ESG Performance and Corporate Financial Performance: Glimpses from the Saudi Arabian Industrial Sector

Abstract

Environmental, Social, and Governance (ESG) has emerged as a critical indicator of corporate sustainability and responsible business practices. Different stakeholders mostly rely on ESG scores to evaluate firms’ long-term value creation and risk management capabilities. The current study examines the effect of ESG performance on the corporate financial performance of Saudi Arabian industries. The study uses ESG scores to measure ESG performance and Return on Assets (ROA), Return on Equity (ROE), and Tobin’s Q to measure financial performance. The study also includes leverage and firm size as control variables. The sample includes 61 non-financial companies over 5 consecutive years, from 2020 to 2024. To analyze the results, the study employed pooled and quantile regression models. The findings from pooled OLS results reveal a positive and significant relationship between ESG performance and ROA (β = 0.14, p < 0.01), a positive but insignificant relationship with ROE (β = 0.12), and a negative but insignificant association with market-based CFP measured by Tobin’s Q (β = −0.003), suggesting that ESG performance enhances accounting-based profitability but has no discernible effect on market-based valuation. Moreover, quantile regression results show that ESG performance effects are not homogeneous across firms, with significant positive effects on ROA at the 50th and 75th quantiles and on ROE and Tobin’s Q only at the 50th quantile. Leverage has mixed effects on firm performance; it significantly improves shareholder returns but reduces operating profitability, though the impact on market valuation varies across firms. Moreover, firm size negatively affects profitability and market value, particularly among medium and high-performing firms, indicating diseconomies of scale. Overall, the results support the view that ESG performance primarily improves firms’ operational performance, as measured by ROA, rather than directly enhancing shareholder wealth or market valuation, as measured by ROE and Tobin’s Q.

1. Introduction

Social responsibility is a crucial research area that explores ways to balance corporate and social performance at both the micro and macro levels. Corporate Social Responsibility (CSR) defines a company’s social responsibilities, covering ethics, fair trade, CSR policies, sectoral social responsibility, and corporate governance [1,2]. It is a core element of Western corporate strategies and policies [3]. CSR usually reflects a company’s ongoing commitment to sustainable development, aiming to improve the quality of life for employees and local communities while responsibly safeguarding natural resources and the environment [2,4].

Despite the significant expansion of companies’ environmental initiatives, scholars argue that a new approach is needed. They warn that an approach lacking ecological resilience may harm the environment rather than support ecological sustainability [5]. While pursuing ecological sustainability benefits the environment, it also raises questions about its effects on a company’s financial performance (CFP). Many studies have examined whether environmental efforts yield financial benefits, with some findings indicating that participating in environmental initiatives can enhance financial performance [6,7]. Therefore, to promote sustainability, investing in Environmental, Social, and Governance (ESG) has become increasingly common in global capital markets [8].

According to the 1987 Brundtland Report of the World Commission on Environment and Development, sustainable development is the development that satisfies present needs without jeopardizing the ability of future generations to meet theirs. The UN General Assembly’s adoption of the report elevated sustainability to a concept of major political and global significance [9,10]. Today, sustainable development is widely acknowledged as affecting all areas of human and business activity, spanning research and practice across various fields. At a more local level, corporate sustainable development is viewed as a contemporary management strategy that seeks to balance corporate growth and profits with social goals that may not yield immediate financial gains, particularly in socio-environmental development [11].

Currently, environmental sustainability is widely recognized as a key management concept worldwide, with a focus on sustainable growth for companies. In developing countries, these ideas are still emerging but are quickly gaining traction as firms realize the importance of sustainability, comply with CSR regulations, and implement eco-friendly practices [2]. Corporate sustainability has become an increasingly significant concern for different communities. Over the past twenty years, listed companies have faced growing pressure to enhance transparency by disclosing sustainability-related information through sustainability reports.

