• Paper submitted and accepted for presentation to 2nd EIASM Interdisciplinary Workshop on Sustainability and ESG Dynamics, Parma, Italy - April 10-11, 2025

For centuries, economic growth and environmental and social sustainability concepts were considered incompatible, if not conflicting. While the guiding principle of corporations was the pursuit of profit, rising demand, production and urbanization led to a strong increase in pollution. 

From the second half of the 1960s, and especially in the 1970s and 1980s, public awareness of humans’ impact on the environment started to increase. Not only were companies asked to change their attitude and adopt sustainable practices and operations, but they also needed methods to assess and report their social and environmental commitments.

Coherently, in recent years, there has been a significant shift in the business and regulatory landscape towards the standardization of sustainability and Environmental, Social, and Governance (ESG) communication. This movement is driven by the increasing recognition of the importance of transparent and consistent reporting on sustainability practices. Regulatory frameworks such as the EU's Corporate Sustainability Reporting Directive (CSRD) have been instrumental in this transition, mandating comprehensive disclosure of ESG metrics and ensuring that companies provide detailed information on their environmental and social impacts. Additionally, global frameworks like the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), and the Task Force on Climate-related Financial Disclosures (TCFD) have established standardized guidelines that facilitate comparability and reliability of ESG data. These developments not only enhance stakeholder trust but also drive companies to integrate sustainability into their core business strategies, fostering a culture of accountability and long-term value creation.

Consequently, the number of organizations implementing sustainable strategies and disclosing ESG information has steadily grown over the years. On one hand, many sustainability-related theories, such as Stakeholder theory, Legitimacy and Signalling Theory, and Shared Value theory, offer potential justifications for why companies might disclose ESG data beyond what is required by law (Alsayegh et al., 2020). On the other hand, Agency theory and Shareholder theory could still explain why organizations might not engage in ESG activities and disclosure.

Numerous empirical studies have been conducted to assess which of the two streams of theories is more “correct”. In other terms, efforts have been put to understand whether enhancing ESG performance and disclosure might foster Corporate Financial Performance (CFP). According to Friede et al. (2015), the growing interest in the relationship between ESG and CFP is demonstrated by the fact that from the early 1970s to 2014, approximately 2,250 empirical studies on this topic have been published (Lee & Suh, 2022). Despite the rich research that has been conducted on the matter, results across the literature appear contradictory. While some find a positive and significant influence of ESG variables on CFP, others find it to be negative and significant, non-significant, or even non-linear. Thus, the debate on the effect of ESG criteria is still ongoing as these mixed results are potentially likely due to many reasons.

First, the methodological approach to measure ESG and CFP is one of the reasons why it is difficult to have a clear picture of the relationship. There is no single, unambiguous, and universally accepted measure of ESG and financial and economic performance. Regarding the ESG variable, many authors used data and ratings provided by different agencies to proxy ESG performance. According to Chatterji et al. (2015) and Berg et al. (2022), there is a lack of agreement among CSR agencies regarding how to measure “ESG quality”. Of course, employing one rate instead of another could change a study’s findings and conclusions, hence the dispersion of ESG ratings’ definitions presents a barrier to empirical research aggregation (Berg et al., 2022). Concerning the financial variable, scholars often relied on accounting measures of profitability – such as return of assets (ROA) and return on equity (ROE) – and on market-based measures – such as Tobin's Q and market return (Combs et al. (2005), Hoskisson et al. (1999), Hult et al. (2008)). Gentry & Shen (2010) show that, although market performance and accounting profitability metrics are positively associated, their covariance is below 10%. Although a positive correlation exists between accounting and market-based measures, it is good to keep in mind that different results could be obtained when considering the relation between ESG variables and accounting or market-based financial measures.

The difficulty of interpreting the ESG-CFP relationship also stems from other factors such as the different statistical techniques employed, the industry included in the analysis or the period in which data was collected.

