Do institutional investors mediate the ESG performance and firm performance relationship in Islamic countries? Evidence from Malaysia, Indonesia and Turkey

Purpose This study aims to examine whether environmental, social and governance (ESG) performance improves firm financial performance in Islamic economies and whether institutional investors mediate this relationship. Although ESG is increasingly viewed as a strategic and ethical imperative, there is still limited comparative evidence on how it affects firms in Shariah-influenced markets. Design/methodology/approach The study uses firm-year data for 1,092 listed firms across 18 industries in Malaysia, Indonesia and Turkey over the period 2009-2022. The analysis uses Ordinary Least Squares regression, mediation analysis, robustness tests and an instrumental-variable check. ESG is examined both as an aggregate construct and through its environmental, social and governance dimensions. Findings The results show that ESG performance is positively associated with firm performance. This effect is driven mainly by the social and governance dimensions. Environmental performance does not show a significant short-term effect, suggesting slower payoffs and higher implementation costs. Institutional investors partially mediate the ESG-performance relationship in a negative direction, indicating that short-term investment orientations may weaken ESG value creation in these markets. Research limitations/implications The cross-sectional design limits causal inference. Future research should use longitudinal designs, distinguish among types of institutional investors and examine consumer responses to ESG signaling in Islamic markets. Practical implications Managers in Islamic economies should prioritize social and governance initiatives and support them with credible ESG disclosure. Policymakers and investors should also encourage longer-term stewardship and stronger reporting practices so that short-term incentives do not weaken the value of ESG investments. Originality/value This study contributes to ESG research by providing comparative evidence from three Islamic economies and testing institutional investors as a mediator. It also extends Islamic marketing research by showing that ESG, especially its social and governance dimensions, can function as a legitimacy and trust signal in faith-guided markets.