Environmental, social, and governance activities and firm performance: Global evidence and the moderating effect of market competition

Despite the growing demand for corporate environmental, social, and governance (ESG) engagement in response to the global complex crisis, the impacts of ESG activities and market environment on firm performance have not been sufficiently investigated. This study aims to explore how ESG activities affect firm performance and how the competitive market environment moderates this relationship. The panel data regression analysis was performed to investigate the relationship between the ESG performance and firm performance (specifically, market capitalization as a measure of market-based firm performance and profit margin and return on assets as measures of account-based firm performance) with the data of 2115 listed companies from 53 countries over the past 5 years (2017-2021). The analysis results showed a U-shaped relation between ESG performance and market capitalization, and a positive linear relationship was observed between ESG performance and profit margin or return on assets. Importantly, it was found that these relationships are negatively moderated by the competition (number of competitors) in the market. It can be interpreted that the greater the number of competitors in the market, the weaker the effect of ESG performance on firm performance. This study discusses plausible reasons for these observations and managerial and policy implications drawn from the results. This study not only analyzes the relationship between ESG performance and various aspects of firm performance at the global level, but also accumulates new evidence for the moderating effect of market competition.