Nonlinear effects of ESG on operational efficiency and operational performance of REITs

Purpose The purpose of the paper is to investigate the nonlinear effects of environmental, social and governance (ESG) performance on operational efficiency and operational performance of Real Estate Investment Trusts (REITs). Design/methodology/approach This study employs the pooled ordinary least squares regression on 190 listed REITs from various economies around the world over the period 2018 to 2022. Findings This study finds an inverted U-shaped association between overall ESG and individual ESG pillars and REITs’ operational efficiency. The findings also reveal an inverted U-shaped association between overall ESG and REITs’ operational performance. However, only the environmental pillar has a significant nonlinear relationship with operational performance. The results indicate that when ESG investments are increasing from a low to moderate level, this leads to better operational efficiency and performance. Nevertheless, REITs suffer from declining operational efficiency and performance at higher level of ESG initiatives. Originality/value Despite various studies being performed on ESG’s impact on financial performance, the majority of these research did not consider ESG’s implications on operational efficiency and performance. Additionally, these studies have only explored the linear association between the variables and are confined to the overall impact of ESG. It is the primary thrust of this paper to fill these research gaps by examining the nonlinear effects of overall ESG as well as three individual ESG pillars on REITs’ operational efficiency and performance.