Can ESG Strategies Drive Firm Value Growth in the MENA Region?

Abstract

Cross-industry and cross-country evidence from the ESG–firm value literature indicates no consensus on the ESG performance impact on corporate financial performance. Stemming from the ongoing debate over whether ESG principles enhance or hinder value creation, this study investigates the effect of Environmental, Social, and Governance (ESG) performance on firm value through three proxies: Tobin’s Q (TQ), Price to Book ratio (PB), and Price to Earnings ratio (PE). Using a cross-country and cross-sectoral comparative approach, the study employs static and dynamic panel regression analyses, along with principal component analysis, to test the hypothesized relationships across nine MENA region countries and ten sectors between 2017 and 2022. To the best of the authors’ knowledge, this is the first study to examine ESG’s impact on TQ, PB, and PE while offering a comparative analysis in the MENA region. Empirical results reveal a significantly positive relationship between ESG scores and firm value using TQ and PB ratios, but this relationship is insignificant with the PE ratio. This study contributes to the ESG and financial decision-making literature, providing insights for investors on portfolio optimization and sustainable investing. The findings offer recommendations that further benefit businesses, policymakers, and decision-makers in enhancing their understanding of ESG implications.

1. Introduction

In the context of the contemporary wave of sustainability, nations are constantly striving for improvement. Consequently, the globe is confronting both opportunities and challenges as a result of the accelerated growth of economies, advancement of societies, and rapid industrialization [1]. The adoption of sustainability is a dynamic and complex process, where re-evaluating business operational procedures and strategic plans to address this persistent challenge has become inevitable. Consequently, corporate behavior has recently been referred to as Environmental, Social, and Governance (ESG) performance [2,3].

ESG has gained increasing popularity over the past decade. Some firms employ sustainability to obtain a competitive advantage, while others view it as a standard operation. Nevertheless, ESG adoption urges firms to provide additional information to the public and investors. This transparency of disclosures and practices could facilitate fair consensus appraisal by analysts and investors [4]. Despite the increasing prevalence of activist ESG investing, socially responsible investing concepts, and imposed ESG policies, the problem of businesses being hesitant to incorporate ESG principles into their business models is still critically persisting [1]. This is a result of the ongoing debate over whether ESG principles truly contribute to increasing corporate financial performance or form a threat that hinders firm value and growth, which are major concerns for firm managers and investors, according to Eldomiaty and Rashwan [5].

Cross-industry and cross-country evidence from the ESG–firm value literature suggests that no consensus has been reached regarding the impact of ESG on corporate financial performance. In other words, does ESG positively influence firm value? Given the divergent results, this debate persists, highlighting the necessity for further research to identify the potential scenarios of ESG and to investigate the mechanisms that explain whether and to what extent ESG performance influences firm value [6,7]. Specifically, this field of interest has historically been under-researched in the Middle East and North Africa (MENA) region [8,9]. In emerging economies like the MENA region, empirical studies are often impeded by the difficulty of obtaining trustworthy financial and ESG data; accordingly, many ESG-related subjects remain underexplored, a gap that is particularly urgent to address given the region’s rapid ESG adoption, growing regulatory initiatives, and rising stakeholder expectations, which together create a critical need to assess whether ESG is ultimately beneficial or detrimental to firm value [10].

The PWC 2024 Middle East Report highlights that the number of firms in the MENA region with a formal ESG strategy increased from 64% in 2023 to 80% in 2024 [11]. These highly structured institutional efforts demonstrate that ESG-related concerns in many firms have developed to the point of creating new executive roles to carry out ESG strategies [12]. However, the MENA region confronts unique challenges in terms of ESG implementation. If there is no clear vision as to whether ESG is beneficial or detrimental to financial performance, this will only exacerbate the current challenges. Challenges include the need for greater stakeholder engagement and collaboration, as well as the need to address social and environmental issues such as energy efficiency, scarcity of water, and labor rights [10].

Despite the ongoing efforts of the regulatory authorities in the MENA region to introduce additional policies for compliance with ESG principles, the mission of persuading businesses in the MENA region with ESG implementation advantages is a major and persisting challenge. Efforts include increasing transparency, expanding financial markets, safeguarding minority shareholders, and adhering to both new and existing regulations. The varying levels of ESG adoption and application across countries and business sectors impose another major challenge in the region, which could have diverse impacts on value creation [13].

Even within the same sector, the ESG profiles of firms will differ depending on where they are in the corporate life cycle and their ESG implementation stage. Moreover, ESG implications may be affected by structural aspects in the business sector. Therefore, to address such challenges, the rationale behind ESG implementation for MENA region countries and sectors should be empirically investigated from the perspective of financial performance, specifically firm value [14].

In the pursuit of understanding the true impact of ESG performance on corporate value creation amidst the ongoing heterogeneity debate across countries, industries, and measures, this study aims to investigate the impact of the ESG Score on firm value through the three proxies of Tobin’s Q (TQ), Price to Book ratio (PB), and Price to Earnings ratio (PE) in the context of MENA region firms while conducting a cross-country and cross-sectoral comparative analysis. The analysis is based on a panel dataset of 51 firms in 9 MENA region countries (including the 6 Gulf Cooperation Council countries) and 10 business sectors from 2017 to 2022.

This comprehensive approach is deeply rooted in the variations in firm value proxies employed by previous researchers. Over the course of time, researchers have used various measures of firm value, from TQ to price multiples like PB and PE ratios. Researchers have also debated the varying characteristics of these proxies in determining market sentiments for firms. Consequently, this ongoing discussion underscores the complexities entailed in firm value measurement and emphasizes our comprehensive approach in this study.

Existing evidence across industries and countries remains inconclusive, reflecting both methodological and contextual heterogeneity. What is not well understood—and is the central gap of this study—is how the ESG–firm value relationship differs across valuation proxies (Tobin’s Q, Price to Book, and Price to Earnings ratios) and across institutional contexts such as country governance and sectoral structures in the MENA region. This study aspires to contribute to existing literature by addressing the following two research questions:

• Is there a significant relationship between ESG scores and firm value in the MENA region?
• Does the relationship between ESG scores and firm value vary across measures, industries, and countries within the MENA region?

By shedding light on the advancement of ESG MENA region scoring trends and conducting comparative empirical cross-country and cross-sector analyses, an enhancement for prior studies focusing on a single country or business sector is provided.

Theoretically, the research goal and contribution set a foundation for future research on sustainability regarding its theoretical implications. From a practical perspective, the results of this study could expand knowledge regarding the relationship between ESG scores and firm value on a firm level across a variety of countries and sectors. This, in turn, is expected to enhance the decision-making process and improve the understanding of ESG implications by a variety of stakeholders, such as investors, regulators, standard-setters, policymakers, decision-makers, and scholars, especially in emerging economies. By linking ESG scores to firm value, promising insights into how businesses could perceive the financial implications of ESG adoption are obtained.

The remainder of this paper is organized as follows. Section 2 reviews the relevant literature and proposes hypotheses. Section 3 describes the data and methodology used to test these hypotheses. Section 4 discusses the results. Section 5 concludes the study.

2. Literature Review and Hypothesis Development

2.1. Literature on Corporate Sustainability Performance and Financial Performance

Efforts to link Corporate Sustainability Performance (CSP) and Corporate Financial Performance (CFP) date back to the 1970s. Moskowitz [15] identified 14 firms as promising financial opportunities based on their sustainability performance, finding that a portfolio of these 14 stocks outperformed the NYSE, Dow Jones, and S&P over the following six months. Bragdon and Marlin [16], in the first empirical test, analyzed profit growth and pollution reduction initiatives for 17 paper and pulp firms and found that implementing pollution control measures could potentially increase earnings.

However, contrasting findings emerged in Vance’s [17] criticism, which showed that a high-CSP portfolio underperformed a low-CSP one. Hong and Kacperczyk [18] similarly found that a “sin stocks” portfolio outperformed others. Lobe and Walkshaeusl [19], however, reported no consistent performance difference between sin and non-sin equities. These mixed results raise questions about whether sustainability performance can consistently deliver shareholder value.

The discussion on the link between CSP and CFP has led to a discussion on the causality direction. Waddock and Graves [20] demonstrated a favorable correlation between sustainability performance and financial performance, both as dependent and independent variables, proposing that the two aspects have a simultaneous impact and that causation is bidirectional. Contrastingly, Scholtens [21] discovered that financial performance typically comes before social performance.

In the recent literature, Lu and Taylor [22] highlight that CSP improves CFP in the long run. On the other hand, Tuppura et al. [23] argue that there is no conclusive answer to the CSP-CFP relationship in the USA. According to Wang and Gao [24], the CSP-CFP causality direction remains unclear—whether high CSP leads to high CFP or whether high CFP provides capabilities to improve CSP. This echoes Ullmann’s [25] earlier statement, which contends that variability in sample size, industrial context, proxies used, and data collection and analysis methods contribute to the inconsistent CSP-CFP relationship.

2.2. Literature on ESG Performance Measurement

Corporate sustainability’s growing importance among stakeholders led to the emergence of ESG as a unifying concept in the early 2000s [26]. ESG reflects a broader framework integrating environmental, social, and governance dimensions into business evaluation, shifting attention from purely financial metrics to sustainability-related factors. In both developed and developing nations, the impact of ESG on financial performance has been a subject of ongoing debate among practitioners, investors, and researchers. Amel-Zadeh and Serafeim [27] emphasize ESG’s relevance in addressing not only sustainability policies but also governance and social responsibility. Gyönyörová et al. [4] further emphasize that businesses are better valued by analysts and investors through high transparency regarding their policies and procedures. Therefore, ESG is crucial because it encourages businesses to provide more transparent information to the public and investors.

