TOWARDS A SUSTAINABLE GROWTH: HOW ENVIRONMENTAL, SOCIAL, AND GOVERNANCE (ESG) FACTORS AND FIRM CHARACTERISTICS DRIVE FINANCIAL PERFORMANCE IN THE FTSE4G BURSA MALAYSIA FIRMS

Abstract

The integration of environmental, social, and governance (ESG) factors into investment decisions has gained significant in recent years, reflecting a shift towards sustainable firm performance. This study examines the relationship of ESG factors, firm characteristics, and financial performance in 96 firms listed on the FTSE4G Bursa Malaysia index from 2014 to 2022. Utilising panel regression analysis, the study examines accounting-based performance measures: Net income margin (NIM), Return on Assets (ROA), Return on equity (ROE), and market-based performance measure: Tobin’s Q. The results show a positive and significant relationship between ESG factors and financial performance, as measured using Tobin’s Q, suggesting that investors increasingly recognise ESG factors as a determinant of corporate value. However, ESG factors exhibit no significant impact on traditional financial metrics; NIM, ROA and ROE, indicating that while ESG factors enhance market perception, they may not directly influence short-term profitability. These results underscore the growing importance of ESG factors in investment strategies, where firms may encounter trade-offs between immediate financial gains and long-term sustainability objectives. This study highlights the necessity for firms to embed ESG factors within corporate strategies, fostering long-term value creation over short-term financial performance