ESG Adoption and Corporate Financial Performance

Abstract

A debate on the correlation between ESG adoption and financial performance of firms still exists in the frontier markets, as previous Pakistani studies have used correlational designs which do not allow for causal relationships. I filled this gap by testing, using a pre-post quasi-experimental design, the causal relationship between ESG and financial performance, whether firm size moderates this relationship, and whether the effect is sector specific. The sample comprises 20 companies listed on the PSX across seven sectors, providing a total of 120 firm year observations over three years pre and three years post ESG adoption, analyzed using firm fixed effects panel regression and complementary statistical tests. The results demonstrate that there is no statistically significant direct effect of ESG adoption on the variables ROA, ROE and PM and no significant moderating effect of firm size. On the sectoral level, there is a strong positive significance for Cement, and a strong negative significance for IT & Technology and Pharmaceuticals, a pattern that is surprising from a theoretical perspective. The results indicate that policymakers should justify ESG based guidelines on the grounds of stakeholder and environment instead of short-term financial gains and should not have a uniform policy for ESG regulation across different sectors.

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