The Three ESG Pillars, Firm Value and Financial Performance: A Comparison of Developed and Emerging Markets

Abstract

Purpose-Current study examines the impact of E, S, and G factors separately on firm performance and value of developed and emerging markets, a perspective overlooked in current literature.

Design/Methodology/Approach-The study uses a large international sample comprising 614 non-financial firms with 8,484 unbalanced observations, segregated between emerging and developed markets. The study estimates the output using the Generalized Least Square (GLS) technique.

Findings- Our study presents two novel findings in these markets. In the case of developed markets, we find that E, S, and G positively affect firm financial performance and firm value. However, in emerging markets we find that E, S, and G have mixed (that is, negative and positive, and significant and insignificant) effects on firm performance and firm value.

Practical implications- Our findings show that the positive impact of ESG pillars on firm value and performance in developed markets must incentivize senior management to enhance their sustainability commitment. This model should be replicated in emerging markets as well. Additionally, from the perspective of regulatory bodies, specifically considering emerging markets, our findings can help understand the causes of the unfavorable association between ESG practices, investor expectations, and firm performance.

Originality/Value-Previous literature mainly focuses on the overall ESG score when evaluating its impact on firm-specific variables. Additionally, the institutional settings and market dynamics of developed and emerging markets are significantly different and must be considered when interpreting results or developing empirical models. The current study addresses these gaps.