The Role of Environmental, Social, Governance (ESG) Practices and Ownership on Firm Performance in Emerging Markets

ABSTRACT

This paper investigates: (i) the effect of environmental, social, and governance (ESG) engagement and ownership attributes on firm performance and (ii) whether different ownership attributes (institutional, foreign, and state ownership) moderate the association between ESG engagement and firm performance. Employing an extensive sample from 22 emerging countries worldwide, we provide cross-country evidence that ESG engagement and its three pillars, i.e. environmental, social, and governance pillars, enhance firm performance, proxied with ROA and Tobin’s Q. Moreover, institutional and foreign ownership positively impact firm performance. We present novel evidence that the positive impact of superior ESG engagement on firm performance is lower for higher institutional ownership companies than lower institutional ownership companies, but greater for higher foreign ownership companies than lower foreign ownership companies.

KEYWORDS:

• Emerging markets
• ESG scores
• ownership
• firm performance

JEL:

• G3
• G30
• G32

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Supplementary Material

Supplemental data for this article can be accessed online at https://doi.org/10.1080/1540496X.2023.2223930

Correction Statement

This article has been republished with minor changes. These changes do not impact the academic content of the article.

Notes

1. Pensions & Investments – Data extracted from: https://www.pionline.com/esg/global-esg-data-driven-assets-hit 405trillion#:~:text=The%20value%20of%20global%20assets,to%20%2440.5%20trillion%20in%202020.

2. Statista – Data extracted from: https://www.statista.com/statistics/742097/sri-assets-value-by region/#:~:text=Between%202016%20and%202018%2C%20the,trillion%20of%20this%20total%20amount.

3. CFA. 2020. ESG and Institutional Investment Around The World. https://www.cfainstitute.org/-/media/documents/book/rf-lit-review/2020/rflr-esg-and-responsible-institutional-investing.pdf.

4. We provide the details on Refinitiv Eikon database in Appendix A.

5. We run the same estimations taking ROE as the dependent variable. The findings are displayed in Appendix H, I & J in the Supplementary File. Except for two estimations, the findings are in line with the results obtained with ROA as the dependent variable.

6. We employ t-tests to observe the difference between the high- and low-ownership samples. The outputs, available upon request, reveal that the samples constructed based on the median level of different ownership attributes are significantly different from each other.

7. We also conduct robustness tests for the impact of institutional ownership on firm performance with different sub-samples and different methodology (2SLS correcting for the endogeneity concern). We use the number of analysts following a company as an instrument for institutional ownership. The results are displayed in Appendix K.