Impact of ESG on Firm Performance in the MENAT Region: Does Audit Quality Matter?

The main objective of this study is to examine the impact of the environmental, social and governance (ESG) pillars on financial performance. To do so, we constructed a sample of 126 non-financial companies in the MENAT region between 2017 and 2023. To estimate this relationship, we used the system GMM method, addressing endogeneity concerns like reverse causality, unobserved heterogeneity and dynamic panel bias. The empirical evidence confirms that environmental and social pillars positively and significantly contribute to financial performance, highlighting their strategic role in value creation. The governance pillar, however, does not appear to influence financial performance directly, suggesting that the governance processes within the region are not efficient enough to lead to substantial financial impacts. Of greater significance, though, are the positive and significant effects of interactions between audit quality and ESG, such that good audit practice can increase the effectiveness of ESG efforts in terms of affecting financial performance. The results may be useful for policy makers and company managers in the MENAT countries by increasing ESG performance.