Worldwide, growing awareness of sustainability has spurred the creation of organizations such as the Global Reporting Initiative (GRI), founded in 1997 and publishing its first guidelines in 2000. GRI provides the primary framework for sustainability reporting, helping companies measure and disclose their ESG performance (henceforth EP). Companies are encouraged to track their sustainability efforts to develop strategies, improve outcomes, and enable investors to see how sustainability connects with FP. To improve the quality of sustainability disclosures, the International Integrated Reporting Council (IIRC) was established in 2010 and released its framework in 2013 to set standards for integrated reporting of financial and non-financial data. In 2017, the Taskforce on Climate-Related Financial Disclosures (TCFD) was formed. Its final report offers guidance to companies on disclosing climate-related financial risks and evaluating the economic impacts of climate change mitigation actions, including reducing carbon emissions, enhancing energy and water efficiency, and encouraging sustainable land use [12].

Non-financial reporting is essential for companies to demonstrate their commitment to social, environmental, and governance issues, often via ESG or CSR initiatives [13]. Over time, sustainability reports have gained influence, shaped investment decisions, and supported long-term sustainability goals. In this context, managers play a crucial role as more organizations incorporate EP metrics into executive compensation. They must allocate resources to develop effective monitoring and control systems to meet ESG objectives [14,15]. The success of these initiatives is vital to the organization’s overall success. Through CSR/ESG strategies, managers seek to enhance the firm’s dynamic capabilities, bolstering resilience in today’s economic environment. These capabilities allow firms to redesign, adapt, and improve processes and resource management in response to uncertain social, economic, and environmental conditions [16].

Before the 2000s, corporate sustainability was relatively niche, but it has since become mainstream, leading to a surge in metrics from data providers such as CSRHub and ASSET4 ESG. This has led to a confusing array of measures and indices for corporate sustainability. The CFA Institute Center for Financial Market Integrity [17] highlighted that prudent investors should account for ESG factors, as they can affect investment outcomes, and investment professionals increasingly incorporate ESG into their analyses [18].

Beyond the external benefits of improved corporate sustainability, companies also gain internal advantages that support better performance. These benefits are expected to appear as companies succeed in their sustainability initiatives. This view supports the idea that corporate sustainability comes from a strategic, long-term growth mindset [19]. According to legitimacy theory [20] and stakeholder theory [21], high EP can satisfy stakeholder expectations, uphold the social contract, maintain legitimacy, and enhance reputation. When stakeholders are satisfied and reputation improves, companies often see increased productivity, greater ability to attract and retain skilled employees, and higher customer loyalty—all of which contribute significantly to improved overall firm performance [18]. This highlights the importance of companies engaging in socially responsible activities, since sustainable, ethical, and responsible actions offer the greatest value to each organization [22].

The association between ESG disclosure and CFP is particularly relevant in emerging economies such as Saudi Arabia, where sustainability reporting is gaining significance but is still at a relatively early stage of development [23]. Through its Vision 2030 agenda, Saudi Arabia has placed strong emphasis on sustainability, transparency, and economic diversification as part of its strategy to reduce dependence on oil revenues and foster long-term sustainable growth [24]. Moreover, growing evidence indicates that enhanced ESG disclosure can generate significant benefits for Saudi companies. By improving transparency and accountability, ESG reporting can attract FDI, increase FV, and strengthen competitive positioning in both domestic and global markets [25]. Companies that demonstrate strong EP are often better positioned to gain the confidence of international investors who increasingly integrate sustainability considerations into their investment decisions, while also building trust among domestic stakeholders [26]. Furthermore, Saudi Arabia’s commitment to ambitious sustainability goals, including net-zero emissions by 2060, has increased investor interest in different energy initiatives [27]. Besides attracting FDI, ESG initiatives can improve operational efficiency, increase risk management capabilities, and support long-term value creation, ultimately leading to stronger FP [28]. However, Saudi Arabia faces hurdles in implementing ESG reporting. Regulatory fragmentation poses a significant challenge, as companies must navigate changing local regulations and international standards [29]. It also lacks expertise in ESG frameworks. Industry-specific issues, such as the oil and gas sector’s dependence on high-carbon activities, pose complex barriers to ESG integration without compromising profitability [30]. These issues are further complicated by the global debate over materiality and the difficulty of quantifying social and governance metrics—often less emphasized than environmental ones—making ESG adoption more challenging [30].

