ESG performance, board characteristics, and investment efficiency: insights from emerging economies

Purpose This study aims to examine the relationship between firms’ environmental, social, and governance (ESG) performance and their investment efficiency (IE), focusing on emerging markets. It investigates the moderating effects of board characteristics on this relationship. Design/methodology/approach Using a sample of 361 nonfinancial firms from 14 emerging markets from 2009 to 2021, panel data regressions were employed. As a robustness check and to handle endogeneity, the authors also ran GMM regressions. Findings The results of panel regressions revealed that overall ESG performance has a positive and significant impact on IE. However, the individual components of ESG exhibit varying effects: the social and governance scores positively influence IE, while the environmental score has a negative impact. Board size and gender diversity negatively moderate the ESG–IE relationship, whereas cultural diversity and board independence show no significant moderating effects. GMM regressions produced consistent results. Research limitations/implications The study is limited by missing ESG data for some firms, which constrained the sample size. Future research could explore granular ESG factors and compare findings between emerging and developed markets to provide deeper insights. Practical implications This study offers valuable insights for managers, investors and policymakers in emerging markets. Managers can enhance investment efficiency by integrating comprehensive ESG strategies that strengthen transparency, mitigate agency conflicts, and improve capital allocation. Investors may use ESG scores – particularly social and governance dimensions – as reliable indicators of efficient investment behavior. Policymakers can leverage the findings to design regulatory frameworks that promote standardized ESG reporting and encourage sustainable investment practices. Firms should also consider optimal board structures, as board size and gender diversity influence the effectiveness of ESG initiatives on investment efficiency. Social implications The findings highlight the broader societal value of ESG engagement in emerging markets. Strong social and governance practices contribute to fair labor conditions, community development and responsible corporate conduct, ultimately enhancing trust among stakeholders. By demonstrating that ESG initiatives can improve investment efficiency, the study reinforces the idea that socially responsible behavior aligns with sustainable economic growth. Moreover, improved ESG practices support national and global sustainability agendas, particularly in regions where institutional frameworks are still developing. Encouraging ESG adoption can therefore foster more resilient, equitable and socially inclusive economic systems. Originality/value This study provides empirical evidence from emerging markets, which are underrepresented in ESG research. It extends existing knowledge by examining the moderating role of board characteristics, offering a nuanced understanding of how governance structures influence the ESG performance relationship. The use of objective ESG scores from the LSEG Workspace database enhances the reliability and objectivity of the findings.