More ESG Practices, Higher Financial Performance? The U-Shaped Pattern in China's Agricultural and Food Firms

Abstract

ESG (environmental, social, and governance) practices, an internationally recognized concept of a firm's sustainability, can serve as a bridge to enhance effective communication between firms and various stakeholders. It is also a new tool for measuring firms' value. This study employs a balanced panel data set of 114 publicly traded agricultural and food firms in China from 2016 to 2022. It empirically investigates the relationship between ESG and financial performance based on shareholder primacy theory and stakeholder theory. Employing a two-way fixed effects (FE) model, our findings reveal a U-shaped nonlinear pattern in how ESG impacts financial performance. It differs from previous studies that found predominantly positive relationships: Specifically, the average ESG score for firms is 0.396, the median is 0.390, and the inflection point of the U-shape occurs at 0.53. When firms' ESG investments are less than 0.53, the high initial ESG cost makes it difficult to transform ESG into financial improvement. However, once this threshold is surpassed, good ESG can convey an excellent reputation to the public and increase anti-risk ability—which, in turn, significantly improves firms' financial performance and facilitates long-term development. Also, our study demonstrates that firms' ownership and different positions in the supply chain differentially affect the relationship between ESG and financial performance. This paper also offers insights into promoting the sustainable development of Chinese agri-food firms.