EFFECT OF ESG PRACTICES ON COMPANY PERFORMANCE: AN EMPIRICAL ANALYSIS UNDER THE MODERATION OF FINANCIAL RESTRICTIONS IN BRICS COUNTRIES
Name: MAIELE BASTOS DE VARGAS
Publication date: 11/03/2025
Examining board:
Name |
Role |
|---|---|
| DONIZETE REINA | Presidente |
| ELIZEU MARIA JUNIOR | Examinador Interno |
| SIRLEI LEMES | Examinador Externo |
Summary: Environmental, Social, and Governance (ESG) practices have become increasingly
relevant in corporate management and investment decision-making. However, the
relationship between ESG and financial performance remains a topic of debate in the
literature, particularly in companies from emerging markets, where financial constraints
may influence firms' ability to implement sustainable initiatives. Given this context, this
study investigates the moderation of financial constraint (RF) in the relationship with
ESG practices in the financial performance of companies from BRICS countries (Brazil,
Russia, India, China, and South Africa). To achieve this objective, fixed-effects
regression models were estimated, using return on assets (ROA) and Tobin’s Q (QT) as
proxies for financial performance. As measures of financial constraint, the KZ (KaplanZingales), WW (Whited-Wu), and SA (Size-Age Index) indices were adopted. In addition
to analyzing aggregate ESG, its three individual pillars—Environmental (E), Social (S),
and Governance (G)—were examined separately, allowing for a more detailed
investigation of each ESG dimension's effects. The results indicate that ESG has a
positive and significant impact on firms' operational profitability (ROA), but its effect on
market valuation (QT) is less evident and, in some cases, negative. This finding suggests
that while ESG practices can drive efficiency and innovation, the market may not
immediately recognize their financial benefits. Moreover, companies facing greater
financial constraints tend to exhibit lower operational profitability, reinforcing the
hypothesis that difficulties in accessing financing may limit firms' ability to achieve direct
gains from ESG initiatives. The moderation analysis reveals that for highly constrained
firms, the positive impact of ESG may be reduced, especially when resources for
sustainable investments are limited. When analyzing results by country, the impact of
ESG and financial constraints varied according to the economic and regulatory context
of each BRICS nation. India and China showed the strongest effects of ESG on financial
performance, while Brazil and Russia had moderate positive impacts. In South Africa,
ESG exhibited a greater influence on market valuation, suggesting that South African
investors may better recognize the benefits of sustainable practices. The findings of this
study highlight the need to consider financial constraints as a key factor in determining
the effectiveness of ESG practices, especially in emerging markets. Additionally, the
results suggest that the impact of ESG on market value may depend on the time horizon
required for these investments to generate perceptible returns. Thus, this research
contributes to the literature by providing empirical evidence on the role of financial
constraints in the relationship between ESG and financial performance, offering valuable
implications for corporate managers, policymakers, and investors seeking to assess the
true impact of ESG practices in the corporate landscape.
