The Effect of ESG on Corporate Performance and the Moderating Role of COVID-19: Evidence from FTSE 350 Companies in the UK

Amidst the global economic upheavals brought by the COVID-19 pandemic, it has become increasingly critical to understand the role of Environmental, Social, and Governance (ESG for short) in corporate performance. Aiming to address the issue of how ESG influences corporate outcomes and examines whether COVID-19 moderated this relationship, this research establishes a two-way fixed effect (TWFE) panel data model by utilizing a sample of FTSE 350 firms in the UK from 2016 to 2022. Using a TWFE model, we find that higher ESG scores are significantly associated with improved return on assets (ROA) but not with return on equity (ROE) over the full period. The pandemic exerted a universally negative impact on all corporate performance metrics. However, firms with stronger ESG demonstrated greater resilience during the crisis. Further analysis reveals a nuanced moderating role of COVID-19: while the interaction between ESG and COVID-19 significantly enhanced ROA but no such effect was observed for ROE. These findings underscore the value of ESG as a risk-mitigation tool during systemic shocks and highlight the differential impact of ESG dimensions on financial outcomes. The study contributes to stakeholders theory, agency theory, signaling theory, resource-based view by contextualizing ESG's role in crisis management and provides actionable insights for firms and policymakers to prioritize ESG integration for long-term sustainability.