Variations in financial performance of firms with ESG integration in business: The mediating role of corporate efficiency using DEA

Abstract

We investigated the variations in the corporate financial performance (CFP) of firms that integrate ESG factors into their business practices, focusing on the mediating role of corporate efficiency (CE). Using 909 company-level data, we applied Data Envelopment Analysis (DEA) to measure CE. We examined how these efficiency scores and CFP viz., Return on Assets (ROA), market value, and profit after tax (PAT) are influenced at different levels of ESG. To provide variational and distributional aspects, we employed quantile regression to estimate the relationship between ESG, CE, and CFP across different quantiles. The findings indicated that the impact of ESG integration on efficiency and CFP positively varies across quantiles. Further, a non-linear U-shaped relationship is established between the overall ESG score, environmental score, and social score with the CE. The efficiency initially dips at a lower disclosure score and surges to its highest at a higher disclosure score. Finally, our results revealed that ESG integration brings CE, which in turn channeled into financial outcomes, suggesting that CE plays a crucial mediating role. These results contribute to the understanding of how ESG practices can be leveraged for better financial outcomes through CE. These findings provide companies and policymakers with vital direction, encouraging a focus on robust ESG disclosure in establishing the path toward long-term corporate sustainability and profitability, guided by improved CE.

Keywords

• environmental
• social
• and governance (esg)
• corporate efficiency
• corporate financial performance
• quantile regression
• data envelopment analysis
• mediation analysis