The Role of ESG in High-Pollution Industries: Implications for Market and Financial Performance

Abstract

Purpose – Using data from 49 USA energy and raw material companies listed in the S&P 500 in the period 2011–2021, this study aims to investigate the impact of the quality of environmental, social and governance (ESG) disclosure on market and financial performance as measured by Tobin’s Q and return on assets, respectively. Design/methodology/approach – This study uses panel data regression analysis that accounts for firm- and time-fixed effects to examine the impact of ESG on market and financial performance in high-pollution industries. Findings – Thisstudy findsthat the quality of ESG disclosure is positively related to stock market performance. Among the three components of ESG, the quality of corporate governance disclosure hasthe strongest impact on firm market performance. Practical implications – The results suggest that the quality of ESG disclosure has a heterogeneous impact on the market performance and profitability of USA energy and raw material firms. While a good ESG score can improve stock market performance, potentially attracting public investment and improving capitalstructure, this requires high levels of capital investment that might deprive other essential company operations of resources. Originality/value – This is the first study that examines the impact of ESG disclosure quality on market and financial performance in high-pollution industries. Moreover, this study enriches the existing knowledge by applying dynamic panel data regression analysis in the ESG disclosure–financial performance relationship.