Abstract

This article aims to analyse the relationship between Environmental, Social and Governance (ESG) ratings and financial performance for firms in emerging markets. In modern global finance, emerging economies are becoming increasingly integrated into global capital markets, so understanding whether ESG performance contributes to a firm’s value has become an increasing priority for investors and policymakers. We find that despite growing global interest surrounding the topic, ESG reporting remains inconsistent and often voluntary. Using a quantitative approach, we assessed the influence that both ESG composite and pillar scores (environmental, social and governance) have on accounting-based measures (ROA, ROE) and market-based measures (Tobin’s Q).  The evidence suggests a positive relationship between ESG ratings and financial performance, though contextual factors remain crucial and need to be considered.

1. Introduction

The purpose of the ESG framework is to decide whether a business is being socially responsible and to hold it accountable, which is in the best interest of shareholders and potential investors. 

The environmental component of the framework considers the impact and contribution that a business can have on the natural world, including but not limited to: waste and pollution management; resource management; and greenhouse gas emissions. The social component of the framework looks at how a business treats and protects its employees, suppliers, customers and the public by considering: diversity equity and inclusion; working conditions; and data protection. Lastly, the governance component of the framework deep dives into how the business polices itself through the following: tax strategy; executive remuneration; and donations (Ashton, 2024).  

The absence of standardisation in ESG reporting stems from a variety of factors; however, this is mainly due to the lack of a globally agreed-upon definition of “good” environmental, social and governance practices. This ambiguity leads to diverse interpretations and reporting methods, making it difficult to compare companies across different sectors or regions (Aliakbari & Globerman, 2023).  Furthermore, ESG reporting regularly relies on companies and firms choosing which standards to follow, if any. This is very different to financial reporting. This, therefore, then creates a situation where companies can select frameworks that perhaps present their performance in the most favourable light, which is also referred to as “greenwashing” (Ormesher & Tuson, 2023).  

It is important to mention that the complexity of ESG issues plays a significant role. For example, environmental impact, social inequality and corporate governance are broad and heavily interconnected areas. Measuring progress in these areas is not as easy as measuring financial performance, which has well-established metrics and accounting standards.  

ESG strategies enable businesses to achieve net zero through driving environmental initiatives. Net zero describes a state in which greenhouse gas emissions caused by humans are on global balance with the emissions that are removed from the atmosphere. By achieving zero emissions, we bring the global carbon cycle back into balance. This is an important and urgent goal to limit the effects of climate change. By understanding how a business manages the risks and opportunities that go beyond profitability metrics, investors can assess both the natural and social capital alongside the financial performance. ESG in the workplace is attractive because companies and business managers who embrace ESG create more fulfilling work environments where people can thrive and businesses can grow. Shrestha et al. (2025) comment how ESG allows a higher level of transparency to be achieved, so investors can feel confident about investing in a business that shares similar values to theirs. Furthermore, companies with strong ESG principles may be better positioned to manage risks, gain a competitive advantage, enhance their reputation and drive innovation. 

A firm or business can decide which components of the ESG framework to prioritise, depending on the aspects of the framework that are most relevant to their business. Some prevalent frameworks that measure and report ESG include the Climate Disclosure Standards Board (CDSB), the Global Reporting Initiative (GRI), the International Sustainability Standards Board (ISSB) and the Carbon Disclosure Project (CDP) (Cdp.net, 2025). The GRI framework, specifically, has been applied by 80% of the largest 250 corporations worldwide to report on universal, topic-specific and sector standards (KPMG, 2022). ESG reporting and ratings may differ between businesses because of the varying frameworks, meaning that investors must assess the available data to make their investment decisions.

1.1 CHARACTERISTICS OF AN EMERGING MARKET

An emerging market economy is the economy of a developing nation integrating into the global market, marked by rapid growth in GDP, trade volume and increased foreign direct investment. These economies, such as India, China and Brazil, are characterised by a shift from agriculture to industrialisation, adopting reforms and standards from developed markets to support their transition. However, they come with risks like political instability and currency volatility, offering investors both opportunities and challenges. This is a prevalent topic to research further, due to the fact that ESG performance in global finance is becoming increasingly relevant alongside the global climate issue.

