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Corporate sustainability is becoming increasingly vital as companies face mounting pressure from investors, regulators, and stakeholders to incorporate environmental, social, and governance (ESG) principles into corporate strategies. However, the impact of ESG ratings on corporate financial performance (CFP) remains unclear, particularly in emerging markets. This study examines this relationship using a sample of 8,921 firm-year observations from firms listed on the Johannesburg Stock Exchange, employing a two-way fixed-effects panel model to control for firm-specific and time-invariant factors. The findings show a positive relationship between ESG ratings and financial performance, mediated by operational efficiency and corporate debt cost. Firms with higher ESG ratings demonstrate improved resource utilization, process optimization, and workforce productivity while benefiting from decreased borrowing costs due to improved creditworthiness, risk perception, and transparency. Furthermore, the findings show that larger firms, non-state-owned enterprises, high-pollution industries, and those operating under stringent environmental regulations benefit the most from ESG ratings, underscoring significant heterogeneity across firms and industries. These findings underscore the economic benefits of ESG adoption beyond regulatory compliance and provide critical insights for corporate executives, investors, and policymakers. This study emphasizes the importance of structured ESG frameworks and standardized reporting to curb greenwashing and improve corporate transparency and financial stability in emerging markets.
Kamugisha et al. (2025) studied this question.