ESG Factors and firm performance: The case of countries engaged in the Paris agreement on climate change

Abstract

This study investigates the influence of Environmental, Social, and Governance (ESG) factors on the financial performance of non-financial firms across the United States, the United Kingdom, Japan, and Canada during the period from 2008 to 2023. The findings reveal that ESG significantly impacts firm performance, with SOCSCORE and GOVSCORE contributing positively to both Return on Assets (ROA) and Return on Invested Capital (ROIC). However, ENVSCORE demonstrates a negative effect, suggesting that environmental initiatives, despite their critical role in sustainability, may impose short-term financial burdens. Furthermore, participation in the Paris Agreement is associated with a decline in firm performance. The integration of ESG into corporate strategies enhances asset utilization and overall performance but reduces capital efficiency. Among control variables, leverage (LEV) and asset intensity (AIR) negatively affect financial outcomes, while revenue growth (REV_GROWTH) and price-to-book ratio (PB) have positive influences. Firm size (SIZE) and current ratio (CR) exhibit mixed effects, underscoring their complex and context-dependent relationships with performance. Overall, the study emphasizes the importance of social and governance initiatives while addressing the financial trade-offs and challenges linked to environmental investments