The Moderating Relationship of Institutional Quality on ESG’s Effects on Financial Performance

Objective: to explore the relationship between Environmental, Social, and Governance (ESG) initiatives and financial performance, considering the moderating role of institutional quality, defined as the effectiveness of governance systems in ensuring political stability, regulatory quality, rule of law, and control of corruption, measured by the Worldwide Governance Indicator. Theoretical approach: this research is grounded in corporate sustainability and governance theories, building upon previous studies on the relationship between ESG and financial performance and highlighting the importance of institutional and policy variables. Method: the study employs multiple linear regression with panel data, analyzing 7.662 companies across 75 countries using data from Thomson Reuters. The analyzed period (2004-2021) includes milestones such as COP26 and the Glasgow Climate Pact. The approach examines the moderated interactions between ESG and WGI to assess their association with EBITDA. Results: our findings reveal a positive and significant association between ESG indices and EBITDA, suggesting that higher ESG scores are associated with better financial performance. Importantly, the moderating role of institutional quality (WGI) amplifies this positive association. Specifically, the interaction term (ESG × WGI) shows a good coefficient, indicating that countries with stronger governance environments exhibit a more pronounced ESG–performance relationship. Conclusions: the study underscores the critical importance of institutional quality in the relationship between ESG and financial performance. This global and diversified analysis, encompassing various institutional and sectoral contexts, brings originality to the topic. The practical implications include insights for managers and investors, while the social implications emphasize the relevance of public policies and governance for corporate sustainability.