ESG as a turnaround strategy: Evidence from global firms facing performance shortfalls

Abstract

This study examines whether and how firms adopt environmental, social, and governance (ESG) strategies in response to performance shortfalls, and whether such adoption yields subsequent financial benefits. Drawing on the behavioral theory of the firm, we conceptualize ESG adoption as a strategic response to negative performance feedback. Using a propensity score matched sample of 1516 firms across 38 countries, we identify ESG responses based on substantial increases in ESG scores and link them to prior underperformance, measured primarily via return on assets. Employing a propensity score matching combined with difference-in-differences framework, we find that ESG adoption following shortfalls is associated with significant long-term improvements in firm performance. Disaggregating ESG into its core dimensions reveals that environmental initiatives yield the most immediate performance gains, while social and governance initiatives exhibit relatively less prominent delayed benefits, with governance delivering the largest long-term effects. These findings highlight the heterogeneous value of ESG components and underscore the importance of timing and strategic fit. Our study contributes to literatures on ESG, turnaround strategies, and performance feedback by framing ESG not as static virtue-signaling, but as a deliberate recovery mechanism.