The Impact of Environmental, Social, and Governance Factors on Corporate Financial Performance in Emerging Markets

Abstract

This paper examines the relationship between environmental, social, and governance (ESG) activities and financial performance of corporations in emerging markets. It utilizes Return on Assets (ROA) and Return on Equity (ROE) to gauge profitability, and Tobin's Q to evaluate the effect of ESG factors on stock market performance. Firm size, total asset turnover ratio and leverage have also been considered as control variables. The sample consists of 556 companies operating in emerging markets, and data from 2012 to 2021 has been analyzed. The study finds an inverse relationship between environmental performance and ROA, however any of the other ESG activities do not significantly affect the financial performance of companies. Therefore, the study concludes that there are no notable positive effects of ESG performance on CFP in emerging markets.