The first challenge in evaluating ESG implementation, according to Cornell and Damodaran [28], is defining what constitutes ESG information and how ESG performance is measured. Several rating organizations are attempting to answer such questions; however, there is a substantial body of literature highlighting disparities in ESG ratings for the same firms [29]. Rating organizations differ not only in how they assess each of the multiple ESG elements but also in which factors are deemed significant enough to warrant measurement. As a result, scales had to be unified, so the ESG scoring systems were introduced [4].

Several ESG matrices and scoring systems, including Bloomberg and London Stock Exchange Group (LSEG) Data & Analytics (formerly Refinitiv^® Eikon), have similar elements. ESG disclosure enables businesses to consider the majority of stakeholders, address investor needs, create credibility, and respond to competitiveness in their industries. Moreover, it helps rating organizations develop ESG scores for firms based on their ESG disclosure [30]. Therefore, ESG disclosure has been quite popular during the past ten years. While some businesses use sustainability to gain a competitive edge, others see it as a routine practice. Nevertheless, sustainability is a dynamic and challenging process [3].

2.3. Literature on ESG and Firm Value

Several theories in literature have been associated with the ESG concept. The stakeholder and shareholder theories debate whether there is a positive or negative link and are two major critical theories widely referred to in this association. Other theories, such as agency theory, signaling theory, resource slack theory, good management theory, risk reduction theory, and virtuous cycle theory, may be used to articulate the direction of causation once a link between ESG performance and financial performance is established.

According to Friedman [31], the primary objective of a business is to maximize value for shareholders while abiding by the law and moral principles. However, this theory has been criticized, as managers may pursue personal gain with money saved by not investing for the good of society. This argument overlooks Friedman’s last point, that businesses should increase profits “without deception or fraud.” If this is the case, businesses should anticipate a rise in shareholder value from increased ESG initiatives, supporting Friedman’s theory [32].

Freeman and Mcvea [33] argue that previous hypotheses did not account for the changes in the corporate environment. To address these issues, the stakeholder theory was developed, where any group or individual impacted by or capable of impacting an organization’s goals is considered a stakeholder. Ambler and Wilson [34] criticized the stakeholder perspective, questioning whether it is feasible to harmonize the concerns of all stakeholders, given their varying perspectives on evaluating business success.

The relationship between ESG and firm value is argued to be mitigated by the agency problem [35]. Family enterprises with high ownership concentration, strong corporate governance, and tied management face critical agency problems. In developing markets, ownership is typically concentrated among families and large institutional shareholders, where controlling shareholders may prioritize non-financial activities to preserve corporate reputation and respond to stakeholder expectations [36,37].

The resource slack theory suggests that firms with strong financial performance have greater capacity to invest in sustainability projects, leading to improved financial performance. While nearly 50 years of research on the link between corporate sustainability performance and corporate financial performance exist, most research is attributed to the good management theory [38]. Some scholars explain the ESG–firm value relationship in terms of the risk-reduction mechanism, which impacts firm value [39,40,41]. Researchers have also proposed the theoretical integration of value-creating and value-destroying paradigms [42]. Waddock and Graves [20] contend that businesses may modify their corporate culture to accept sustainability spending, even when managers’ actions are motivated by the “wrong” motives, as it benefits them monetarily, thus starting a virtuous cycle.

The rationale behind the importance of ESG impact on firm value is that it determines whether businesses should bear ESG compliance costs or risk ignoring them. A number of studies have explored this relationship, with some authors claiming that ESG promotes firm value [42,43,44,45,46,47,48,49]. However, other researchers argue that ESG applications and sustainability programs are costly, especially for small and medium-sized enterprises [50,51,52,53]. Despite extensive research, there is no consensus on how ESG impacts firm value, especially in emerging markets like the MENA region, which is the focus of this study.

Gerged et al. [54] report a positive and significant relationship between ESG scores and ROA, though its significance is lower compared to TQ. Buallay [55] introduces a framework for driving firm performance in the MENA region through sustainability reporting, revealing mixed impacts on operational, financial, and market performance. Srour [56] observes an insignificant positive impact of ESG on ROA but a significant positive impact on TQ in Egypt. Al Amosh et al. [57] argue that ESG disclosures positively affect financial performance indicators, with governance performance specifically favoring ROA.

Aqabna et al. [58] and El Khoury et al. [53] present research on sustainability in the MENA region, finding mixed results. Aqabna et al. [58] suggest that ESG investments significantly improve ROA and TQ but have no impact on ROE, while El Khoury et al. [53] highlight that ESG boosts TQ but does not significantly affect ROA or ROE. These findings underscore the mixed results in the MENA region, pointing to the need for further comprehensive investigation.

Ibrahim and Wahba [59] highlight the positive and significant relationship between sustainability and financial performance, encouraging firms to consider their responsibilities toward the community. Eldomiaty et al. [60] report that Corporate Social Responsibility (CSR) is positively associated with financial performance, including sales turnover and customer loyalty, suggesting that market mechanisms will favor firms excelling in social governance. This view is further supported by other researchers [61,62,63,64].

Aboud and Diab [35] argue that firms should aim for a high ranking in the ESG index, noting a stronger relationship between financial success and ESG during political turmoil, supporting the view that investors increasingly factor ESG into investment decisions. Abdelfattah and Aboud [65] conclude that firms with higher CSR ratings have higher stock returns. Al-Hiyari and Kolsi [66] highlight that ESG transparency provides MENA stock market players with value-relevant information, helping shareholders make more informed investment decisions.

Elhendawy et al. [67] suggest that managers can enhance a firm’s appeal to investors by sponsoring social and environmental initiatives. Bashatweh et al. [68] highlight that in Jordan, banks’ market value increases with ESG, boosting market share and competitiveness. This finding is further supported in Saudi Arabia by Kouaib [69], where ESG has a positive impact on investment efficiency. Ellili [70] provides evidence from the UAE, showing a favorable association between ESG and cost of capital.

On the other hand, Al-Jalahma et al. [71] suggest that sustainability reporting negatively impacts banks’ performance in terms of ROA and ROE, a viewpoint further supported by Janah and Sassi [72] in Morocco, where ESG does not significantly improve stock performance. Firmansyah et al. [73] contribute to the discussion with insights from Saudi Arabia, concluding that ESG has a significant negative impact on TQ, although the negative association between ESG and ROE is insignificant. These studies present counterarguments in the ESG–firm value literature, highlighting the mixed nature of the evidence.

Table A1. ESG and Financial Performance Literature Summary for the MENA Region.

