Does Institutional Quality and Managerial Ability Drive the Association between ESG and Firm Performance: Evidence from Emerging Asian Markets

This study aims to explore the role of managerial ability (MA) and institutional quality (IQ) in enhancing thepositive impact of Environmental, Social, and Governance (ESG) policies on financial performance (FP). Againstthe backdrop of global climate change, socio-economic advancements, and evolving corporate governancestandards, organizations face increasing pressure to adopt ESG practices. However, the implementation of ESGpolicies often entails substantial costs. By investigating the joint influence of MA and IQ, this research seeks toidentify supplementary factors that can amplify the beneficial effects of ESG initiatives on FP. The study isquantitative exploratory and uses panel data of 750 publicly listed companies covering period from 2010 to 2020.Data has been acquired from the reputed data provider like Thomson Reuters and OLS regression has been usedfor panel data analysis. Two measures of financial performance, the Tobin’s Q and Return of Assets (ROA) havebeen used as proxies of financial performance. The study reaffirms the positive impact of Environmental, Social,and Governance (ESG) factors on the financial performance of firms. Each pillar of ESG – environmental, social,and governance – is positively correlated with financial performance. Additionally, managerial ability andinstitutional quality act as supplementary variables, moderating the relationship between ESG and firms’financial performance. Notably, both proxies of financial performance, Tobin’s Q and Return on Assets (ROA),yield nearly identical results in terms of their relationships with ESG and the moderating effects of managerialability and institutional quality. Data of only 750 firms used for the analysis. Latest data was not available,therefore, data from 2010 to 2020 was used in the study. The study underscores the potential for inducingEnvironmental, Social, and Governance (ESG) practices in emerging economies through a combination ofmanagerial ability and institutional pressures. It emphasizes the role of policymakers in addressing inefficiencies,corrupt practices, and policy inconsistencies that impede the governance index and hinder the ease of doingbusiness. At the organizational level, policymakers should prioritize appointing managers with higher managerialability to responsible positions. For managers, understanding the long-term benefits associated with ESGpractices is crucial, despite potential short-term challenges. While previous research often focused on specificcountries, regions, or industries, this study stands out by examining the relationship between ESG and FP acrossmultiple emerging economies and industries, offering more generalizable findings. Building upon Stakeholders'Theory, the study extends Upper Echelon Theory and Institutional Theory to incorporate the roles of managerialability and institutional quality in shaping this relationship."