The impact of ESG engagement and gender diversity on corporate investment efficiency: evidence from European listed firms

Purpose The purpose of this study is to empirically examine whether environmental, social and governance (ESG) engagement enhances corporate investment efficiency and gender diversity affects the relationship between ESG engagement and corporate investment efficiency. Design/methodology/approach The analysis uses a sample of 4,023 firm-year observations from publicly listed, non-financial firms across six European countries – namely the UK, France, Germany, Spain, The Netherlands and Italy – from 2008 to 2022. A panel multiple regression analysis combined with the Generalized Method of Moments technique is applied to investigate the interconnections between ESG engagement, investment efficiency and gender diversity on corporate boards. Findings The results of this study indicate that ESG engagement positively impacts investment efficiency in the current period, while showing a negative relationship in the previous period, suggesting that ESG initiatives yield benefits over time. Furthermore, this study reveals that board gender diversity strengthens the relationship between ESG engagement and investment efficiency. However, in the short term, gender diversity is associated with a negative relationship, reflecting challenges in decision-making within diverse boards. Research limitations/implications This study advances the theoretical understanding of corporate investment behavior by integrating stakeholder, institutional, legitimacy and resource dependency theories. Furthermore, the findings of this study validate institutional and legitimacy theories by highlighting how firms respond to societal expectations and regulatory pressures in shaping ESG strategies. Practical implications This research emphasizes the importance of ESG initiatives in enhancing investment efficiency, optimizing resource allocation and boosting stakeholder confidence. The positive influence of ESG practices on capital allocation and governance structures is evident. Additionally, promoting gender diversity on corporate boards fosters better decision-making and enhances the long-term impact of ESG initiatives on investment efficiency. Therefore, the regulators should encourage a higher involvement of women on boards to enhance investment efficiency. Likewise, firms should integrate gender diversity as a key component of their corporate governance to maximize the benefits of ESG engagement. Originality/value This study offers a unique contribution to the literature by exploring the relationship between ESG engagement and investment efficiency, focusing on the moderating role of gender diversity on corporate boards. It demonstrates that ESG practices positively affect investment efficiency and that gender diversity enhances corporate governance, ultimately improving investment decision-making. Using the Generalized Method of Moments methodology, this study effectively addresses endogeneity issues and provides reliable estimates, ensuring robust findings. This comprehensive analysis offers novel insights into the complex dynamics between ESG engagement, gender diversity and investment outcomes.