Author/Year/Journal	Title	Context	Variables/Measures	Findings	Viewpoint
Ibrahim & Wahba [59] International Journal of Business and Management Studies.	The Effect of Corporate Social Responsibility on the Firm’s Financial Performance.	Egypt (2007–2010)	CSR: S&P/EGX ESG Index. Financial Performance: ROA and EPS.	There is a positive significant relation between corporate financial performance and the CSR.	Positive
Eldomiaty et al. [60] International Journal of Social Economics.	The financial aspects of the corporate responsibility index in Egypt: A quantitative approach to institutional economics.	Egypt (2007–2010)	CSR: CSR Index. Financial Performance: Fundamental Financial Ratios.	CSR positively impacts firms’ financial performance in terms of customer loyalty and sales turnover.	Positive
Ahmed [61] Journal of Accounting Research, Department of Accounting, Faculty of Commerce, Tanta University.	Are corporate social and environmental responsibility, firm performance, and value mutually exclusive? Evidence from Egypt.	Egypt (2014)	ESG: Dummy Variable for S&P/EGX ESG Inclusion. Firm Value: ROA and Tobin’s Q.	There is a positive relationship between ESG and firm value.	Positive
Genedy and Sakr [62] International Journal of Business and Economic Development.	The relationship between Corporate Social Responsibility and Corporate Financial Performance in developing countries. Case of Egypt.	Egypt (2007–2015)	CSR: S&P/EGX ESG ratings. CFP: ROA, ROE, and EPS.	CSR has a positive relationship with Corporate Financial Performance.	Positive
Aboud and Diab [35] Sustainability Accounting, Management and Policy Journal.	The financial and market consequences of environmental, social and governance ratings: The implications of recent political volatility in Egypt.	Egypt (2007–2016)	ESG: S&P/EGX ESG index Firm Financial Performance: ROA. Firm Market Performance: Liquidity and Trading Volume.	ESG has a significant positive impact on market & financial performance of a firm. The correlation between ESG ratings and financial performance was more pronounced during the recent period of political instability.	Positive
Abdelfattah & Aboud [65] Journal of International Accounting, Auditing and Taxation.	Tax avoidance, corporate governance, and corporate social responsibility: The case of the Egyptian capital market.	Egypt (2007–2016)	CSR: S&P/EGX ESG ratings. Stock Returns: Average annual stock return.	Higher CSR ratings are associated with higher stock returns, suggesting that CSR enhances firm value rather than reducing it.	Positive
Al-Jalahma et al. [71] 2020 International Conference on Decision Aid Sciences & Application. DASA. IEEE.	Environmental, Social, and Governance (ESG) disclosure and firm performance: Evidence from GCC Banking sector.	GCC Countries (2016–2019)	ESG: ESG Disclosure. Bank Performance: ROA and ROE.	Sustainability reporting negatively impacts banks’ performance.	Negative
Buallay et al. [48] Measuring Business Excellence	Sustainability reporting and performance of MENA banks: is there a trade-off?	12 MENA Countries (2008–2017)	ESG: The Bloomberg ESG Score. Operational Performance: ROA. Financial Performance: ROE. Market Performance: Tobin’s Q.	There is a positive impact of ESG score on performance and value to shareholders.	Positive
Ellili [70] Sustainability.	Environmental, social, and governance disclosure, ownership structure and cost of capital: Evidence from the UAE.	United Arab Emirates (2010–2019)	ESG: The Bloomberg ESG Score. Cost of Capital: Cost of Equity, Cost of Debt, Cost of Preferred Equity, and Weighted Average Cost of Capital.	ESG non-financial disclosures lower the cost of capital as well as the cost of debt and equity, separately.	Positive
Gerged et al. [54] Business Strategy & the Environment	Is corporate environmental disclosure associated with firm value? A multicounty study of Gulf Cooperation Council firms.	Gulf Countries (2010–2014)	CED: Annual Reports Content Analysis Firm Value: ROA and Tobin’s Q.	CED has a significant positive impact on ROA, while it decreases on Tobin’s Q.	Mixed
Al-Hiyari and Kolsi [66] Global Business Review.	How do stock market participants value ESG performance? Evidence from Middle Eastern and North African Countries.	9 MENA Countries (2013–2019)	ESG: Thomson Reuters Eikon Scores. Firm Value: Stock Price per Share.	There is a positive relationship between ESG performance and MENA firm valuation. ESG transparency provides MENA stock market players with value-relevant information which leads to more effective investment decisions and reduces the cost of capital.	Positive
Otaify [63] Journal of Financial and Commercial Studies.	Environmental, Social, and Governance (ESG) Investing Risk and Return Analysis of Egyptian Sustainable Equity Index.	Egypt (2007–2020)	ESG Risk Premium: Risk Exposure of ESG Index to EGX30 Index. Financial Performance: abnormal return achieved by ESG index than the EGX30 index.	ESG activities should be integrated into business practices by firms listed on the Egyptian stock exchange due to their significant role in enhancing firm value.	Positive
Bashatweh et al. [68] International Conference on Business and Technology.	Does Environmental, Social, and Governance (ESG) Disclosure Add Firm Value? Evidence from Sharia-Compliant Banks in Jordan.	Jordan (2013–2019)	ESG Disclosure: Annual reports, CSR reports, and sustainability reports. Bank Value: ROA, ROI, EPS, and MBR.	A higher ESG disclosure level is important for increasing the value of the institution for investors and other stakeholders.	Positive
Buallay [55] Sustainability reporting in the MENA region.	Toward sustainability reporting in the MENA region: the effects on sector’s performance.	11 MENA Countries (2008–2017)	ESG: The Bloomberg ESG Score. Firm Operational Performance: ROA. Firm Financial Performance: ROE. Firm Market Performance: Tobin’s Q.	The impact of Sustainability Reporting on firm performance (ROA), (ROE) and (TQ) is mixed in the MENA region.	Mixed
Hamdy et al. [64] The Scientific Journal of Business and Environmental Studies.	Investigating the Impact of Sustainability on Corporate Profitability: Evidence from Egypt.	Egypt (2017)	CSR: S&P/EGX ESG composite score. Corporate Profitability: ROE, ROA, and Return on Invested Capital (ROIC).	ESG has a significant positive impact on investor behavior. High ESG firms are rewarded with high CSP.	Positive
Janah and Sassi [72] African Scientific Journal	The role of ESG factors in mitigating crisis effects on Moroccan public companies’ financial performance.	Morocco (2022)	Event Study.	While ESG companies have outperformed the market in developed countries, this does not necessarily apply to developing countries.	Mixed
Kouaib [69] Sustainability.	Corporate Sustainability Disclosure and Investment Efficiency: The Saudi Arabian Context.	Saudi Arabia (2014–2021)	ESG: Thomson Reuters ESG score. Financial Performance: Investment Efficiency.	ESG has a significant positive impact on firms’ investment efficiency, promoting overall firm value.	Positive
Srour [56] Commerce and Finance.	The impact of Environmental, Social, Governance (ESG) disclosure on firm value and Financial Performance: Evidence from Egypt during COVID 19.	Egypt (2018–2021)	ESG: S&P/EGX ESG index ranking. Firm Value: ROA and Tobin’s Q.	ESG has an insignificant positive impact on ROA and a significant positive impact on Tobin’s Q	Mixed
Al Amosh et al. [57] Corporate Governance: The International Journal of Business in Society	Environmental, social and governance impact on financial performance: evidence from the Levant countries.	4 Levant Countries (2012–2019)	ESG: Annual Reports Content Analysis Financial Performance: Tobin’s Q, ROA, and ROE.	ESG collective performance maximizes financial performance, while the governance performance influences ROA only.	Mixed
Aqabna et al. [58] Sustainability	Firm Performance, Corporate Social Responsibility, and the Impact of Earnings Management during COVID-19: Evidence from MENA Region.	9 MENA Countries (2007–2021)	ESG: Refinitiv® Eikon ESG Score. Operational Performance: ROA. Financial Performance: ROE. Market Performance: Tobin’s Q.	ESG has a significant positive impact on ROA and Tobin’s Q; however, it has an insignificant impact on ROE.	Mixed
El Khoury et al. [53] Journal of Sustainable Finance & Investment	ESG and financial performance of banks in the MENAT region: concavity–convexity patterns.	10 MENAT Countries (2007–2019)	ESG: Refinitiv® Eikon ESG Score. Firm Operational Performance: ROA. Firm Financial Performance: ROE. Firm Market Performance: Tobin’s Q.	The magnitude of ESG investment is not impacting anymore the accounting performance in MENAT while it still positively affects market performance.	Mixed
Firmansyah et al. [73] Cogent Economics & Finance	Investigating the effect of ESG disclosure on firm performance: The case of Saudi Arabian listed firms.	Saudi Arabia (2010–2020)	ESG: The Bloomberg ESG Score. Market-based Performance: Tobin’s Q. Accounting-based Performance: ROE	ESG has a significant negative impact on Tobin’s Q; however, an insignificant negative association exists between ESG and ROE.	Negative

in Appendix A provides a chronological summary of the reviewed ESG and financial performance literature in the MENA region.

2.4. Hypothesis Development

Building on stakeholder theory, firms that meet stakeholder expectations are more likely to enhance intangible assets, reduce risk, and sustain long-term value creation. In line with prior studies, we expect ESG performance to be positively associated with forward-looking valuation measures such as Tobin’s Q and Price to Book. However, consistent with agency perspectives, ESG activities may impose upfront costs that weaken short-term profitability, which is more closely reflected in Price to Earnings ratios.

It is worth mentioning that the impact of ESG depends on the valuation proxy used. Tobin’s Q and Price to Book ratios are asset- and growth-oriented measures, capturing how investors value long-term prospects, intangibles, and future cash flows. In contrast, the Price to Earnings ratio (PE) is a short-term profitability metric tied directly to current earnings. Prior research shows that ESG is more consistently linked to market-based measures of firm value than to earnings-based indicators [44,74,75,76]. Furthermore, institutional differences across MENA countries and sectoral characteristics may shape the strength and direction of these relationships. Accordingly, we propose the following hypotheses:

H1. 

ESG performance is positively associated with firm value in the MENA region.

H1a. 

ESG performance is positively associated with Tobin’s Q (TQ).

H1b. 

ESG performance is positively associated with Price to Book (PB) ratio.

H1c. 

ESG performance is positively associated with Price to Earnings (PE) ratio.

Researchers’ insights regarding the industrial disparities in the relationship between ESG scores and financial performance date back to the contention that competitive advantages for sustainability are dependent on several interconnected competencies that vary based on industry and country regulations. This was further confirmed by Hull and Rothenberg [77]. Thereafter, Hoepner and Yu [78] discovered a positive relationship between social and financial performance in limited business sectors, notably healthcare and consumer discretionary. In addition, Baron et al. [79] argued that corporate social performance positively affects financial performance in the consumer industry sector, while it exhibits a negative relationship in the industrial sector. Similarly, Arian et al. [80] highlight that while firm ESG performance appears to be associated with improved financial performance, this is not consistent across industries.

The variables, business strategies, and industrial characteristics that could change the relationship are still under-researched [81,82]. Further research with a more robust examination of diverse industries is needed [83,84,85]. Therefore, this study contends that earlier studies on the relationship’s inconsistent and contradictory conclusions may be the result of distinct stakeholder groups and expectations among firms operating in different countries and sectors with varying characteristics and strategies. Accordingly, the study further proposes the following main hypotheses and sub-hypotheses:

H2. 

The impact of ESG score on firm value measures differs across countries in the MENA region.

H2a. 

The impact of ESG score on Tobin’s Q (TQ) differs across countries in the MENA region.

H2b. 

The impact of ESG score on Price to Book (PB) ratio differs across countries in the MENA region.

H2c. 

The impact of ESG score on Price to Earnings (PE) ratio differs across countries in the MENA region.

H3. 

The impact of ESG score on firm value measures differs across sectors in the MENA region.

