The Effects of <scp>ESG</scp> Performance on Financial Performance: Evidence From <scp>GCC</scp> Countries

ABSTRACT This study investigates how environmental, social, and governance (ESG) performance influences corporate financial performance (CFP) in the Gulf Cooperation Council (GCC) region, with a focus on the moderating role of financial constraints. Using panel data from 71 listed firms across six GCC countries during 2018–2023, a two‐way fixed effects model was used to test whether ESG engagement translates into higher profitability. The findings reveal that ESG performance significantly improves firm profitability, but this positive effect weakens when firms face higher financing frictions, highlighting the importance of capital access in converting ESG engagement into financial value. By introducing financial constraints as a moderating mechanism, the study extends evidence on the ESG‐CFP link in the underexplored GCC context and highlights the region's unique institutional and financial environment. Practical and policy implications suggest that strengthening sustainable financing mechanisms and ESG disclosure frameworks can support firms in achieving both sustainability and financial objectives.