Market volatility stems from political instability, external price movements and/or supply-demand shocks due to natural calamities. It exposes investors to the risk of fluctuations in exchange rates, as well as market performance. Emerging markets are often attractive to foreign investors due to the high return on investment (ROI) they can provide. In the transition from an agriculture-based economy to a developed economy, countries often require a large influx of capital from foreign sources due to a shortage of domestic capital. Using their competitive advantage, such countries focus on exporting low-cost goods to richer nations, which boosts GDP growth, stock prices and returns for investors. Governments of emerging markets tend to implement policies that favour industrialisation and rapid economic growth. Such policies lead to lower unemployment, higher disposable income per capita, higher investments and better infrastructure.  On the other hand, developed countries, such as the USA, Germany and Japan, experience low rates of economic growth due to early industrialisation. Emerging markets usually achieve a low-middle income per capita relative to other countries due to their dependence on agricultural activities. As the economy pursues industrialisation and manufacturing activities, income per capita increases with GDP. Lower average incomes also function as incentives for higher economic growth (Rubaj, 2023). 

Brazil, Russia, India, China and South Africa are the biggest emerging markets in the world. In 2009, the leaders of Brazil, Russia, India and China formed a summit to create “BRIC”, an association aiming to improve political relationships and trade between the largest emerging markets. South Africa joined the “BRIC” group in 2010, which was finally re-named “BRICS” (Curtis, 2024).

2. Aim

Our main aim is to analyse the relationship between ESG ratings and financial performance in emerging market firms. In our article, we are going to be looking at whether ESG ratings affect a firm’s value negatively or positively in an emerging market. Furthermore, we will be investigating whether governance has stronger financial performance than environmental or social components. Additionally, when it comes to financial performance, our aim is to specifically zoom into Return on Assets (ROA), Return on Equity (ROE) and market-based indicators such as Tobin’s Q. One of the main problems is that ESG reporting is not mandatory in many emerging markets, which makes it hard to assess data across studies. It should also be noted that disclosure standards differ by country, where there is less detailed reporting in emerging markets. On the other hand, in developed markets, reporting is often mandatory or strongly encouraged, making data availability higher and more accessible. Furthermore, auditing standards tend to be weaker in emerging markets, which therefore then results in measurement errors and bias. Additionally, emerging markets have weaker legal enforcement and a higher corruption risk, which changes how ESG affects financial performance.

3. Methodology

3.1 RESEARCH DESIGN

We followed a quantitative research design to compare the numerical relationship between ESG ratings and financial performance in emerging markets. Rather than collecting primary data, we rely on established empirical studies that use large firm-level datasets and econometric analysis.  

There are two main prior studies that support the data found and help frame the empirical approach of this paper. Firstly, the article titled “ESG Rating and Financial Performance in the Emerging Markets: The Moderating Effects of Cross-Listing and Industry Type” from Shrestha et al. (2025) provides a study examining the effects of ESG rating, cross-listing and industry type on (CFP) in emerging markets. The article analyses 464 companies over a 10‑year period using different databases to earn ESG ratings. Secondly, “ESG Integration and the Financial Stability Trade-Off in Emerging Markets” by Caicedo et al. (2026) tests and investigates the impacts of ESG practices on the financial stability in emerging markets. It uses data from one ESG agency (Bloomberg) from 2010 to 2021 on 86 Brazilian firms.

Together, these studies provide a foundation for understanding how ESG ratings interact with financial outcomes in emerging markets, where reporting standards and data availability differ significantly from developed markets.

3.2 DATA SOURCES

The studies mentioned used secondary data sourced and obtained by rating agencies, financial institutions and organisations that assess companies’ performance and their focus on sustainability practices. Ratings can be a composite ESG score or individual pillar scores (environmental, social and governance). Financial performance measures used in the prior studies include return on assets (ROA), return on equity (ROE), Tobin’s Q and stock returns. Caicedo et al. (2026) look at further measures of financial stability such as the weighted average cost of capital (WACC) and Altman Z-score (AZS). Our samples are firms in emerging markets from recent years, reflecting the broader context described in the introduction regarding the limited and inconsistent nature of ESG reporting in these economies.  

