The relationship between sustainability and financial performance of South African companies

Orientation: Environmental, social and governance (ESG) performance remains crucial information required by stakeholders as they are interested in monitoring whether companies contribute to sustainability or not. Research purpose: The study’s purpose was to determine how the sample companies scored on the three pillars of ESG performance and to determine the relationship between ESG scores and the financial performance of selected South African listed companies, with special reference to the impact of coronavirus disease 2019 (COVID-19) on that relationship. Motivation for the study: Because of crises such as the COVID-19 pandemic, companies tend to focus on their ESG-impact, resulting in them investing in sustainable operations. Research approach/design and method: Linear mixed-effect regression analysis models were developed to determine the relationship between ESG scores and financial performance. The sample consisted of 104 companies listed on the Johannesburg Stock Exchange (JSE) from 2017 to 2022. Main findings: We found that companies do not equitably score on the ESG performance pillars. We also found the following significant relationships: (1) Return on equity (ROE) positively impacts governance performance, (2) ESG positively impacts Tobin’s Q and (3) governance performance positively impacts ROE. Furthermore, the results show that sustainability and financial performance before and after COVID-19 are mainly not meaningful. Practical/managerial implications: New insights are revealed in the interests of shareholders, potential investors and company management regarding how to interpret the relationship between ESG pillars and financial ratios. Contribution/value-add: We contribute to the theory as a conceptual framework was developed to interpret the results within the shareholder’s theory.