The Effect of ESG Management on Corporate Long-term Performance

[Purpose] This study is to examine the financial factors influencing ESG ratings and to analyze the impact of ESG ratings and individual ESG components on firms’ long-term performance. [Methodology] The ESG ratings are obtained from the Korea Corporate Governance Service (KCGS). The financial factors such as cash ratio, debt ratio, company size are from FNGUIDE. By using data for 4,080 firm-years that received ESG ratings from 2012 to 2021, this study examines if ESG ratings affect on firms’ long-term performance. The long-term performance is measured by the return on total assets (ROA) from period t＋1 to t＋4. [Findings] Our findings show that ESG rating is high, the more the firms have cash, the bigger the firms’ size, and the higher the firms’ ROA. We find that an increase in ESG activities is positively correlated with long-term firm performance, extending up to year t＋4. However, when analyzing the individual components of ESG - namely Environment (E), Social (S), and Governance (G) activities - we find that while firm performance initially increases until t＋2, it declines thereafter. [Implications] Our study provides valuable insights to managers and stakeholders, emphasizing the importance of understanding external environmental, social, and governance aspects by analyzing the financial factors that influence ESG management. Additionally, our findings strengthen the previous studies by examining the varying effects of ESG activities on corporate performance over time, highlighting that the impact may differ across ESG components. These results suggest that companies need to consider the efficient resource allocation in the long-term by balancing costs and benefits from individual ESG activities.