H3a. 

The impact of ESG score on Tobin’s Q (TQ) differs across sectors in the MENA region.

H3b. 

The impact of ESG score on Price to Book (PB) ratio differs across sectors in the MENA region.

H3c. 

The impact of ESG score on Price to Earnings (PE) ratio differs across sectors in the MENA region.

3. Data and Methodology

3.1. Data

In this study, ESG scores and financial data were sourced from London Stock Exchange Group (LSEG) Data & Analytics. For the country-specific control variables, data for the MENA region, including the list of countries and Gross Domestic Product (GDP), as well as the six Worldwide Governance Indicators (WGI), were obtained from the World Bank.

Notably, the COP21 signing of the Paris Agreement, effective November 2016, marked a turning point for ESG awareness and disclosures in the MENA region [11]. Accordingly, 2017 became the starting point for the extensively rising ESG scoring trend for the MENA region firms, as very little information on ESG scores and disclosures was available prior to that year. This trend could be observed in Figure 1, which demonstrates a growing response in disclosing sustainability performance from MENA region firms due to the imposed regulations and increased stakeholder awareness.

The study sample includes all publicly traded firms with LSEG Data & Analytics ESG scores in the MENA region over a 6-year period from 2017 to 2022 in all MENA region countries based on data availability. The six-year period up to 2022 ensures a robust timeframe for examining ESG implications for firm value within the region. The list of firms with ESG scores is collected each year, alongside the corresponding firm value measures. Some exclusions are imposed to ensure dataset reliability based on two selection criteria. In line with the previous literature, the first criterion is that firms should be operating in a non-banking industry due to the different nature of their working capital structure and the varied regulatory constraints imposed by authorities [66]. The availability of full data and variables for the firms in the sample during the whole study period is the second criterion.

This quantitative methodology and sampling technique yield a sample of 306 observations across 51 firms in 9 MENA region countries, including the 6 GCC countries of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates, as well as Egypt, Israel, and Morocco, from 10 sectors based on the Global Industry Classification Standard (GICS^®) (https://www.msci.com/our-solutions/indexes/gics (accessed on 5 June 2024)) developed by MSCI and Standard & Poor’s (S&P) over the period from 2017 to 2022. According to Karimi et al. [86] and Kripfganz [87], since the panel data sample includes complete observations for each sample unit throughout the study period, it represents a strongly balanced panel data sample that excels at establishing trends and highlighting correlations.

Table 1. Descriptive matrix of balanced panel data sample by country, sector, and year.

Country/Sector	2017	2018	2019	2020	2021	2022	Total
Bahrain	2	2	2	2	2	2	12
Financials	1	1	1	1	1	1	6
Industrials	1	1	1	1	1	1	6
Egypt	6	6	6	6	6	6	36
Communication Services	2	2	2	2	2	2	12
Industrials	1	1	1	1	1	1	6
Materials	2	2	2	2	2	2	12
Real Estate	1	1	1	1	1	1	6
Israel	12	12	12	12	12	12	72
Communication Services	3	3	3	3	3	3	18
Energy	1	1	1	1	1	1	6
Healthcare	2	2	2	2	2	2	12
Industrials	1	1	1	1	1	1	6
Information Technology	2	2	2	2	2	2	12
Materials	2	2	2	2	2	2	12
Real Estate	1	1	1	1	1	1	6
Kuwait	5	5	5	5	5	5	30
Communication Services	2	2	2	2	2	2	12
Industrials	1	1	1	1	1	1	6
Real Estate	2	2	2	2	2	2	12
Morocco	2	2	2	2	2	2	12
Communication Services	1	1	1	1	1	1	6
Real Estate	1	1	1	1	1	1	6
Oman	3	3	3	3	3	3	18
Communication Services	1	1	1	1	1	1	6
Materials	1	1	1	1	1	1	6
Utilities	1	1	1	1	1	1	6
Qatar	8	8	8	8	8	8	48
Communication Services	2	2	2	2	2	2	12
Energy	2	2	2	2	2	2	12
Financials	1	1	1	1	1	1	6
Industrials	1	1	1	1	1	1	6
Real Estate	1	1	1	1	1	1	6
Utilities	1	1	1	1	1	1	6
Saudi Arabia	9	9	9	9	9	9	54
Communication Services	2	2	2	2	2	2	12
Consumer Staples	1	1	1	1	1	1	6
Financials	1	1	1	1	1	1	6
Materials	3	3	3	3	3	3	18
Real Estate	1	1	1	1	1	1	6
Utilities	1	1	1	1	1	1	6
United Arab Emirates	4	4	4	4	4	4	24
Communication Services	2	2	2	2	2	2	12
Real Estate	2	2	2	2	2	2	12
Total	51	51	51	51	51	51	306

illustrates the classification of the sampled firms in the MENA region into their corresponding GICS^® sectors.

3.2. Measurement of Variables

This study employs the same ESG performance proxy that has been widely used by predecessor researchers. Several studies in the MENA region have used the LSEG Data & Analytics (formerly Refinitiv^® Eikon) ESG scores as their independent variable [54,66,69,88].

Regarding firm value measures, TQ is preferred as a proxy by many scholars [52,89,90,91,92,93,94]. It is a market-based performance indicator that compares a firm’s assets to its market value. This ratio is commonly used by academics and practitioners to analyze if a company is overvalued or undervalued [95,96,97,98,99,100]. However, some critiques have been directed towards TQ as a proxy for firm value. As highlighted in their paper, Butt et al. [101]. shed light on TQ criticism by arguing that TQ may provide falsely favorable results for marketing-related research, where marketing academics typically use TQ as an indicator of firm value. Additionally, TQ is based on accounting-based data, which frequently undervalues intangibles, thereby overstating firms’ success in intangibles such as marketing, human resources, and R&D.

Price multiples can also be used as proxies for firm value [102,103,104]. Therefore, recent researchers then employed PE and PB ratios as firm value proxies since they capture the market expectations relating to both future earnings and the risks associated with those earnings [105,106,107,108]. Consequently, this study contributes to the literature by considering these three financial measures of firm value.

Consistent with ESG literature, size and leverage are included as firm-specific control variables [54,91,93,94]. The funds received by a firm from outside sources to finance its operations are referred to as financial leverage, which is the ratio of total liabilities to total assets. In this study, financial leverage is considered a control variable since it is argued that managers frequently reveal more ESG information as leverage increases due to increased financial institution scrutiny. Furthermore, firm size, which is calculated by the natural log of total assets, is considered a control variable because previous research revealed a favorable association between ESG disclosure and size [91,109].

Regarding the country-specific control variables, this paper controls for Gross Domestic Product (GDP) and Country Governance (GOV) to consider the other effects on ESG score [48,55]. The description and measurements of the dependent, independent, and control variables employed in the empirical models are further illustrated in

Table 2. Variable Measurement.

Variable	Acronym	Measure	Source
Dependent: Tobin’s Q Price to Book ratio Price to Earnings ratio	TQ PB PE	[Market value of all outstanding shares +Book value of debts]/Book value of total assets Market price per share/Equity book value per share Market price per share/Earnings per share	LSEG Data & Analytics Database LSEG Data & Analytics Database LSEG Data & Analytics Database
Independent:
ESG Score	ESG	ESG Combined Score	LSEG Data & Analytics Database
Control: Firm-specific:
Firm Size	S	Natural Logarithm of Total Assets	LSEG Data & Analytics Database
Leverage	Lev	Total Debt/Total Assets
Country-specific:
Gross Domestic Product Governance	GDP GOV	Natural Logarithm of annual GDP of Country. Governance Index combined by PCA analysis.	The World Bank Open Data Source

.

3.3. Research Model

This paper employs the following panel regression analysis models to investigate the impact of ESG on firm value by incorporating country and sector dummies, following Kaiser [110] and Sharma et al. [111], as follows:

$$\begin{gathered} {\mathrm{FV}}_{\mathrm{itg}}= {\beta }_0+ {\beta }_1{\mathrm{ESG}}_{\mathrm{itg}} +{ \beta }_2{\mathrm{Lev}}_{\mathrm{itg}} + {\beta }_3{\mathrm{S}}_{\mathrm{itg}}+ {\beta }_4{\mathrm{GDP}}_{\mathrm{itg}}+ {\beta }_5{\mathrm{GOV}}_{\mathrm{itg}}+ \sum \mathrm{dCountry} \\ + \sum \mathrm{dSector}+ {\epsilon }_{it} \end{gathered}$$

(1)

The model is divided further into three sub-models based on the firm value proxy as follows:

$$\begin{gathered} {\mathrm{TQ}}_{\mathrm{itg}}= {\beta }_0+ {\beta }_1{\mathrm{ESG}}_{\mathrm{itg}}+ {\beta }_2{\mathrm{Lev}}_{\mathrm{itg}}+ {\beta }_3{\mathrm{S}}_{\mathrm{itg}}+ {\beta }_4{\mathrm{GDP}}_{\mathrm{itg}}+ {\beta }_5{\mathrm{GOV}}_{\mathrm{itg}} \\ + \sum \mathrm{dCountry}+\sum \mathrm{dSector}+ {\epsilon }_{it} \end{gathered}$$

