Creating a bridge between ESG and firm's financial performance in Asian emerging markets: catalytic role of managerial ability and institutional quality

What is it about?

The environmental, social, and governance (ESG) performance of firms can enhance their financial performance (FP). However, ESG activities entail expenditures in non-business-related projects that may not benefit the organization in the short term. Despite seemingly a burden on businesses, ESG initiatives can be turned into financially beneficial avenues by higher quality institutions (at the country level) and managers having higher managerial abilities (at the organizational level). Better quality institutions facilitate organizations to be involved in ESG. Countries with higher institutional quality (IQ) provides stable institutional framework to reward managers who undertake ESG projects. ESG performance also depends upon the ability of managers to visualize, evaluate, and implement ESG policies and practices by suitably managing the available resources. Managers with higher managerial ability (MA) are capable of carefully crafting ESG policies and plans to extract maximum benefits and enhance the firms’ FP. Through the data of 687 publicly listed companies from 2012 to 2023, this study finds a positive relationship between firms’ ESG performance and FP. MA and IQ both moderate the relationship between ESG and FP and can be suitably used to augment profitability of firms.

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