Non-linear Effects of Organizational Capital on Firms’ ESG Management

This study investigates the influence of organizational capital on achieving corporate ESG (Environmental, Social, and Governance) management. As ESG management has become a vital component for sustainable corporate growth, both industry and academia have explored various strategies to effectively implement it. However, most existing research focuses on technological or investment aspects, neglecting the intrinsic resources within firms. Addressing this gap, this study examines the role of organizational capital on ESG outcomes. Organizational capital is embedded within a firm’s production processes, facilitating the effective integration of human and physical resources. Firms with high levels of organizational capital are expected to positively influence ESG performance by synergizing intangible and tangible assets. However, the study also highlights that excessive accumulation of organizational capital could lead to agency costs, thereby restricting investments in ESG initiatives. Consequently, the study hypothesizes an inverted U-shaped relationship between organizational capital and ESG performance. Using panel data from publicly listed manufacturing firms in Korea from 2011 to 2020, the study conducts panel regression analysis to empirically test this hypothesis. The results confirm the existence of an inverted U-shaped relationship between organizational capital and ESG performance, with a similar pattern observed for the environmental (E) and social (S) components when ESG indicators are disaggregated. These findings offer significant contributions to the existing literature. First, the study introduces a quantitative measure of organizational capital as a key determinant of ESG performance. Furthermore, by demonstrating a nonlinear relationship, it identifies an optimal level of organizational capital for maximizing ESG outcomes, providing valuable insights for both academia and industry.