(2)

$$\begin{gathered} {\mathrm{PB}}_{\mathrm{itg}}={\beta }_0+{\beta }_1{\mathrm{ESG}}_{\mathrm{itg}}+{\beta }_2{\mathrm{Lev}}_{\mathrm{itg}}+{\beta }_3{\mathrm{S}}_{\mathrm{itg}}+{\beta }_4{\mathrm{GDP}}_{\mathrm{itg}}+{\beta }_5{\mathrm{GOV}}_{\mathrm{itg}} \\ +\sum \mathrm{dCountry}+\sum \mathrm{dSector}+{\epsilon }_{it} \end{gathered}$$

(3)

$$\begin{gathered} {\mathrm{PE}}_{\mathrm{itg}}={\beta }_0+{\beta }_1{\mathrm{ESG}}_{\mathrm{itg}}+{\beta }_2{\mathrm{Lev}}_{\mathrm{itg}}+{\beta }_3{S}_{\mathrm{itg}}+{\beta }_4{\mathrm{GDP}}_{\mathrm{itg}}+{\beta }_5{\mathrm{GOV}}_{\mathrm{itg}} \\ +\sum \mathrm{dCountry}+\sum \mathrm{dSector}+{\epsilon }_{it} \end{gathered}$$

(4)

where: FV is a continuous variable; the dependent variable is the firm value measured by three models (i.e., TQ model, PE model, and PB model). β0 is the constant and β1–5 the slope of the controls and independent variables. The independent variable is the ESG score. The firm’s control variables are leverage (Lev) and firm size (S), and the country’s control variables are Gross Domestic Product (GDP) and governance (GOV). (ε) is a random error, (i) stands for firms, (t) stands for the period, and (g) represents the country. The description and measurements of the dependent, independent, and control variables employed in the empirical models are illustrated in Table 2. dCountry represents the country dummy variables to control for the country-effects in the models, and dSector represents the sector dummy variables to control for the sector-effects in the models.

Prior to estimation, tests for normality, heteroskedasticity, multicollinearity, and endogeneity are performed, followed by the Hausman test to identify the most appropriate static model (fixed- or random-effects) for each dependent variable. To avoid any possible sensitivity of the findings to static panel data estimations and to capture the dynamic nature of the employed data, the dynamic Generalized Method of Moments (GMM) regressions are conducted as well, guided by the results of the Durbin–Wu–Hausman test. Most of the studies that investigated corporate sustainability performance against financial performance have overlooked the matter of endogeneity [112]. Endogeneity emerges from factors that include omitted variables together with measurement errors and reverse causality. The technique uses instrumentation to resolve endogeneity problems, which represents a common practice across sustainability research [113,114,115].

Additionally, the Moran’s I test is used in this study to determine whether spatial autocorrelation is present in the data and how significant it is before model estimation because neglecting the spatial spillover effects brought on by externalities would lead to an inadequate assessment of how ESG performance affects firm value [116]. The inverse distance weight matrix is employed to calculate the Moran’s I statistics for both the dependent variables (TQ, PB, and PE) and ESG scores on a year-by-year basis, as reported in

Table A2. Moran’s I Test Results for ESG and TQ (2017–2022).

Year	Moran’s I	p-Value
2017	−3.397	1.999
2018	−0.406	1.315
2019	−0.311	1.244
2020	−0.199	1.157
2021	0.122	0.903
2022	0.251	0.802

Note: Statistical significance is assessed at the 1%, 5%, and 10% levels.

,

Table A3. Moran’s I Test Results for ESG and PB (2017–2022).

Year	Moran’s I	p-Value
2017	−1.675	1.906
2018	−1.546	1.878
2019	−1.401	1.839
2020	−1.031	1.697
2021	−0.173	1.137
2022	0.339	0.753

Note: Statistical significance is assessed at the 1%, 5%, and 10% levels.

and

Table A4. Moran’s I Test Results for ESG and PE (2017–2022).

Year	Moran’s I	p-Value
2017	0.591	0.554
2018	0.500	0.617
2019	−1.044	1.703
2020	−0.951	1.658
2021	0.273	0.785
2022	0.552	0.581

Note: Statistical significance is assessed at the 1%, 5%, and 10% levels.

in Appendix B. The results indicate no evidence of spatial dependence among neighboring firms, with all Moran’s I values being statistically insignificant at the 1%, 5%, and 10% significance levels throughout the sample period.

Furthermore, to ensure robustness of the models prior to performing regression analyses, sensitivity analysis was conducted through the forward stepwise introduction of variables. This method is widely established for its ability to systematically evaluate the contribution of different variables to achieve a model outcome and, in that way, to identify substantial predictors while taking into consideration the differing potential of the input variables for multicollinearity [117]. This analysis adds variables sequentially via statistical selection processes and details how the addition of any given variable influences the fit of the research model.

4. Results and Discussion

4.1. Descriptive Statistics

Table 3. Distribution of firm-year observations by country and sector.

Country	GICS Sector										Frequency	Percentage
	Communication Services	Consumer Staples	Energy	Financials	Health-Care	Industrials	Information Technology	Materials	Real Estate	Utilities
Bahrain	0	0	0	6	0	6	0	0	0	0	12	3.92%
Egypt	12	0	0	0	0	6	0	12	6	0	36	11.76%
Israel	18	0	6	0	12	6	12	12	6	0	72	23.53%
Kuwait	12	0	0	0	0	6	0	0	12	0	30	9.80%
Morocco	6	0	0	0	0	0	0	0	6	0	12	3.92%
Oman	6	0	0	0	0	0	0	6	0	6	18	5.88%
Qatar	12	0	12	6	0	6	0	0	6	6	48	15.69%
KSA	12	6	0	6	0	0	0	18	6	6	54	17.65%
UAE	12	0	0	0	0	0	0	0	12	0	24	7.84%
Frequency	90	6	18	18	12	30	12	48	54	18	306	100.00%
Percentage	29.41%	1.96%	5.88%	5.88%	3.92%	9.80%	3.92%	15.69%	17.65%	5.88%

presents the descriptive statistics for the sample, showing the distribution of firm-year observations by country and sector. The sample composition by country reveals that the highest number of firm-year observations is from Israel (72), followed by Saudi Arabia (54). The sample composition by sector reveals that most firm-year observations are concentrated in the communication services sector (90), followed by the real estate sector (54).

Table 4. Descriptive statistics of variables.

Variable	Obs.	Mean	Std. Dev.	Min.	Max.
TQ	306	0.6556	0.5157	0.0158	4.7592
PB	306	2.3794	2.5306	0.2848	22.5677
PE	306	16.6742	30.1914	0.49	479.1809
ESG	306	32.0766	21.6401	0.973548	86.2006
Lev	306	0.2709	0.1971	0	1.0237
S	306	22.37	1.3204	18.6333	25.5862
GDP	306	26.3853	0.7988	24.2678	27.7341
GOV	306	0.2018	1.0993	−2.3834	1.504

Note: The variable definitions are provided in Table 2.

shows that the average ESG score in the MENA region is 32.08. The highest score was 86.20 in 2021 for Teva Pharmaceutical Industries Ltd. in Israel’s healthcare sector, while the lowest was 0.97 in 2017 for Israel Corporation Ltd. in the materials sector. The average TQ in the region is 0.66, with the highest TQ of 4.76 in 2022 for Global Telecom Holding SAE in Egypt’s communication services sector, and the lowest of 0.02 in 2020 for Taro Pharmaceutical Industries Ltd. in Israel’s healthcare sector. The average PB ratio is 2.38, with the highest of 22.57 in 2018 for Bezeq Israeli Telecommunication Corp Ltd. in Israel’s communication services sector, and the lowest of 0.28 in 2020 for Douja paPromotion Groupe Addoha SA in Morocco’s real estate sector. The average PE ratio is 16.67, with a maximum of 479.18 in 2021 for Ooredoo QPSC in Qatar’s communication services sector, and a minimum of 0.49 in 2021 for Douja Promotion Groupe Addoha SA in Morocco’s real estate sector.

Table A5. PCA Factor Loadings of the Six Worldwide Governance Indicators.

Indicator	Factor Loading (PC1)
Voice and Accountability (VA)	0.1930
Political Stability (PS)	0.2427
Government Effectiveness (GE)	0.4703
Regulatory Quality (RQ)	0.4744
Rule of Law (RL)	0.4812
Control of Corruption (CC)	0.4754

,

Table A6. PCA Proportion of Variance for the First Principal Component.

Component	Eigenvalue	Proportion of Variance	Cumulative Variance
PC1	4.0852	68.09%	68.09%

and

Table A7. PCA KMO and Bartlett’s Test of Sphericity Results.

Variables	Values
Kaiser-Meyer-Olkin (KMO)	0.762
Bartlett’s Test of Sphericity—Chi-square	364.783
p-value	0.000

Note: The p-value for Bartlett’s test is significant at the 1% level (p < 0.01), indicating that the variables are sufficiently correlated for PCA.

in Appendix C present the PCA results used for creating the GOV index by combining the six Worldwide Governance Indicators (WGI) including factor loadings, proportion of variance explained by the first principal component, and the KMO and Bartlett’s test of sphericity results confirming the data’s suitability for PCA.

Table A8. Average Country-Level Scores on the Governance Index (GOV).

Country	GOV Score
Israel	2.537
United Arab Emirates	2.522
Qatar	1.928
Oman	0.202
Bahrain	−0.106
Saudi Arabia	−0.592
Kuwait	−0.738
Morocco	−2.044
Egypt	−3.708

in Appendix C displays the average country-level scores and rankings of the GOV index across the sample period, which are further discussed in the Results section.