Secondary datasets are further illustrated in “ESG Rating and Financial Performance in the Emerging Markets: The Moderating Effects of Cross-Listing and Industry Type,” providing a table comparing ESG rates, governance and sustainability indicators across emerging markets (Shrestha et al., 2025). The data presented provides information categorised by country, type of emerging market, ESG pillar scores and financial performance. “ESG Integration and the Financial Stability Trade-Off in Emerging Markets” offers evidence that ESG performance is positively associated with financial performance in emerging markets. There is initial evidence that suggests the trade-off economically after adopting sustainability practices and investing in ESG scores provide an increase in debt. However, after increasing firm value, there is an advanced value that recovers and strategic practices are consolidated (Caicedo et al., 2026). It shows specific samples using other datasets, variable definitions (ESG composite vs. pillar scores), model structure of panel regressions with fixed effects and control variables. These sources collectively strengthen the empirical grounding of this study and align with the conclusion of emphasis on the importance of credible ESG disclosure in shaping investor responses.

3.3 VARIABLES

In the regression models used, the dependent variables include ROA, ROE, Tobin’s Q and annual stock returns. These allow us to differentiate the extent to which ESG ratings have an impact on short-term accounting profitability compared to investor market valuation. Independent variables include ESG composite score and ESG pillar scores. Control variables include firm size, leverage (ratio of debt to equity), market-to-book ratio and industry/country/year fixed effects. These variables reflect the multidimensional nature of ESG described in the introduction and allow for a more detailed examination of how environmental, social and governance components individually influence financial outcomes. The main independent variable is the ESG score measured either as a composite ESG rating or separated ESG pillar score.

4. Results Analysis

Overall results statistically confirm the positive correlation between ESG performance and accounting‑based measures (such as ROA and ROE), confirming that firms with stronger sustainability practices tend to exhibit better financial outcomes. When considering the relationship on a pillar-specific basis, governance scores show the strongest correlation with financial performance. Environmental scores show moderate correlations, with Shrestha et al. (2025) showing inconsistent regression results. These findings connect directly to the conclusion of observation that ESG impacts are not uniform and vary across pillars, industry and more.

Regression results show that ESG ratings have a strong positive relationship with financial performance. In 2019, across 21 countries, there is a consistent increase as each pillar score also increases (Shrestha et al., 2025). This aligns with the broader consensus in the conclusion that ESG engagement is associated with improved firm financial performance and contradicts the belief that ESG serves solely as a cost burden. 

The OLS regression from Shrestha et al. (2025) statistically proves the effect on Tobin’s Q (coefficient = 0.0096, p < 0.01).  The positive coefficient generated is indicative that an increase in ESG is associated with higher valuation. When cross-listing is considered, the relationship remains positive for both non-cross-listed firms (0.0071) and cross-listed firms (0.0108). This provides further insight into how ESG has a positive impact on all firms’ financial performance but to a greater extent on cross-listed firms. 

As previously mentioned, Caicedo et al. (2026) analyse the impact on a pillar-by-pillar basis. Following their statistical analysis, they comment on how holistically, the improved ESG score results in a lower cost of capital for a firm. However, most interestingly, they comment that only the governance pillar has a negative relationship. They concatenate that “good governance reduces capital costs by improving financial confidence”. Another relevant area of investigation from Caicedo et al. (2026) was the reversal in trends after the COVID-19 pandemic. Caicedo et al. (2026) state how before the pandemic, the social and governance pillars had the strongest influence on financial firm performance in emerging markets. However, post-pandemic, the social component turned negative; the explanatory power of governance weakened. They attribute this to the growing influence of stakeholder opinions on the relationship between ESG ratings and financial performance.  

Caicedo et al. (2026) also offer another interesting perspective. Their statistical analysis shows that ESG has no significant short-term impact on WACC. They show that in the short run ESG reduces AZS, as shown by the coefficient of -0.018.  From this, we can conclude that it supports the notion that ESG adoption means a firm incurs short-term implementation costs. However, when compared to the long term, ESG reduces WACC as shown by the coefficient of -0.01 generated, whilst simultaneously increasing AZS. This empirically proves that in the long run, ESG movements can lower the cost of capital and potentially improve financial stability.  

Therefore, both these papers combine to provide concrete statistical evidence that reinforces the conclusions that ESG performance has an impact on a firm’s financial performance in emerging markets.

