Unearthing the Nexus between ESG and Financial Performance: Does Company Size and Age Matter?

Regardless of how embracing eco-friendly practices provides firms with a competitive edge, the associated financial strain remains a prominent concern. This research aims to explore the effect of ESG scores on the financial performance of small and medium enterprises (SMEs). To unravel these relationships, the research investigates whether the firm size and age act as moderating factors in this context. Despite a burgeoning body of literature, the relationship between environmental, societal, and governance (ESG) disclosures and firm-level financial performance remains a subject of ongoing debate, marked by conflicting findings and contradictory outcomes. To address this gap, this study examines how the moderating factors of company age and size influence this relationship, particularly within the unique context of emerging economies. Drawing on a sample of 110 manufacturing SMEs from the Federation of Malaysian Manufacturers database, a moderation analysis is performed to assess the influence of firm size and age on the nexus between ESG disclosures and financial performance. For the empirical assessment of the hypothetical model Partial Least Square Structural Equation Modelling (PLS-SEM) is employed to assess the construct’s reliability and validity, discriminant validity-heterotrait-monotrait ratio (HTMT), and collinearity statistics (VIF). Moreover, an initial analysis has been undertaken to examine the descriptive statistics and construct a correlation matrix. The study unveils a discernible moderating effect, indicating that the presence of smaller enterprises diminishes the nexus between ESG practices and financial performance. The outcome conforms to the prevalent conjecture that ESG endeavors with less developed or small firms may exhibit ineffectiveness due to constraints, including limited financial resources, restricted experience, and evolving reputation. By delving into the role of these internal dimensions and their moderating influence, this study illuminates a crucial yet often neglected perspective in the discourse surrounding ESG and financial performance. This study contributes substantially to the existing body of knowledge by unraveling the intricate interplay between ESG practices and financial performance. In transcending the traditional focus on larger enterprises, this study offers a lens to analyze internal determinants and their contextual dynamics. The findings not only enrich scholarly deliberations but also bear practical implications for business managers and policymakers. In sum, this study paves the way for future explorations in this domain and extends an invaluable resource for scholars, practitioners, and decision-makers alike.