4.2. Correlation Analysis

Table 5. Correlation matrix of variables.

	TQ	PB	PE	ESG	Lev	S	GDP	GOV
TQ	1
PB	0.0152	1
PE	−0.0735	0.0622	1
ESG	0.1234 *	0.1989 *	0.1229 *	1
Lev	0.2601 *	0.1593 *	−0.0605	−0.0825	1
S	−0.3190 *	0.0119	0.089	0.4889 *	0.1437 *	1
GDP	−0.2611 *	0.0798	0.011	0.2458 *	0.1040 *	0.5390 *	1
GOV	−0.1604 *	0.1537 *	0.1390 *	0.2096 *	0.0341	0.3060 *	0.1884 *	1

Note: The variable definitions are provided in Table 2. The superscript * in bold denotes significance at the 10% level.

presents the results of Pearson’s correlation matrix coefficients for all variables. At a significance level of 10%, it is noted that the ESG score and firm value proxies of TQ, PB, and PE are strongly linked with each other. Results show that the positive coefficients of ESG of 0.123, 0.199, and 0.123 are significantly correlated with TQ, PB and PE ratios, respectively. This proposes initial evidence regarding the existence of a significant positive relationship between the ESG score and firm value proxies. These correlations provide some preliminary evidence to suggest that the ESG score offers informative inferences about MENA region firm value proxies to market participants.

4.3. Regression Analysis

Table 6. Country and Sector-effects models regression results—MENA region.

Country and Sector-Effects Model	TQ Model		PB Model		PE Model
	Static	Dynamic	Static	Dynamic	Static	Dynamic
ESG	0.0078 ***	0.0080 ***	0.0124 ***	0.0168 *	1.7040	0.067
Lev	0.5395 ***	0.5575 ***	3.7419 ***	2.8761 ***	−5.7070	−13.204
S	−0.2393 ***	−0.2406 ***	−0.4977 ***	−0.1786	20.8110	0.944
GDP	0.0000	0.1551	−0.0000	−1.2226	−0.0000 *	−28.337
GOV	−0.0771	−0.0864	−0.1158	−0.2089	−64.6993 *	−0.411
Bahrain	−0.3643	−0.0872	−1.8539	−2.5353	−727.5360 *	−55.770
Egypt	−0.1274	−0.1541	−2.0896	−1.8356	−680.5596 *	−10.698
Israel	−0.4182 ***	−0.4189 ***	0.5224	2.1193 ***	−412.2612 **	5.981
Kuwait	−0.4663 **	−0.3140	−2.0506	−3.1311	−789.1379 **	−27.614
Morocco	−0.7385 ***	−0.5918	1.5933	1.2112	−806.6479 **	−27.006
Oman	−0.4073 *	−0.1967	−3.2147 **	−3.6984	−701.6425 *	−43.849
Qatar	0.2128 *	0.3155	−1.6496 **	−0.8502	−598.4400 **	−4.073
Saudi Arabia	−0.3516 *	−0.4666 **	−0.6441	0.4603	−449.6844 **	27.119
United Arab Emirates	Base	Base	Base	Base	Base	Base
Communication Services	−0.0800	0.3952 **	1.2236 **	0.5051	−29.5586	−17.850
Consumer Staples	−0.5059 ***	Base	−0.7201	Base	−137.4289	−6.385
Energy	−0.1402	0.3533 *	−1.0717	−1.1664	−26.2245	−23.712 *
Financials	−0.7750 ***	−0.2958	0.6768	−0.7003	−7.5504	−40.163 ***
Healthcare	−0.4417 ***	0.0525	−1.8529 *	−3.0975*	−84.0297	−30.798 **
Industrials	−0.4297 ***	−0.0212	0.9325	0.8131	−55.0987	−22.217 *
Information Technology	−0.7056 ***	−0.2282	1.7338 *	0.1826	−38.7935	Base
Materials	−0.3038 ***	0.1844	0.0159	−0.0742	86.2746	−23.889 **
Real Estate	−0.2631 **	0.2173	−1.4914 **	−0.7744	−20.81321	−26.649 **
Utilities	Base	0.4922 **	Base	−0.7519	Base	−22.783
_cons	6.1416 ***	1.5205	12.8269 ***	38.5561	388.7758	772.970
Hausman Test	Random		Random		Random
Adj-R	56.46%		34.52%		11.04%
No. of Obs.	306	294	306	294	306	294

Note: The table presents results of static and dynamic regression analyses for TQ, PB, and PE models. The variable definitions are provided in Table 2. ***, ** and * in bold denote significance at 1%, 5% and 10% levels, respectively.

presents the random-effects and GMM regression analyses results for TQ, PB, and PE models. At the 10% significance level, the ESG regression coefficients are positive and significant with both TQ and PB, respectively. However, at the same level of significance, the positive regression coefficient of ESG is not statistically significant with the PE ratio. This implies that, for MENA region firms, a higher ESG score—after controlling for the country and sector effects—correlates with higher TQ and PB ratios, and thus, higher firm value. This is consistent with the studies previously mentioned, which support the positive viewpoint of this relationship in the literature review, indicating that ESG scores are perceived as a crucial variable in determining the value of MENA region firms. Since a firm’s capital in the MENA region is typically characterized by higher concentrated ownership structures and the predominance of family ties and informal relationships [118], the level of information asymmetry between firms’ management and outsiders will be higher. Therefore, ESG scores add incremental value-relevant information beyond those contained in the financial reports [53,58,119,120].

The incorporation of country and sector dummies points to further evidence of the influence various countries and sectors may have on the significance and direction of the relationship between ESG score and firm value. Regarding country effects, first, the dCountry slope coefficients of ESG for TQ in the static model indicate that the impact of ESG is significantly negative compared to the base category (United Arab Emirates) in Israel, Kuwait, Morocco, Oman, and Saudi Arabia, while Qatar exhibits a significant positive effect. This suggests that high ESG performance and disclosures, reflected in high ESG scores, do not outweigh their costs in these countries. For Bahrain and Egypt, there is no statistical evidence of a significant relationship. In the dynamic model, only Israel and Saudi Arabia retain significantly negative effects, while the other countries, including Qatar, lose significance. Second, for PB, the static model shows significantly negative effects only for Oman and Qatar, with no significant relationships for other countries. In the dynamic model, Oman and Qatar lose significance, while Israel gains a significant positive effect.

Regarding sector effects, first, the dSector slope coefficients of ESG for TQ in the static model indicate significantly negative effects compared to the base category (utilities) in consumer staples, financials, healthcare, industrials, information technology, materials, and real estate. Communication services and energy show no significant relationship. In the dynamic model, consumer staples becomes the base category, and results show that communication services, energy, and utilities sectors exhibit significantly positive effects, while all previously negative sector effects lose significance.

Second, for PB, the static model reveals significantly negative effects for healthcare and real estate but significantly positive effects for communication services and information technology. In the dynamic model, healthcare remains significantly negative, real estate loses significance, and all other sector effects become insignificant compared to the base (consumer staples).

Third, the dCountry and dSector slope coefficient results for the PE static and dynamic models are not regarded in the analysis of findings since the model empirical results do not point to a significant relationship between ESG and PE ratio in the MENA region, as highlighted in some literature [121,122,123]. The direction of ESG-PE correlation, however insignificant, is positive. This draws attention to the implications ESG performance might have on PE ratio in the long-term. In our view, in the MENA context, investors are likely to view ESG as a mechanism for risk mitigation, reputation enhancement, and intangible value creation—factors better captured by TQ and PB. However, because ESG initiatives often involve upfront costs and delayed financial benefits, they may not translate into improved short-term profitability, leading to weaker or insignificant results for PE. These results are consistent with prior evidence reported in the literature [46,79,80,81].

Interestingly, both Qatar and the information technology sector exhibit a changing behavior between the direction of the significant ESG-TQ relationship and the ESG-PB relationship, where Qatar shows a negative influence of ESG on PB; however, it changes to be positive with respect to TQ. Similarly, the information technology sector shows a negative impact of ESG on TQ; however, it changes to be positive with respect to PB. In addition, the countries of Israel, Kuwait, and Morocco, as well as the sectors of consumer staples, energy, financials, industrials, and materials, all exhibit a diminishing ESG impact on PB firm value proxy despite showing a significant impact when proxied by TQ. This provides supportive evidence for the hypothesis that the ESG impact on firm value differs depending on the firm value proxy used, even for the same sample unit.

Consequently, the regression results provide sufficient evidence regarding the empirical hypotheses testing of ESG–firm value country and sector-effects models by failing to reject H1a, H1b, H2a, H2b, H3a, and H3b while rejecting H1c, H2c, and H3c. In line with previous literature, mixed results and contradicting conclusions have been reached regarding the impact of the ESG score on firm value as measured by various indicators, including TQ, PB, and PE ratios. Such disparities in direction and significance of ESG–firm value effects using different proxies for TQ, PB, and PE models, even with respect to the results of the same country and sector, add to the advocating literature of the mixed viewpoint, as highlighted by previous researchers [51,53,55,56,58,94,124,125].

