Corporate Sustainability and Stakeholder Value: Empirical Evidence from ESG Performance and Firm Outcomes

Abstract

This paper conducts a comprehensive empirical analysis involving the link between Corporate Sustainability, defined as firm-level measures of Environmental, Social and Governance (ESG) performance, and firm outcomes that are broad based. It examines in detail the business value of proactive sustainability actions, finding their correlations to accounting profitability, valuation in the long-term, and their implication on risk-mitigation profiles through a comprehensive and unbalanced cross-sectional dataset of 1,450 large and medium cap publicly listed firms over the past decade (2015–2025) in a variety of developed economies. However, using regional fixed-effects panel data regressions, instrumental variable (2SLS) estimators, and dynamic system Generalized Method of Moments (GMM) methods to address the pervasive endogeneity, reverse causality and omitted variable biases in our data, we find a positive but nuanced – and robust, at a structural level – relationship between real aggregate ESG scores and operational efficiency (Return on Assets, ROA) as well as market performance (Tobin’s Q). The individual ESG dimensions show the strongest, most clear-cut positive association with short-term financial performance in the case of Governance (G), while Environmental (E) and Social (S) scores are long-term strategic investments that help to reduce the equity cost of capital and favor the attenuation of idiosyncratic risk. Moreover, countries with high ESG performance seem to impact the value-ladder much more significantly in highly competitive sectors that have constituents as customers or clients where the reputation capital proves to be a major differentiator. These results offer clear rebuttal evidence to the traditional arguments about maximizing value for shareholders with shareholders only as ultimate stakeholders, as maximizing value for other stakeholders can lead to decreased shareholder welfare.