Conscious of these difficulties in the comparison of previous studies, the paper aims at analysing and interpreting the research results of the accounting literature on the relationship between ESG and CFP. In particular, the paper addresses the following research questions:

1. Who have been the most proficient authors/networks?
2. What has been the academic evolution in ESG-CFP research?
3. What determinants/drivers (ex. Normative context, country, industry, socio-economic and cultural aspects ect.) explain the differences in the ESG and Corporate Financial performance relationships within the literature?

In order to answer the research questions, we performed a systematic literature review on Web of Science database based on a three step approach. First, the following search query was used: “ESG” AND “financial performance” OR “ESG” AND “firm performance” OR “ESG” AND “corporate performance”. The query was searched in the Topic category (TS), comprehensive of Title, Abstract, Author Keywords, and Keywords Plus. Secondly, we restricted to journal articles published in the English language. In the third step, inclusion and exclusion criteria were applied based on the study of the title, abstract and the full text of the papers under investigation. In particular we focused only on studies applying quantitative data research at the firm-level, considering the entire ESG variable (and not simply one of its three dimensions), explicitly linking ESG and CFP, excluding “investment” funds portfolio or similar and using ESG variable as measure derived from existing Databases or constructed by the Author(s).

After the three steps we restricted the analysis to 269 articles. Each of them was analysed in depth, in order to map the sign of the ESG-CFP relationship investigated as well as to the country/ies, industry, timeframe, and any other variables included in the article. Further statistical analysis was conducted on the data collected on the 269 articles in order to find any association between the sign of the ESG-CFP relationship and any other variable.

We were able to determine the circumstances in which studies highlighted more frequently positive relations, by combining research results according to region, timeframe, area of investigation, and type of variables used. We found that when data were collected in more recent periods, the percentage of positive results increased. This suggests that in the future, investing in sustainable activities will increasingly lead to economic and financial returns. Overall what we could notice is that in longer periods of time, investing in sustainability might bring returns up to a certain level, beyond which it might be economically inconvenient to behave responsibly.
 

References

Alsayegh, M. F., Abdul Rahman, R., & Homayoun, S. (2020). Corporate economic, environmental, and social sustainability performance transformation through ESG disclosure. Sustainability, 12(9), 3910.

Berg, F., Kölbel, J. & Rigobon, R. (2022). Aggregate Confusion: The Divergence of ESG Ratings. Review of Finance.

Chatterji, A., Durand, R., Levine, D. and Touboul, S., 2015. Do ratings of firms converge? Implications for managers, investors and strategy researchers. Strategic Management Journal, 37(8), pp.1597-1614.

Combs, J., T. Crook, and C. Shook. (2005). "The Dimensionality of Organizational Performance and its Implications for Strategic Management Research." Chapter in Research Methodology in Strategy and Management. Eds. 2. D.J. Ketchen and D.D. Bergh. pp. 259-286.

Friede, G., Busch, T., & Bassen, A. (2015). ESG and financial performance: aggregated evidence from more than 2000 empirical studies. Journal of Sustainable Finance & Investment, 5(4), 210–233.

Gentry, R. J., & Shen, W. (2010). The Relationship between Accounting and Market Measures of Firm Financial Performance: How Strong Is It? Journal of Managerial Issues, 22(4), 514–530.

Hoskisson, R., M. Hitt, W. Wan, and D. Yiu. (1999). Theory and Research in Strategic Management: Swings of a Pendulum. Journal of Management 25: 417-456.

Hult, G., D. Ketchen, D. Griffith, B. Chabowski, M. Hamman, B. Dykes, W. Pollute, and S. Cavusgil. (2008). An Assessment of the Measurement of Performance in International Business Research. Journal of International Business Studies 39: 1064 1080.

Lee, M. T., & Suh, I. (2022). Understanding the effects of Environment, Social, and Governance conduct on financial performance: Arguments for a process and integrated modelling approach. Sustainable Technology and Entrepreneurship, 1(1), 100004.

This study was funded by the European Union - NextGenerationEU, in the framework of the GRINS -Growing Resilient, INclusive and Sustainable project (GRINS PE00000018 – CUP J53C22003140001). The views and opinions expressed are solely those of the authors and do not necessarily reflect those of the European Union, nor can the European Union be held responsible for them.