Employing a Sustainability Model for Assessing CSR- ESG and Its Impact on Financial Performance: A Comparative Analysis of BRICS and Pakistan

Abstract

This study is an attempt to investigate and explain the ESG (environmental, social, and governance initiatives) and Financial Performance relationship of the listed companies in particular context of emerging economies, specially BRICS and Pakistan. In addition, this research also explores how ESG, impacts the overall financial performance of the firms operating in Pakistan in comparison to the major developing economies. Furthermore, it provides insights on how sustainability framework, namely Triple bottom line (TBL or 3 P’s model), plays a role for upholding social, environmental and financial interests of the stakeholders, particularly the listed firms of the emerging economies. This study used ROA (Return on assets) and TQ (Tobin’s Q) as a proxy for financial performance, which is the dependent variable. For independent variable; ESG combines as well as environmental, social, and governance scores are used. The dataset included 828 firms from the stock exchanges of the 6 countries from the year 2010 to 2020. Analysis started with Ordinary least square, fixed effect model and Random effect model followed by two-stage least-squares approach (2SLS) with instrumental variables to correct for potential endogeneity. Additionally, for the robustness of the results, Multilevel analysis model (MLAM) is also performed to consider for potential nesting effect of the data. Results shows positive and significant meaning that if a firm invests in its environment, social and governance activities well, ultimately gets paid significantly in terms of increased financial performance. These results are also in line with the Triple Bottom Line model. TQ as FP measure shows negative association with ESG in almost all estimation models. The comparative analysis also exhibits mixed results, while results are not encouraging for Pakistan. Practical and policy implications of the study give perspective on the value of ESG performance. Which can help managers by increasing corporate reputation and firm performance, practitioners who are looking for green and sustainable innovations and policy institutions and the firms by establishing a supervision and transparency mechanism and sharing ESG ratings.