growing stream of literature on corporate success in environ­
mentally sustainable industries using the concept of ESG. The ESG the­
ory has a long history in academic literature as well as in business. For
more than a century, proponents of the market economy have argued
that for-profit businesses shouldn’t be restricted to maximizing share­
holder returns. These arguments were generally motivated by progres­
sive political objectives. This trend emerged at the same time as the
business community’s rising expectations of social responsibility, which
inspired many managers and executives to offer a variety of voluntary
services to their workers and local communities. The ESG paradigm has
recently been adopted by (i) government agencies, (ii) quasi-
government organizations, (iii) particularly those affiliated to the UN,
(iv) non-profit advocacy groups, (v) financial rating agencies, and (vi)
key policy organizations. Many of these organizations have taken it
upon themselves to construct complex sets of guidelines and ranking
systems for all the various ESG problems that firms should ostensibly be
addressing.
13
Journal of Environmental Management 345 (2023) 118829
8.1. Limitations and future directions
Apart from the contribution of this study, there are some drawbacks
in this study which can be reduced in future studies to achieve better
results. In this study, first, ESG rating scores, market share prices, and
returns on assets, not returns on investors’ investments with uncertain
conditions, may affect firms’ liquidity, so future studies should consider
that. Second, investor advisory services related to carbon risk assess­
ment or water risk assessment are not determined by the percentage of
NGOs, which could be clarified in future studies. In particular, in future
studies, the data collected in this study can be used with research based
on ESG assessment and the implication of the factors can be explored
while considering other factors affecting the ESG rating to determine the
total growth rate of companies such as financial resources (investments,
earning income) with the economy of the respective countries.
Credit author statement
Simin Chen: Conceptualization, Methodology, Software .Yu Song:
Data curation, Writing – original draft, Visualization, Investigation.
Peng Gao: Supervision, Software, Validation, Writing- Reviewing and
Editing.
Ethical statements
Funding statement
This study did not receive any funding in any form.
Human and animal rights
This article does not contain any studies with human or animal
subjects performed by any of the authors.
Informed consent
Informed consent was obtained from all individual participants
included in the study.
Consent to participate
Not applicable.
Consent for publication
Not applicable.
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
No data was used for the research described in the article.
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