Saudi Arabia actively supports ESG integration as a key part of its Saudi Vision 2030, focusing on sustainable growth and economic diversification. In 2018, Tadawul, the country’s stock exchange, joined the UN Sustainable Stock Exchanges Initiative to boost ESG awareness and promote sustainable investing. By 2021, it introduced ESG disclosure guidelines to standardize reporting [31]. The exchange continues to expand ESG initiatives across the country and region, aiming to raise awareness and encourage listed companies to disclose their ESG practices. Integrating ESG into the financial system helps build a more sustainable and efficient framework, creating long-term value for the Kingdom. By 2020, over 203 listed companies, with a total market value of SAR 9.10 trillion (USD 2.42 trillion), held significant influence. While many companies recognize the importance of ESG for sustainable growth, more effort is needed to highlight ongoing projects and strengthen disclosures. These initiatives, aligned with Saudi Vision 2030 [32] and the UNSDGs, promote transparency and support regional and global sustainability efforts.

The financial benefits of ESG reporting for companies remain uncertain since producing these disclosures consumes resources. For instance, in 2019, portfolios with notable ESG activities in major markets were valued at over US$30 trillion [33]. In countries like India, Brazil, and South Africa, ESG disclosure is legally mandated [34]. In countries such as Saudi Arabia, where ESG reporting is not compulsory, the potential advantages may be limited.

Most ESG research has focused on developed nations, with limited evidence from emerging markets such as Saudi Arabia. A few recent studies have examined the ESG-CFP relationship in this context, relying on mean-based estimators and self -developed ESG scores that assume the relationship to be homogeneous across firms, an assumption that becomes weak given Saudi Arabia’s regulatory framework and sectoral heterogeneity. Therefore, the current study examines the impact of ESG on CFP in Saudi Arabian firms.

2. Literature Review and Hypothesis

Farza et al. (2021) [35] examined the effect of environmental innovation on the CFP of German HDAX companies and found a positive association. They reported that environmental innovation drives resource efficiency, thereby improving CFP. Mendonca and Zhao (2019) [7] investigated the relationship between firms’ environmental orientation and the long-run CFP of U.S.-based companies. They found that environmental orientation had a smaller impact on CFP because it did not focus on ecological sustainability. Tien et al. (2019) [2] examined the effects of CSR and CES on the financial performance of Vietnamese firms. They found no relationship between CSR and CFP, but when CES was included, the relationship was positive to some extent. Ellili & Nobanee (2023) [12] analyzed the effect of sustainability disclosure on the CFP of UAE banks. They found that sustainability disclosures positively affected banks’ performance, despite low disclosure levels. Ivascu et al. (2022) [16] examined the influence of ESG on the CFP of European firms. They found a positive long-term relationship between ESG scores and CFP, particularly regarding firms’ cash flows. Aydogan & Kara (2023) [10] and Abukari et al. (2022) [18] reported similar results and linked CFP to companies that consistently perform well on sustainability. Moreover, this positive impact is more pronounced for large-scale companies than for small-scale companies (Chen et al., 2023) [36]. In contrast, Ching et al. (2017) [37] found no association between CFP and sustainability reporting when disclosure spans all three sustainability dimensions. Barauskaite & Streimikiene (2020) [38] reported that adopting CSR initiatives and integrating them into financial reporting confer a competitive advantage, thereby building a positive image and, in turn, enhancing financial performance. Bartolacci et al. (2019) [39] analyzed the relationship between companies’ environmental practices and their impact on CFP using a bibliometric approach and found a positive association. Further, Coelho et al. (2023) [40] reported similar results, suggesting a direct impact of CSR on CFP, with financial performance increasing significantly as firms’ ESG scores improve. Moreover, Rahi et al. (2023) [41], in their hybrid review, reported similar results: a positive long-run association between environmental sustainability and CFP. Furthermore, Soytas et al. (2019) [42] reported empirical evidence supporting the hypothesis that corporate sustainability increases corporate financial performance.