4.4. Discussion

A major conclusion of this research is that the ESG activities are not significantly linked with the Price to Earnings ratio, but they do have a positive correlation with both Tobin’s Q and the Price to Book ratio. A deeper understanding and comparison of the basic characteristics of these valuation methods could help shed more light upon this inconsistency. Together, TQ and PB represent future prospects as they are rooted in assets and are oriented toward long-term growth potential, intangibles creation, and the firm’s risk profile. Due to being directly connected to present earnings, the PE ratio represents short-term profits which is highly vulnerable to investor psychology and firm disclosure behavior. In emerging countries, investors may underestimate ESG information when valuing companies in the short term, further weakening its link to the PE ratio [126,127,128,129]. In particular, investors in the MENA region may perceive ESG primarily as a long-term risk mitigator and an enhancer of intangible asset value captured by Tobin’s Q and PB, rather than as a driver of short-term profitability reflected in PE [130].

These findings align with the Institutional Difference Hypotheses, where the institutional, cultural, and regulatory differences across countries as well as the institutional weaknesses in emerging markets affect the relationship between corporate sustainability performance and financial performance. In developing markets, firms tend to focus on capital accumulation rather than ESG investment. Such firms in developing markets are not subject to the same government pressures for ESG as those operating in developed economies [124].

In emerging markets like the MENA region, the positive impact of ESG on firm value decreases, and the excessive expenditure on ESG adoption and expensive ESG activities in such developing nations may serve as an explanation for this. Another explanation could be that the impact of ESG practices and scores does not often reflect in the short term, but they have a long-term orientation [125].

This could be further explained by the Enterprise Risk Management paradigm in the argument of Chairani and Siregar [131], where different risk management approaches among firms may cause ESG impact on firm value to fluctuate. Moreover, limited investor competency, changing investor preferences, market misvaluation, and ESG disclosure complexity are to blame for the negative correlation between ESG scores and firm value in emerging markets. Although ESG companies have outperformed the market in developed countries, this does not apply to developing countries [72,107].

The exact rationale and country-specific and sector-specific justification regarding the concluded findings are diligently in their infant phase in both theory and practice due to the special nature of sustainability topics in emerging nations. On reviewing the ESG history in the MENA region, the concept of CSR/ESG is relatively new, with few nations having developed any policies or regulations. With the assistance of NGOs and, more recently, stock exchange authorities, the most noteworthy attempts to encourage firms to move in that direction have been made during the past eight years. Nonetheless, there have been some initiatives in the area to raise the profile of sustainability. Notably, the UN Sustainable Stock Exchanges Initiative (SSE) is the significant driver behind ESG transparency and sustainability [132,133,134,135].

For some MENA region countries, the literature has been enough to draw some concluding remarks on the nature and direction of the ESG–firm value relationship. Oman introduced a corporate governance code in 2003 and established the Omani Capital Market Authority in 2009 to improve sustainability. However, it does not provide guidance on ESG-related disclosure or sustainability reporting, despite joining the UN Sustainable Stock Exchanges Initiative in 2022 [136,137,138]. Saudi Arabia has a strong ESG record, with the Saudi Code of Corporate Governance established in 2006 and mandatory for all listed firms in 2010. The Saudi Exchange joined the UN Sustainable Stock Exchanges Initiative in 2018, and the Public Investment Fund (PIF) is committed to incorporating ESG in its investments [138,139].

Boursa Kuwait joined the UN SSE Initiative in 2017, publishing annual sustainability reports aligning with Kuwait’s 2035 developmental plan. These reports highlight CSR policies and future goals, which may change the direction of the ESG–firm value relationship in the long term [138,140]. The United Arab Emirates Abu Dhabi Securities Exchange and Dubai Financial Market have implemented mandatory governance guidelines since 2009, including board composition, meeting frequency, special committee formation, and annual ESG disclosure [133,138]. Bahrain Bourse, like other GCC nations, joined the UN SSE Initiative only in 2019, promoting ESG disclosure. This could justify why the country’s ESG–firm value positive impact has not significantly improved yet [138,141].

In the MENA region, the consumer staples sector is experiencing rapid growth in sustainability concerns due to its complex business operations and mandated reporting requirements. Despite the potential benefits for firm value, the sector’s diverse nature presents unique challenges and opportunities for sustainability impact. This has led to mixed results for the ESG–firm value relationship [142,143]. Furthermore, the energy and utilities sectors are prioritizing sustainability initiatives to find energy sources with lower environmental impact and ensure affordable energy supplies. Globally, stakeholders are increasingly concerned about energy firms’ climate footprint and accuracy [144]. The same applies to the industrials and materials sectors in reducing waste, energy consumption, and transportation. However, there is no “one size fits all” solution for ESG adoption due to the complex logistics process and the industry’s rapid evolution, necessitating continuous adaptation of business models [55,145].

The financial sector in the MENA region, particularly the insurance services sector, is somehow slow to respond to sustainability concerns and lags behind other industries in sustainability reporting impact. However, management is beginning to recognize the environmental impact of their actions. Debt instruments like green bonds and sustainability bonds have significant growth potential in developing nations [48,146,147,148]. The real estate sector in the MENA region has seen a rise in sustainability concerns, especially after the COVID-19 pandemic. Developers, financiers, and investors are expected to contribute to sustainable solutions. However, the sector’s impact on ESG implications is still negative due to its early emergence [149,150,151].

The COVID-19 pandemic has significantly impacted the MENA region’s healthcare sector, affecting its economic power and environmental impact. Nevertheless, a study found that ESG activities positively impact healthcare firms’ financial performance in developed economies; however, this relationship would be negative or insignificant in the case of developing economies like the MENA region [152]. The communication services and information technology sectors in the MENA region produce 20–50 million tons of e-waste annually, posing sustainability challenges such as environmental, social, governance, and economic issues. ESG can help firms communicate these issues, enabling long-term sustainability. Although both sectors display mixed effects on ESG–firm value relationships, they show a promising positive impact on the PB ratio due to rapid industrial and technological advancements [153,154].

Accordingly, the disparity across MENA region sectors regarding ESG impact on value creation is justified by firms demonstrating varying ESG responsibilities by engaging in procedures that achieve a broader contextual, environmental, social, and governance agenda beyond legal frameworks. However, the importance of particular activities is determined by their application context, where these activities may differ in terms of impacting financial performance [78,155]. In addition, the relationship between sustainability performance and financial performance is contingent upon the kind of commodities offered to customers [156]. Another justification could be that the impact of ESG practices and scores is not often reflected in the short term, but they have a long-term orientation [151,157].

Accordingly, each sector benefits/loses from ESG to different extents. Some of them are immune to ESG scores; for example, the energy sector is not sensitive to ESG across all firm value measures. The consumer staples, financial, industrials, and materials sectors are sensitive towards ESG only when measured by TQ. For information technology, real estate, communication services, and healthcare sectors, the direction and significance of ESG impact fluctuate across measures. Therefore, based on these findings, it is noted that there exists a contingency perspective on the effect of ESG scores on firm value, which can be observed by statistically significant differentiated results across the countries and sectors analyzed. Indeed, results range from local to international levels, short-term to long-term, and voluntary to fully mandated [158,159].

Lastly, it is important to recall that imperfect markets might affect the valuation in the case of ESG scores. Since there may be wide variations in the relationship between created value and cost, the market for ESG initiatives is highly imperfect. With reference to Table 6, some MENA region countries exhibit immune behavior against ESG across all proxies (i.e., Bahrain and Egypt). Kuwait and Morocco are sensitive towards ESG only when measured by TQ. Qatar exhibits fluctuating significance and direction of ESG impact across measures. These arguments lead to the conclusion that the primary valuation issue is market incompleteness [159]. It is suggested that there might be more possible variations arising from the arguments about the specific market nature across various countries.

4.5. Robustness Test

Robustness tests were applied to the regression results by expanding the analyses from the MENA region to the MENAT region. This approach is crucial for validating the robustness of the study findings because it demonstrates whether conclusions drawn from the initial analyses hold true across a larger and more diverse set of data [160]. Further adding to the rigor of the overall hypotheses’ conclusions was the incorporation of Turkey, indicating that the relations between ESG scores and proxies of firm values are generally stable across a broader regional context. Including Turkey not only enhances sample representativeness but also allows for a more comprehensive investigation of the relationships between ESG scores and firm value proxies, thereby validating the robustness of the findings across different economic and cultural contexts.

The empirical results of the MENAT region static and dynamic models, exhibited in

Table 7. Country and Sector-effects models regression results—MENAT region.

