Do environmental, social, and governance activities improve corporate financial performance?

TLDR

The study investigates whether firms focused on ESG issues can also achieve corporate efficiency and profitability. The authors used data envelopment analysis to estimate corporate efficiency and examined nonlinear links between ESG disclosure and efficiency, as well as the impact of specific ESG activities on financial performance metrics such as ROA and market value. Corporate ESG transparency, especially governance disclosure, is positively linked to efficiency at moderate levels, and most ESG activities show a nonnegative relationship with financial performance, suggesting voluntary CSR can enhance sustainability.

Abstract

Abstract This study investigated the relationship between corporate efficiency and corporate sustainability to determine whether firms concerned about environmental, social, and governance (ESG) issues can also be efficient and profitable. We applied data envelopment analysis to estimate corporate efficiency and investigated the nonlinear relationship between corporate efficiency and ESG disclosure. Evidence shows that corporate transparency regarding ESG information has a positive association with corporate efficiency at the moderate disclosure level, rather than at the high or low disclosure level. Governance information disclosure has the strongest positive linkage with corporate efficiency, followed by social and environmental information disclosure. Moreover, we explored the relationship between particular ESG activities and corporate financial performance (CFP), including corporate efficiency, return on assets, and market value. We found that most of the ESG activities reveal a nonnegative relationship with CFP. These findings may provide evidence about voluntary corporate social responsibility strategy choices for enhancing corporate sustainability.