Similarly, Nguyen et al. (2021) [43] studied the effect of EP on the CFP of Chinese firms, with corporate governance as a moderating variable. They found a positive relationship between CG mechanisms and EP. Similarly, Lu (2021) [44] found that the effect of corporate sustainability performance on CFP is stronger in firms with strong corporate governance. Okafor et al. (2021) [45] analyzed the impact of CSR spending on the CFP of US tech firms and found that higher socially responsible spending was associated with increases in revenue and profitability. Similarly, Nizam et al. (2019) [46] reported that access to environmental financing enhances banks’ financial performance. Additionally, Weston & Nnadi (2021) [47] conducted a similar study and found that Exchange Traded Funds (ETFs) that adhere to the Principles of Responsible Investing (PRI) tend to outperform traditional ETFs. Gubareva et al. (2023) [48] conducted a similar study, emphasizing the robust returns and hedging advantages of ESG investments across both developed and developing markets. Abdullah et al. (2025) [49] observed that ESG disclosures and expenditures significantly enhanced the CFP of listed GCC companies. Pham et al. (2021) [50] reported a positive effect of corporate sustainability on CFP, as measured by ROA, ROE, and ROCE. A similar study in the Indian context by Gupta and Gupta (2020) [51] reported a positive association between environmental sustainability and CFP. Furthermore, Danso et al. (2019a) [52] found that companies that adopt differentiation strategies often achieve better financial results through environmental sustainability than those that do not. Additionally, companies that prioritize stakeholders tend to achieve better financial results by incorporating environmental sustainability into their operations (Danso et al., 2019b) [53]. Earnhart (2018) [54] reviewed existing studies and found a positive link between environmental practices and corporate financial success. In a similar study, Ameer and Othman (2012) [55] reported superior CFP among companies that follow sustainable practices compared with those that do not. Kaffash et al. (2024) [56] investigated the link between the CFP of US airlines and their environmental sustainability performance and found a positive relationship, indicating that higher CFP is associated with better environmental sustainability performance.

Ha et al. (2023) [57] examined the relationships among green innovation, EP, and CFP and found a positive, significant relationship. Similarly, Sudimas et al. (2023) [58] identified a relationship among green accounting, environmental performance, and firm value, with CFP serving as a mediator; however, they did not find a significant mediating effect. They suggested that greater focus on EP could increase firm profitability. Xie et al. (2019) [59] reported that green process and product innovation enhance CFP, whereas green subsidies do not. Further, Endiana et al. (2020) [60] examined the effect of green accounting through corporate sustainability on the CFP and reported an increase in financial performance. Khan and Gupta (2023) [61] identified a positive relationship between green accounting and CFP, particularly when environmental costs were used as the metric. Pahuja et al. (2025) [62] investigated how EP impacts the financial results of publicly listed firms in Saudi Arabia. They found that ESG factors, such as environmental, social, and governance, play a significant role in boosting firm profitability. Ali et al. (2025) [63] conducted a similar study and documented a positive association between ESG disclosures and firm profitability.

Jyoti and Khanna (2021) [64] reported a negative impact of ESG scores on the CFP of BSE-indexed companies, which contrasts with most previous studies. Similarly, Jha and Rangarajan (2020) [65] found no causal relationship between corporate sustainability practices and CFP among top Indian firms. Similarly, Kim et al. (2020) [66] reported that the growth in EP of South Korean firms led to a minor improvement in firms’ market values. Moreover, Kumar et al. (2022) [67] investigated the relationship between corporate sustainability reporting and the CFP of global energy firms and reported a curvilinear relationship, in which moderate levels of corporate sustainability reporting increase CFP. Furthermore, Lo and Liao (2021) [68] investigated the effects of various factors, including human resources, business strategies, and CFP, on corporate sustainability and found that CFP does not affect firms’ corporate sustainability practices. Almaqtari et al. (2024) [69] examined the relationship between environmental and financial performance, examined the moderating effect of gender diversity, and reported a stronger relationship between the two. Azizah & Haron (2025) [70] reported that the impact of ESG on CFP is context-dependent and influenced by macroeconomic factors. They found a weak positive relationship between ESG factors and CFP. Yeow & Ng (2021) [71] found that green bonds improved EP but had no impact on CFP. Basali (2025) [72] reported no relationship between firm profitability and ESG disclosures.