Country and Sector-Effects Model	TQ Model		PB Model		PE Model
	Static	Dynamic	Static	Dynamic	Static	Dynamic
ESG	0.0076 ***	0.0078 ***	0.0179 **	0.2140 **	0.1665	0.1345
Lev	0.5527 ***	0.5536 ***	2.2905 ***	0.0040 ***	−10.510	−11.3814
S	−0.2406 ***	−0.2425 ***	−0.3161 **	0.2920	−0.3074	−0.2633
GDP	−0.0000	0.3174	−0.0000	0.6880	−0.0000 **	−25.6404
GOV	0.0177	0.0087	−0.1607	0.1870	0.5002 *	1.6263
Bahrain	−0.2867	Base	−1.5004	Base	−1.6640 *	Base
Egypt	0.1697	−0.2666	−1.5380 *	0.8840	−2.5646 *	42.7128
Israel	−0.4028 ***	−0.8751 ***	1.5348 **	0.3710	4.8244 *	52.4771
Kuwait	−0.3051 **	−0.4257	−1.9941 **	0.5990	−2.5579	24.5388
Morocco	−0.5096 ***	−0.6187	1.3242	0.1560	0.619	27.4493
Oman	−0.2950 *	−0.2783	−2.2246 *	0.3400	−8.0952	7.7640
Qatar	0.2075 *	0.0121 *	−0.0734	0.7560	13.4540	45.6236
Saudi Arabia	−0.2044	−0.9116	0.2042	0.8180	19.4343	74.9878
United Arab Emirates	Base	−1.0135	Base	0.9990	Base	69.6417
Turkey	−0.2238	−0.4657	−0.9552	0.7580	13.6696	46.4234
Communication Services	−0.0888	0.5997 ***	1.2379 **	0.6040	2.9223	−17.1594
Consumer Discretionary	−0.7940 ***	−0.1075	2.0334 **	0.0700 *	−7.2375	−26.8409 *
Consumer Staples	−0.6042 ***	0.0804	0.9185	0.4680	11.0320	−7.3720
Energy	−0.1263	0.5690 ***	−1.2114	0.2010	−1.3212	−22.2132 *
Financials	−0.7486 ***	−0.0654	0.1529	0.3030	−15.9205	−39.5084 ***
Healthcare	−0.4211 ***	0.2685 *	−2.2459 **	0.0000 ***	−10.0477	−30.1782 **
Industrials	−0.3181 ***	0.3685 ***	1.1247	0.4290	−1.2852	−19.8645 *
Information Technology	−0.6844 ***	Base	1.3751	Base	21.0526	Base
Materials	−0.3092 ***	0.3840 ***	0.2607	0.7560	−2.5793	−22.5219 **
Real Estate	−0.2573 **	0.4353	−0.2137	0.2550	−4.6320	−24.9369 **
Utilities	Base	0.6950	Base	0.4040	Base	−20.6205
_cons	6.0633 ***	−2.6220	8.5074 **	0.5650	25.8415	675.0538
Hausman Test	Random		Random		Random
Adj-Rsquared	53.86%		31.00%		10.72%
No. of Obs.	372	360	372	360	372	360

Note: The table presents results of static and dynamic regression analyses for TQ, PB, and PE models. The variable definitions are provided in Table 2. ***, ** and * in bold denote significance at 1%, 5% and 10% levels, respectively.

, indicate that integrating Turkey into the analyses did not alter any of the core hypotheses regarding the impact of ESG scores on firm value, which differs across different proxies, countries, and sectors. Turkey exhibits a variety of unique market features, including economic dynamics, regulatory environment specifics, and culture [161]. These variations are likely to induce minor differences in the significance and direction of some variables and country/sector dummies. Ultimately, model robustness and resilience are proven since the main hypotheses hold despite these modifications. This confirms that while Turkey adds complexity, it does not alter the relationship being investigated.

5. Conclusions

The association between sustainability performance and financial performance has attracted many scholars, who report inconclusive results. The reasons for these mixed results could be attributed to the complex nature of ESG activities, embedded country-specific legal origin, cultural, social, and economic institutional environment, industry characteristics, investor perception, and the associated costs as well as benefits of such activities. As a result, data discrepancies based on geographical locations and business characteristics lead to inconsistent conclusions in both developed and developing countries across the literature [8,9]. Research concerning ESG performance, as it relates to firm value, has provided mixed results in developed countries. The same is true for developing nations. Therefore, the primary motivation for this study is to provide empirical evidence that could convince firms not only to adopt ESG but also to have high ESG ranks.

Based on the data availability of LSEG Data & Analytics publicly traded non-financial firms in the MENA region from 2017 to 2022, a sample of 51 firms in 9 countries and 10 business sectors is employed to investigate the impact of ESG scores on firm value through the three proxies of Tobin’s Q (TQ), Price to Book ratio (PB), and Price to Earnings ratio (PE). Regression analysis reveals mixed findings as the results vary based on the used proxy, where the ESG–firm value relationship is found to be significantly positive using TQ and PB ratios. However, when the PE ratio is integrated into the analysis, no significant relationship is yielded. Empirical results demonstrate that there are differences in the impact of ESG on firm value across measures, countries, and sectors.

This study has implications for both theory and practice. Theoretically, this study expands the ESG–firm value literature by investigating the ESG–firm value relationship on a firm-level across a variety of MENA region countries and sectors using various proxies. Empirical findings also contribute to the enrichment of ESG and financial decision-making literature, where they could raise investors’ awareness in terms of portfolio optimization and sustainable investing.

Practically, results are beneficial to stakeholders such as investors, regulators, policymakers, and scholars in improving their understanding of ESG implications and advantages. It also provides insights on how firms might benefit from the initiatives to promote ESG by linking ESG to financial performance. This study proposes that managers need to carefully choose ESG goals because their success depends on the country and industry contexts. Firms should maximize their efforts to find cost-efficient ways of ESG incorporation into value chains. Firms should also accept sustainability as a strategic priority prior to implementing ESG practices. Once sustainability has been elevated to a strategic priority, firms can begin to implement ESG practices with some confidence that this will not only yield ESG performance improvements but also improved organizational performance in the long term [125,148].

The findings also offer insights for market regulators in emerging economies on the advancement of ESG adoption, where regulators are central in shaping the ESG adoption landscape. This study pinpoints the need for strong regulatory structures that encourage firms to adopt sustainable practices. The regulators are in a position to enact policies that promote transparency and accountability, with the expectation that companies will comply with the formalized standards. In conclusion, effective regulation would allow competition among firms to spur improvement in ESG application. Of primary relevance are extensive insights from this study for countries with emerging economies, where regulatory frameworks are not fully developed, and thus it becomes important to establish clear guidelines to induce ESG practices.

Also, the heterogeneity of results carries clear policy implications. In Bahrain and Egypt, where markets appear immune to ESG across all proxies, regulators should strengthen disclosure standards and investor awareness to enhance the materiality of ESG information. In Kuwait and Morocco, where ESG matters only under Tobin’s Q, policymakers could encourage integration of ESG into governance codes and long-term investment strategies, especially for institutional investors. For Qatar, where ESG shows fluctuating effects, harmonizing disclosure practices and embedding ESG into market infrastructure (e.g., sustainability indexes, green finance instruments) would help reduce information asymmetry and stabilize investor perceptions.

Furthermore, the divergence in the Price to Earnings ratio indicates that managers in the MENA region should refrain from presenting ESG initiatives as immediate profit drivers. Instead, they should highlight ESG’s role in mitigating long-term risks and strengthening intangible assets—dimensions that investors recognize through Tobin’s Q and Price to Book ratios.

For standard setters, it does stress the importance of enhancing the ESG regulations at the country level. Standard setters can work out comprehensive guidelines by discovering the key drivers of ESG performance, which are the ones to help companies adopt ESG factors in their business models. The study outcomes indicate that connecting ESG criteria to financial performance metrics can motivate firms to prioritize sustainability goals. This alignment should not only increase ESG rating credibility but also the firms are provided with an incentive to regard ESG as a competitive advantage instead of a compliance issue. In this regard, standard setters have the option to either improve the existing frameworks or create new ones that are more applicable to the challenges faced by the firms in the developing markets.

Similarly to sustainability research conducted in emerging economies, a major limitation is the small sample size, which hinders the generalizability of findings. This could be justified by ESG disclosure deficiency and, accordingly, scores for firms, which reduce the sample size. The study period has been reduced to 6 years for the same reason. In addition, the study relies on the ESG LSEG Data & Analytics Score as the primary ESG performance measure, which may be subject to potential measurement biases and variations in disclosure quality that could influence the results. Furthermore, observations are not uniformly distributed among countries and sectors, leading to the underrepresentation of certain groups. Such an uneven distribution additionally restricts the possibility for generalizing the findings to the complete MENA region and is recognized as a limitation of this data-driven approach.

Another limitation is the quantity rather than the quality of ESG disclosure, where the results of this study may not necessarily provide the “true” motivation for firms to disclose sustainability activities. Although country and sector dummies are used in this study to account for unobserved heterogeneity, the underlying mechanisms behind the observed variation in the relationship between ESG and firm value are not directly examined. Nevertheless, the current study was unable to employ interaction terms due to data limitations, which would have significantly reduced the sample size. Lastly, the generalizability of the study findings may be impeded by the exclusion of the banking industry and the reliance on secondary data sources.

Future studies may consider capturing performance related to each ESG pillar, gathering wide sample data to better separate industries and geographic regions in cross-national contexts, and examining the financial performance before and after ESG adoption. Consequently, it is advised to continue the regression analysis to forecast the ESG–firm value relationship, particularly by examining investors’ understanding of ESG in a comprehensive approach. Moreover, exploring and comparing the robustness of alternative ESG measurements remains a promising direction for future research. Future studies may also consider incorporating the banking sector into the analysis through sector-specific methodologies. Exploring primary ESG measures like content analysis of sustainability reports or surveys may help uncover deeper insights and expand the analysis. In addition, the theme of long-term and short-term investors can also be tackled since they may have distinct investment goals that influence firm valuation. Incorporating and investigating these goals alongside investors’ ESG motives for incorporating or not incorporating ESG criteria, through qualitative or mixed methods approaches, might shed new and meaningful insights. Lastly, an interesting avenue for future research would be to include interaction terms between ESG scores and sector-specific variables (such as pollution intensity) or context-dependent factors such as a country’s governance quality index. Such interactions would elevate the analysis from descriptive to explanatory by uncovering the underlying mechanisms driving the ESG–firm value relationship.