The impact of ESG practices on firms’ production efficiency: a nonparametric frontier analysis

Purpose This study aims to examine the indirect link between environmental, social and governance (ESG) practices and production efficiency, a relationship that remains underexplored in existing literature. By clarifying how ESG practices shape firms’ operational performance, the study aims to improve the understanding of the mechanisms that contribute to long-term value creation. Design/methodology/approach This study uses a nonparametric frontier analysis to model the impact of ESG scores on firms’ production efficiency levels. Drawing on a large sample of firms from 2015 to 2022, it investigates a dynamic, positive and nonlinear relationship between ESG practices and production efficiency. In addition, a second-stage nonparametric location-scale regression analysis is performed to validate the findings and provide deeper insight into the interplay between ESG, performance and inefficiency levels. Findings The results indicate that ESG practices have a significant, nonlinear positive impact on firms’ production efficiency, supporting the notion that operational performance may serve as an important “missing link” in the ESG-value creation chain. Moreover, the findings suggest that ESG initiatives shape firms’ inefficiency distributions, highlighting the potential strategic implications of aligning sustainability efforts with operational objectives. Originality/value This paper contributes to the ESG literature by providing empirical evidence that highlights the indirect impact of ESG practices on production efficiency. By exploring the nonlinear dynamics and improving the understanding of how ESG practices interact with firms’ operational processes, the study offers valuable insights into the pathways through which ESG engagement drives long-term firm performance and value.