ESG and firm performance: The rarely explored moderation of sustainability strategy and top management commitment

This study probes the effect of Environmental, Social, and Governance (ESG) (as a composite construct and separate dimensions) on Firm Performance (FP) measured by ROA and Tobin's Q directly and through the unique moderation of sustainability strategy and top management commitment. The study uses a stratified random sample of 255 non-financial companies listed on the stock exchange of a developing country like Pakistan from 2016 to 2020. The study employs a two-stage least squares (2SLS) estimator using the instrumental variable of the industry mean for controlling the potential endogenous nature of the ESG-FP nexus. The estimation unveiled that ESG and all of its separate dimensions – environmental, social, and governance exert a significant positive impact on ROA. Similarly, ESG and its environmental and social dimensions also have a significant positive effect on Tobin's Q. Besides, the findings also disclosed the distinct moderations of sustainability strategy and top management commitment in the nexus of ESG and each of its separate dimensions with ROA and Tobin's Q. The only insignificant nexus between governance and Tobin's Q also converted into a significant positive association through the moderation of top management commitment. The study contributes to the literature, theory, methodology and practice in numerous ways.