ESG disclosure practices and financial performance: a general and sector analysis of SP-500 non-financial companies and the moderating effect of economic conditions

Abstract

ABSTRACT This paper investigates the linear and non-linear impact of CSR initiatives, disaggregated into three sets of dimensions; environment, social, and governance (ESG), and their interaction effects with economic growth on short and long-term financial performance across SP-500 non-financial companies, and further separated into manufacturing and service sectors in the USA. We estimated a dynamic panel data model, using the System Generalized Method of Moments (SYS-GMM) technique on a final sample of 281 companies and a total of 2,829 observations from 2010 to 2019. The result showed that social and governance dimensions of ESG influence companies’ financial performance across the two measures of a firm's financial performance (ROA and Tobin's Q), while environmental dimension is significant with the Tobin's Q measure. The overall result indicated that ESG disclosure practices significantly impact corporate financial performance both directly and indirectly. In addition, our findings reported that economic conditions positively moderate the effects of different ESG disclosure practices on financial performance. The results found provide firm-level decision-makers with insight into the nature of the financial implications exerted by ESG disclosure and the role that economic conditions play in determining the magnitude of these effects. Finally, the industry/sector results indicate that the service sector is also very sensitive to environmental information disclosure therefore, managers in this sector should pay attention to environmental issues and disclosure as air and chemical pollution may not be all as it relates to the environment. The general interpretation and key conclusion are that ESG information disclosure does enhance corporate financial performance in the SP-500 index, in times of both normality and financial/socioeconomic crisis, which has significant meaning for investors, company management, policy makers, and industry regulators.