Undercurrents of divergent ESG effects on financial performance: A systematic literature review

The impact of environmental, social, and governance (ESG) performance on corporate financial performance (CFP) has been observed to vary. However, the underlying causes of this divergence require further extensive study. A systematic literature review was conducted to investigate the factors that contribute to divergent ESG effects on CFP. Scopus, ProQuest, and EBSCO database searches for pertinent articles in the recent decade (2015–2025) yielded a total of 60 articles from studies published between 2015 and 2025 that were analyzed. The present study proposes a conceptual framework that delineates the factors contributing to the divergence of the ESG and CFP relationship, in addition to their interrelationships and potential mitigating factors. The findings suggest that environmental performance has the potential to mitigate financial constraints, however these effects appear to be contingent on geography, sector, and time horizon. Investor reaction to ESG investments is depends on the nature and perception of the costs incurred. This study underscores the significance of identifying cost-reducing opportunities inherent in ESG activities, such as environmental performance-linked innovation, to create a win-win situation that improves ESG performance and introduces financial benefits. Investors may find it advantageous to prioritize concrete ESG performance over ESG signaling to mitigate risk in their investments. Several research gaps remain and are recommended for future exploration.