The Effect of Environmental, Social, and Governance Performance on Corporate Financial Performance: Life Cycle Perspective

ABSTRACT The paper provides important insights into how a firm's position in its life cycle moderates the impact of environmental, social, and governance (ESG) performance on financial performance, measured with profitability and market value ratios. The concept of a firm's life cycle can serve as an alternative explanation for the observed inconsistency in research findings, compared to the proposed explanation based on a nonlinear relationship between ESG performance and financial performance, which has yielded conflicting empirical results. Using panel data on listed European companies over the period 2014–2024 with S&P Global ESG scores, which have not been used in previous research on this topic, we provide evidence that the relationship between ESG and financial performance varies depending on the life cycle stage. Firm profitability fully mediates the relationship between ESG and market valuation when valuation is measured by the market value of assets (MVA), but the mediation appears only partial when valuation is measured by the market‐to‐book value of equity (MBV), suggesting that investors positively value ESG initiatives largely, though not exclusively, to the extent that they lead to an increase in firm profitability.