The Impact of ESG Ratings on Financial Performance: Evidence From Developing Economies

ABSTRACT Despite ongoing challenges, developing countries have made significant progress in addressing sustainability issues. This study examines the impact of ESG ratings on firm performance in nine Middle East and North Africa (MENA) countries. Based on a sample of 92 listed firms over the period 2012–2022 and using panel data regressions, the results show that the environmental, social and governance dimensions of ESG ratings have a positive and statistically significant impact on firm financial performance, as measured by ROA and ROE. Conversely, the total ESG score is negatively related to both ROA and ROE, suggesting that higher ESG ratings may have short‐term costs. However, the relationships with Tobin's Q are insignificant, implying that market recognition of ESG initiatives may be delayed, with the benefits becoming apparent over time. This study focuses on an underresearched region and provides valuable insights into the dynamics of ESG in this context.