Environmental, Social, and Governance Score and Corporate Financial Performance: The Strategic Role of Corporate Cash Holdings

Abstract

This research paper investigates the impact of Environmental, Social, and Governance (ESG) performance on corporate financial performance (CFP). Moreover, it explores the moderating role of corporate cash holdings in the link between ESG and the financial performance of firms. Data is collected for companies with ESG ratings throughout the world. The final sample of this study consists of 6072 firms from 1999 to 2020 covering the various regions of the universe, including East Asia and Pacific, Europe and Central Asia, South Asia and Sub-Saharan Africa, Latin America and the Caribbean, Middle East and North Africa, and North America. Panel data regression by using STATA software is conducted to investigate the direct and moderating roles among the variables. The research’s findings show that higher ESG hurts firms' profitability, measured by EBIT; however, ESG positively influences firms’ revenue (sales). Furthermore, we examined the moderating role of corporate cash holdings on the ESG and CFP nexus. The results indicate that firms with substantial cash reserves can better manage the costs associated with ESG activities, mitigate the impact on profitability, and enhance revenue generation. Our research study contributes to the existing knowledge and provides novel insights regarding ESG by investigating the role of corporate cash holdings on the ESG and corporate financial performance nexus. This study highlights the incentives for corporate managers to maintain sufficient cash reserves. Secondly, firms should adopt governance policies that balance short-run financial goals with long-run sustainability objectives.