Abstract
This study investigates the link between Corporate Social Responsibility (CSR) measured by ESG and firm performance of 120 firms in South Africa between 2015 and 2020 by examining the impact of ESG score and its sub-pillars (Environmental, Social and Governance) on firm performance measured by Return on Assets (ROA), Return on Equity (ROE) and Tobin’s Q (TQ). The study further attempts to determine whether this relationship differs across South African industries. To this end, both dynamic and static panel techniques are employed, namely the generalised method of moments (GMM) and the fixed effects estimator, respectively.
The GMM regressions do not show a statistically significant correlation between ESG and company profitability in South Africa. But the Social Pillar score of ESG contributes positively to both ROA and ROE, while the Environmental Pillar Score negatively affect Return on Assets. Lastly, it is established that the governance pillar has little bearing on firm performance across all Financial Performance Measures.
The results of the fixed effects indicate that, across all sectors, ESG has no significant impact on market performance as measured by TQ. But the environmental factors reveal a significant performance impact on the basic materials and consumer discretionary industries, whereas the social factors prove to have a significant performance effect only on the financial industry. In addition, the environmental pillar appears not to affect the performance of many industries, including manufacturing, housing, technologies, health and telecommunications and energy. These results indicate the role of industry specific and ESG sub-pillar characteristics in driving the ESG-performance nexus. This has the potential to encourage managers to review their existing ESG investing strategies in a way that allows them to align with activities which are of direct interest to the sector they operate in, thereby increasing firm performance.
Keywords: ESG, Corporate Social Responsibility, firm performance, JSE, South Africa.