Environmental, social and governance (ESG) performance, ethnicity and investment efficiency

Purpose The paper aims to investigate the relationship between environmental, social and governance (ESG) performance and investment efficiency in Malaysia. Subsequently, the paper investigates whether ethnicity, proxied by Bumiputera directors, moderates the relationship. Design/methodology/approach This study uses publicly listed firms on Bursa Malaysia from 2017 to 2022, yielding a sample of 216 firm-year observations. The authors used multivariate ordinary least squares regression to test the relationship and to correct for the selection bias, the Heckman two-stage selection bias and lag ESG test were used. Findings The study finds that higher ESG performance reduces investment efficiency. The finding supports the trade-off hypothesis and suggests the possibility of managerial opportunism, with managers investing in ESG activities for self-interest. The study further finds that Bumiputera directors, a proxy for ethnicity, weaken the negative relationship between ESG performance and investment efficiency. The weaker negative relationship indicates that the presence of Bumiputera directors mitigates information asymmetry by improving disclosure. The results remain robust to a series of additional and endogeneity tests. The findings have important implications for practitioners and policymakers: ESG effectiveness depends not only on the extent of disclosure but also on the governance structure. Originality/value By highlighting the role of Bumiputera directors, this study reveals that governance structures rooted in local institutional dynamics can significantly shape the relationship between ESG performance and investment efficiency.