The effect of ESG scores on corporate financial performance: case study on South Africa

Choga, Simba Michael

The effect of ESG scores on corporate financial performance: case study on South Africa

Thesis / Dissertation

2025

Publisher

University of Cape Town

Department

School of Economics

Faculty

Faculty of Commerce

Abstract

This study seeks to examine the relationship between environmental, social and governance (ESG) scores and firm performance: using both accounting and market-based measures of firm performance. This research is important because it allows for valuable insights for investors and the local government, enabling them to navigate the complex environment of ESG disclosure and financial performance. Although the bulk of the evidence suggests the existence of a positive relationship between ESG scores and firm performance, a few studies find a negative relationship. Further, most research primarily use the combined ESG score and thus ignore the fact that the effect of the ESG subcomponents may vary. Using a panel of 38 JSE-listed firms over the period 2010 to 2022, the results from this study suggest existence of a negative but insignificant relationship between ESG scores and firm performance; regardless of the measure of performance used. Similar results are also found for the ESG subcomponents. The results suggest that firms engaged in ESG activities experience a negative effect on their profitability and market value. This would suggest that the push for ESG efforts negatively affects JSE-listed firms' performance which aligns with some previous research. Therefore, JSE-listed firms should consider investing less in ESG practices to improve firm performance.