The Effect of ESG Disclosure and ESG Performance on Firm Financial Performance: The Moderating Role of Economic Conditions

Abstract

This study examines how environmental, social, and governance (ESG) disclosure and performance influence firm financial performance, and whether these effects differ under varying economic conditions. Drawing on stakeholder, signalling, legitimacy, and agency theories, the study differentiates between ESG disclosure as an external communication tool and ESG performance as a reflection of actual practices. Using panel data from S&P 500 firms spanning 2006-2023, fixed effects regressions with clustered standard errors are employed to control for unobserved heterogeneity and firm-level dynamics. Financial performance is measured using ROA, ROE, and Tobin’s Q. The results show that both ESG disclosure and performance are positively and significantly associated with all three financial outcomes, indicating broad financial benefits across operational and market-based metrics. However, during crisis periods (2008-2009 and 2020-2021), ESG disclosure and performance are each significantly associated only with ROA, suggesting that ESG practices primarily support internal profitability under economic stress. However, the results do not support the hypothesis that ESG performance offers stronger financial benefits than disclosure. Both variables show similar economic effects on ROA, with no significant relationship to ROE or Tobin’s Q. These findings challenge the assumption that ESG performance always offers superior financial value over disclosure. Both ESG disclosure and performance appear to support operational resilience during downturns, though their financial effects are concentrated in internal outcomes such as profitability rather than in market-based measures. Overall, the results emphasise the need to evaluate ESG’s financial implications through a context-sensitive lens, particularly under varying economic conditions.