Strategic Linkages to ESG Performance: The Role of Performance Measurement System and Psychological Empowerment

ABSTRACT Sustainable development strategies (SDS) have been widely studied from both an innovation and financial perspective, as they play a critical role in balancing the environmental, social, and governance (ESG) pillars. However, the causal pathways connecting SDS to internal capabilities, such as performance measurement systems (PMS) and human resource management (HRM) practices, and their subsequent impact on both ESG performance (ESGP) and financial performance (FP) remain underexplored. This study integrates the sustainable balanced scorecard (SBSC) framework and resource orchestration theory (ROT) to examine how PMS control types (i.e., diagnostic and interactive), PMS justice (PMSJ), and psychological empowerment (PE) mediate the relationships between SDS, ESGP, and FP. Using data from China's top 500 manufacturing firms, we find that SDS positively impacts FP by enhancing ESGP. Furthermore, PMS control types, PMSJ, and PE act as sequential mediators, clarifying the internal mechanisms linking SDS to sustainable performance. These findings suggest that strategic attention to both PMS types and employee empowerment is crucial for achieving ESG as well as financial goals.