5. Interpretation

Findings from the two sources indicate that emerging markets with higher ESG scores tend to have better financial performance.  Stronger and more consistent results are found for Tobin’s Q, suggesting that ESG is more greatly rewarded based on investor perception. Economically, this relates to signalling theory, as ESG appears to function as a credibility signal for investors. Governance seems to be the most financially significant pillar, which is important in emerging markets where legal enforcement, corruption and political unrest may be more prevalent. In emerging markets, as governance risks are generally higher, strong ESG performance usually increases the confidence of the investor to a greater extent and subsequent market valuation. However, contextual factors maintain importance. How ESG correlates to financial outcomes can be affected by differences in regulation, enforcement and economic structure. In conclusion, the studies suggest that ESG engagement across emerging markets causes a positive correlation to financial performance, while the strength of the relationship stems from industry, country and governance conditions.

6. Discussion

6.1 Overview of Key Findings

Our study aimed to analyse the relationship between ESG ratings and financial performance in emerging markets, and by drawing on data from a range of empirical studies, we have gained an enriched understanding of this relationship. Our findings support the claim that there is a relationship present between ESG rating and financial performance. Research has also shown that the strength of this relationship depends on external factors such as sector type, geographical location and, in some cases, political context.  

After reviewing studies, it can be concluded that a positive relationship between ESG rating and financial performance exists, where financial performance can be measured through proxies such as return on assets (ROA) or more generalised indicators such as Tobin’s Q. It is important to note that a recurrent theme within studies is that this relationship is not uniform, indicating that ESG ratings do not generate identical financial performance for all firms in emerging markets.

6.2 ESG and Financial Performance

As previously stated, evidence suggests that a positive relationship exists between ESG ratings and financial performance. This dismisses previously upheld arguments that ESG is merely a reputational façade or a “dangerous placebo” – a term coined by BlackRock’s former sustainable investing chief, Tariq Fancy (Amaro, 2021).  

Siwiec and Karkowska (2024), using the Refinitiv Eikon database, successfully prove the relationship between the two variables in terms of ROA for firms in the Central and Eastern European area. Their findings remain consistent across multiple regression models, lending robustness to their conclusions. Similarly, Shrestha et al. (2025) ascertained a positive relationship between ESG performance and corporate financial performance and linked it back to Freeman’s stakeholder theory, which posits how firms that prioritise appealing to environmentally and socially oriented stakeholders can generate superior financial performance due to enhanced trust, social reputation and legitimacy (Freeman, 1984).  

Another key finding was the relationship between ESG policy implementation and its impact on profitability. Most economic agents reason that movements towards ESG-friendly policies incur a greater cost for firms than regular policies. This is because the nature of ESG-oriented policies involves higher upfront costs, operational costs and uncertain or delayed payoffs relative to regular policies. Under standard profit-maximisation economic logic, it would be assumed that voluntary adoption of ESG policies leads to short-term profit sacrifice. However, evidence suggests that ESG is more than able to coexist with profit and even enhance it. Siwiec and Karkowska (2024) highlight this by explicitly stating that such ESG engagement can lead to “measurable profits”. They attribute this to superior risk management and improved investor relationships associated with ESG-oriented firms. Firms effectively managing their ESG sector can better identify and manage long term risks, particularly environmental, regulatory and social, which stabilises a firm’s performance and improves ROA.   

They also argue that the proven positive relationship between ESG and performance acts as a strong signal incentive for potential investors, particularly those with an active social or environmental compass. Framing the reasoning on a more holistic scale, they also argue that transparency in company activities further increases investor confidence and willingness for capital inflows. Siwiec and Karkowska (2024) further note how this investment can have secondary benefits, such as improvements to quality of life and societal welfare, which can attract foreign direct investment. This demonstrates how ESG-driven policies can enhance profitability on a microeconomic level and can feed through on a macroeconomic scale in the form of foreign direct investment. 

However, a limitation to consider in all analysis, particularly in emerging markets, is the lack of standardised ESG reporting frameworks. This often results in weak comparability between firms and economies which decreases the credibility of using ESG ratings alone as an explanatory variable for a firm’s financial performance.

