Does Environmental, Social, and Governance Sustainability Improve Financial Performance? A Nonlinear Panel Data Analysis on Industrial Firms in G20 Countries

The environmental, social, and governance dimensions of sustainability deal with issues such as firms’ environmental impact, efficient use of resources, their relations with stakeholders and society in general, and management transparency. Sustainable activities of firms have different meanings for policymakers, managers, investors, and other stakeholders. Business managers focus on the impact of sustainability investments on financial performance. This study examines the linkage between corporate governance performance, social performance, environmental performance, and financial performance of firms in G20 countries. Unlike previous studies examining the linear relationship between firms’ sustainability scores and financial performance, this study investigates non-linear relationships. In this respect, this study draws attention to the fact that there may be an optimal point for firms’ sustainability investments. In this context, the "too little of a good thing" and "too much of a good thing" views, which argue that there is a U-shaped or inverted U-shaped linkage between sustainability scores and financial performance, respectively, are tested with panel data analysis methods for 251 firms operating in the industrial sector of G20 countries. According to the results, there is an inverted U-shaped relationship between firms’ sustainability, social, environmental, and corporate governance performance and their return on assets and equity. This result supports the validity of the "too much of a good thing" effect. However, there is no significant relationship between firms’ environmental performance and their return on equity. Accordingly, firms’ financial performance varies depending on environmental, social, and governance performance levels.