Impact of ESG practices and economic volatility on firm performance in the US IT Sector: Evidence from 2010–2022

In recent years, Environmental, Social, and Governance (ESG) practices have gained prominence as firms seek to align profitability with sustainability and ethical responsibility. We analyse the impact of ESG scores, regional economic volatility (ECOVOL), regime shifts, and other control variables on financial performance indicators such as Return on Assets (ROA) and Return on Equity (ROE). Using a long-difference multilevel fixed-effects approach, we examine firm- and regional-level data for 32 U.S.-based IT firms from 2010 to 2022. Our findings indicate that ESG practices are positively associated with ROA (β = 0.202, p < 0.01) and ROE (β = 0.00382, p < 0.01) only in the long term, with no significant effects observed in the short or transitional periods. Economic volatility has no notable effect on ROA, highlighting the IT sector's resilience to macroeconomic instability. However, lagged economic volatility is negatively and significantly related to ROE (β = -2.165, p < 0.01), suggesting that firms exposed to historical economic instability tend to underperform in equity returns. The COVID-19 pandemic exhibits a marginally positive association with ROA (β = 1.667, p < 0.10), reflecting increased demand for digital solutions. While political regime shifts show no direct effect on ROA, they are positively associated with ROE (β = 0.0424, p < 0.05). These results underscore the strategic importance of ESG investments and highlight the IT sector's capacity to sustain growth amidst economic uncertainty.