6.3 Industry Heterogeneity

It is obviously important to acknowledge the generalised positive relationship between ESG ratings and financial performance; however, it would be a sweeping generalisation to make conclusions on the effects of ESG from this alone. The impact of ESG has more worth when its impact is observed on an industry-by-industry basis. Shrestha et al. (2025) observed the impact of ESG rating on 10 industries across emerging economies, allowing us to obtain a more nuanced and enriched understanding of the true impact of ESG. After testing industry level heterogeneity, the results presented show evidence that ESG does not have a uniform effect on all industries, and its financial relevance depends on sector-by-sector characteristics. 

Evidence from Shrestha et al. (2025) showed that ESG coefficients are more consistent in regressions on Tobin’s Q compared to the regressions on ROA. This statistical discrepancy suggests that ESG influences how firms are valued and perceived by investors to a greater extent than a firm’s immediate profitability. This also aligns with commentary on signalling theory from Sun et al. (2024), who argued that greater firm ESG disclosure can serve as a credibility and transparency signal, which can ameliorate investor perception. This particularly applies in emerging markets characterised by information asymmetry and weaker institutional frameworks.  

Empirical results show substantial variation from industry to industry, which is caused by the environmental and social risks and characteristics unique to each industry type (Hoepner et al., 2010). Consumer-oriented industries such as “Consumer Goods” and “Consumer Services” exhibit positive ESG effects on Tobin’s Q regressions. This shows how investors place greater value on ESG performance in industries where brand image, social responsibility, customer trust and stakeholder scrutiny are particularly high. In contrast, industries such as “Basic Materials” and “Utilities” show weak or negative ESG coefficients across the board. This suggests that ESG activities in these sectors are perceived as less financially suitable by investors, as well as involving higher compliance and startup costs without immediate valuation benefits harming ROA.

The financial industry showed significant coefficients for Tobin’s Q regressions, but the relationship between ESG and ROA was not consistently significant. This suggested interesting views on how, although ESG engagement may improve brand image and how well firms are perceived by the market, it does not necessarily translate into profitability, as shown by inconsistent coefficients for regression on ROA. This aligns with previous discussions on how the ESG movements can function more as a risk management tool and credibility signalling mechanism for potential investors. Contrastingly, for technology-driven firms in emerging markets, ESG performance has strong effects on ROA but limited effects on Tobin’s Q. This suggests that ESG engagement in technological industries has a more direct influence on operational efficiency and innovation. These results from Shrestha et al. (2025) help to show that the ESG-financial performance relationship in emerging markets is highly heterogeneous. ESG engagement is more consistently rewarded through market valuation rather than through operational profitability, with the magnitude and significance of these ESG effects depending heavily on the wider industry context.

6.4 China’s Unique Position

Within the overarching relationship between ESG and financial performance, there are further specifics which can be observed to fully analyse this relation. One anomaly which consistently appeared across financial literature was the global superpower, China. Evidence shows that Chinese firms exhibit limited or insignificant financial gains from ESG ratings compared to firms in other emerging markets.  Shrestha et al. (2025) use evidence to show that, unlike other firms in emerging markets, Chinese firms do not benefit from improved ESG rating, reductively concluding that “Chinese firms exhibit limited gains from ESG efforts”. When Chinese firms are included in merging market observation samples, analysis shows that the observed financial benefits of ESG engagement dampen. The issue of ESG rating standardisation becomes particularly visible in the case of China, as it illustrates how institutional values and state influence amplify concerns on the credibility of ESG information.  

One reason for this anomaly lies in China’s political structure, particularly its distinctive ownership and governance structures. The Chinese Communist Party (CCP) has been in power since 1949, so consequently, many Chinese listed firms are defined as state-owned enterprises (SOEs). In SOEs, decisions such as ESG implementation are influenced by political agendas rather than by consideration of financial performance. Linking back to stakeholder theory from Freeman (1984), investors may therefore see the Chinese ESG movement as a less credible movement, heavily reducing the chances of a positive market response in the form of inward investment, hence limiting the ESG financial performance.

