Does it pay to be green?

Abstract

This study empirically investigates the effect of environmental, social, and governance (ESG) practices on the financial performance of firms across various industries, for 10 years (2013-2022). The study analyzed 148 publicly traded firms from the NGX. ESG scores and financial performance were obtained from the NGX. The independent variable is the ESG score (overall ESG score). The dependent variable is financial performance metrics including EPS, return on assets (ROA), and return on equity (ROE). The control variables include firm size, leverage, and liquidity. Multiple regression analysis was employed to determine the relationship between ESG practices and firm performance, controlling for these three factors. The study found a positive and significant relationship between overall ESG score and firm performance. Higher ESG scores were associated with better ROA, ROE, and EPS. Firms with higher ESG scores tend to perform better financially. Companies should enhance their ESG practices to improve financial performance. Investors should consider ESG scores as a crucial factor in their investment decisions. Policymakers should encourage transparency and standardization in ESG reporting to facilitate better comparisons and assessments. The study underscores the importance of integrating ESG considerations into corporate strategies and investment decisions. It suggests that strong ESG performance can be a source of competitive advantage. However, the study relies on ESG scores from NGX, which may not capture all nuances of ESG practices. The analysis is limited to 10 years, and longer-term effects may differ. Results may vary significantly across different industries, and this study’s findings are based on a general sample. Nonetheless, this study contributes to the literature by providing a comprehensive analysis of the combined effects of the E, S, and G components on firm performance, using recent data and a robust methodology. It highlights the individual contributions of each ESG dimension, offering deeper insights into how specific practices influence financial outcomes.

Keywords: earnings per share, environmental, firm leverage, firm profitability, firm size, governance, return on assets, return on equity, social C13, C16, M22, M48