ESG practices and firm performance: E-S mediation and executive-board heterogeneity

Purpose Drawing on stakeholder theory, trade-off theory, institutional theory, and tokenism theory, this study examines the relationship between environmental, social, and governance practices and firm performance in Japan, while accounting for the mediating roles of environmental and social practices and the moderating effects of diversity. Design/methodology/approach Using hierarchical multiple regression, the study analyzes 1,082 firm-year observations from 2006 to 2023, drawn from Bloomberg's Environmental, Social, and Governance (ESG) and Financial Analysis databases. The sample includes 79 companies listed in the FTSE Blossom Japan Index (as of June 2023). Findings The findings suggest that governance practices are significantly associated with operating margins through their influence on social practices. Regarding moderation effects, female board members moderate the relationship between environmental practices and operating margin. Female executives have a negative moderating effect on the relationships between governance, environmental, and social practices and operating margin. Female executive involvement, despite its association with lower short-term operating margins, may play a significant role in strengthening ESG practices and advancing long-term sustainability outcomes. The directors' age exhibits no significant moderating influence. Originality/value This study contributes context-sensitive evidence on the board diversity–ESG–performance nexus in Japan, integrating multiple theoretical perspectives to explain both improved sustainability outcomes and short-term financial trade-offs, while highlighting the role of institutional context in shaping these relationships.