Cross-listing is another area explored by Shrestha et al. (2025), where cross-listing is defined as “when a company in one country becomes listed on more than one exchange or an exchange in another country” (Kenton, 2022). Firms in emerging markets often elect to carry out cross-listing to expand growth opportunities and gain access to lower-cost capital (Liao et al., 2021). Cross-listing must be considered in the ESG-financial performance relationship, as Del Bosco and Misani (2016) suggest that cross-listing leads to increased ESG adoption and engagement as firms use it to improve firm credibility, legitimacy and commitment to governance to overcome concerns associated with the liability of foreignness. However, once again, the state in China means the state dominance over firms heavily reduces the credibility of Chinese firms’ participation in cross-listing as a genuine commitment to governance and legitimacy. The absence of internationally harmonised standards and mechanisms also means investors face greater information asymmetry when evaluating Chinese firms. Overall, investors discount ESG disclosures for cross listed Chinese firms due to major concern over state intervention.  

Another cause for this anomaly can be attributed to the specifics of ESG practices implemented by Chinese firms. This is because Chinese ESG practices differ in orientation and purpose, often shaped by state-led development and national policy objectives. This form of ESG engagement tends to prioritise social stability alongside industrial policy alignment, which may not fully align with the expectations of international investors. An example of their unique ESG movements can be seen in their heavy importance placed on rural area revitalisation, which involves the economic development of villages using local resources with the aim to simultaneously improve industrial competitiveness and basic public service provision (Shen et al., 2023). Shen et al. (2023) posit the argument of how some economists believe continuation of unique ESG movements can be beneficial for China from an ESG lens alone; however, some argue that adoption of more internationally recognised practices could increase comparability of ESG information. As suggested, adoption of internationally recognised practices improves transparency and could lead to such a movement having a greater influence on Chinese firms’ financial performance. The country specific anomaly further strengthens the argument that institutional quality and governance structures moderate the ESG performance in emerging markets.

7. Conclusion

This paper set out to analyse the relationship between ESG ratings and financial performance in emerging markets, calling upon theoretical and empirical studies to aid the investigation. Evidence was used to assess the existence, and more importantly, its consistency. The consensus shows that a relationship does exist and that greater ESG engagement is associated with improved firm financial performance. This performance is measured through metrics such as Tobin’s Q and ROA. Evidence presented supports the claim that ESG activities improve a firm’s financial performance for reasons such as improved stakeholder trust, risk management and signalling effects. This contrasts with traditional conformity bias surrounding the belief ESG engagement serves solely as a cost burden. 

Deeper analysis highlights that this ESG-financial performance relationship is not uniform. When zooming in on this relationship, varying degrees of heterogeneity are shown on an industry level. Evidence shows ESG engagement is rewarded to a greater extent in consumer-facing and technology-oriented industries in comparison to capital-intensive ones. Furthermore, investor-led methods of financial performance evaluation (Tobin’s Q) are more responsive to ESG than accounting profitability measures of performance (ROA). This is demonstrative of how the ESG impact on financial performance is largely investor-led, as it is investors who interpret it as a proxy to gauge a firm’s commitment to governance and legitimacy. The relationship fails when anomalies arise, with the most notable of such being China as a whole. The state ownership, distinctive governance systems and unique ESG policies weaken the credibility and appeal of Chinese ESG movements for investors, meaning firms do not experience investment-fuelled financial performance boosts.  

From an economic perspective, this relationship has a multifaceted, important use in global finance. The most obvious is its role in investor capital allocation. It is estimated that in 2020, 41% of investors integrated sustainability information in their investment decisions (Wong, 2024). We believe the ESG engagement functions as a strong non-financial signal that eliminates issues of information asymmetry and heavily influences investor decisions. However, this is dependent on the degree of transparency and credibility in ESG disclosure, as when this happens, ESG ratings can be reflected in asset prices due to capital flowing towards firms perceived as lower risk and better governed (Friede & Busche, 2015). Our research shows that for firms, this relationship offers a strategic tool for accessing external finance (investment) and strengthening resilience to long-term risk. For both investors and policymakers, the ESG metric offers a new and arguably more enriched way for assessing firm quality beyond traditional financial metrics (Preston, 2019). As emerging markets continue to integrate into global capital markets, the value of the observed ESG-financial performance relationship will depend on whether ESG engagement conveys credible, value-relevant information rather than functioning as a symbolic or compliance-driven signal.

*AI Usage Declaration Statement: Microsoft Copilot was used to create a methodology template. 

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