An investigation into the role of ESG pillars on firm financial performance in South Africa

Abstract

South Africa is encouraging firms to be more ethical, transparent and environmentally conscious to improve their financial performance. Studies establishing the relationship between Environmental, Social and Governance (ESG) and firm performance in South Africa have relied on generalised linear estimations which overlook the heterogeneous effects that ESG factors can have across firm performance over time. To address this, the study investigates ESG disclosure’s non-linear impact on Johannesburg Stock Exchange (JSE) firms’ financial performance in addition to the traditional linear models. Using Fixed, Random, and Panel Quantile Regression, it examines the influence of overall ESG scores and the individual pillars: Environment (ENV), Social (SOC) and Governance (GOV), on firm performance, measured by Tobin’s Q (TQ), Market Capitalisation (MCAP), and Return on Equity (ROE). The analysis uncovers how ESG impacts vary across low-, middle-, and high-performing firms. Data for 28 JSE-listed companies were obtained from the LSEG Refinitiv database, covering the period from 2012 to 2023, comprising 336 observations. The results reveal the following: (i) For linear models, the combined ESG score tends to negatively affect market-based performance measures (TQ and MCAP). (ii) For accounting-based performance (ROE), both the combined ESG score and the ENV pillar have positive and significant effects, while the SOC and GOV pillars show no significant impact. (iii) For quantile regression, the combined ESG score has a positive and significant influence on the three performance measures across most levels of the distribution. The SOC pillar demonstrates significant positive effects across all measures and quantiles. The ENV pillar has a strong positive effect on both TQ and ROE and a modest positive impact on MCAP in the upper quantiles. The GOV pillar demonstrated evident effects only on ROE and mostly within the lower-to-middle quantiles. ESG factors have a varied impact on firm performance in South Africa. Environmental, governance and social initiatives enhance performance by improving corporate reputation and stakeholder trust, particularly for firms with lower market performance. Thus, the study recommends that firms falling in the lower half of the performance distribution, should prioritise socially driven ESG initiatives to enhance stakeholder relations. Regulators and policymakers should harmonise ESG disclosure and incentivise ESG integration to ensure these are recognised and rewarded by financial markets.