Effect of ESG Performance on Firm Financial Performance : A quantitative analysis of the moderating role of regulatory stringency

This study investigates the relationship between Environmental, Social, and Governance Performance (ESGP) and Firm Financial Performance (FFP), exploring the potential moderating role of Regulatory Stringency (RS) across diverse institutional contexts. Utilizing a panel dataset covering 11 years, multi-industry sample of 594 public quoted companies from the European Union (EU) and the Emerging Asia (EA) to support the arguments, the analysis reveals a consistently positive relationship between ESGP and FFP. It was found that the ESGP – FFP relationship is statistically significant yet economically modest confirming most of the current empirical findings. However, RS did not significantly moderate this relationship, suggesting that ESGP may operate independently of regulatory context. Sectoral post hoc analyses further highlight industry specific variations in the ESGP–FFP link, implying that sectoral ESG materiality and institutional pressures are crucial factors. The findings underscore the importance of institutional theory in understanding ESG engagements, while also suggesting that firms may adopt ESG strategically, irrespective of regulatory coercion. The data were sourced from the Refinitiv Eikon database and analyzed using Jamovi, an open-source statistical software. While this study contributes valuable insights into the ESG–FFP link, it is limited by its exclusion of firm fixed effects and reliance on secondary data, highlighting avenues for future research employing richer datasets and more rigorous methodologies.