The literature discussed above provides mixed evidence regarding the association between ESG performance and CFP. Most prior research has reported a positive association, suggesting that ESG initiatives, disclosures, innovation, and CSR increase firm profitability. However, studies have documented weak, insignificant, and even negative relationships, suggesting that the financial effects of ESG practices may depend on other factors, such as governance, industry conditions, and macroeconomic conditions. Most ESG research to date has focused on developed nations, with scarce data from emerging markets such as Saudi Arabia. To our knowledge, a small number of recent studies have examined the ESG-CFP relationship in the Saudi Arabian context, including [29,62,73], and [63], and this research is limited in two ways. First, these studies rely on conventional mean-based estimators, such as panel regression, which capture only the average effect of ESG performance on CFP and implicitly assume this relationship is uniform across firms. Second, these studies used self-developed ESG scores, which suit homogeneous firms (same industry/region), even though Saudi Arabia’s ESG regulatory environment (Tadawul’s 2021 disclosure guidelines [31]) and firm heterogeneity (oil-dependent vs. non-oil sectors) suggest the ESG-CFP relationship is unlikely to be homogeneous across firms. The current study extends the emerging Saudi ESG literature by employing quantile regression on provider-based scores (CSRHub ESG scores) over a five-year period, allowing us to examine whether the ESG-CFP relationship differs for low-, median-, and high-performing firms, a dimension of heterogeneity that prior Saudi studies have not addressed. Moreover, because we use performance proxies (ROA, ROE, and Tobin’s Q) to measure CFP, the quantile analysis across these measures shows that the ESG-CFP relationship is sensitive to where a firm sits in the performance distribution. Accordingly, this study addresses this gap by investigating the relationship between EP and CFP in Saudi Arabia and formulates the following hypotheses.

H₁. 

Environmental Performance (EP) is positively associated with Corporate Financial Performance (CFP) among Saudi listed firms.

H₂. 

The relationship between EP and CFP is heterogeneous across the conditional distribution of financial performance, such that the effect of EP is not uniform for low-, medium-, and high-performing firms.

3. Data and Methodology

The current study examines the effect of ESG performance on the corporate financial performance of Saudi Arabian companies. The initial sample consisted of 84 non-financial companies observed from 2020 to 2024, selected because they had available ESG scores, financial data (ROA, ROE, and Tobin’s Q), and control-variable data (Leverage and Firm size) for the full five-year window. Of these, 23 firms were excluded because their ESG scores were unavailable for three or more years during the study period, which was the binding data-availability constraint. The final sample therefore consists of 61 firms with complete data across all five years, forming a balanced panel of 305 firm-year observations. The data sources include CSRHub for ESG scores and Koyfin for financial data. Table 1 below shows the final sample and the number of firm-year observations.

Table 1. Method of Final Sample Selection.

Description	No. of Firms	No. of Observations
Initial sample	84	420
(-) Firms excluded due to non-availability of ESG data	23	115
Final balanced panel	61	305

3.1. Variables

The study employs Corporate Financial Performance as the dependent variable, ESG score as the independent variable, and leverage and firm size as control variables.

3.2. Dependent Variable

Corporate financial performance is chosen as the dependent variable, based on previous studies by [73,74,75,76,77]. Proxies such as Return on Assets (ROA), Return on Equity (ROE), and Tobin’s Q are used to measure corporate financial performance [73,76,77,78].

3.3. Independent Variables

The study employed the ESG score, collected from the CSRHub database, as an independent variable from January 2020 to December 2024. The study used a comprehensive ESG score ranging from 0 to 100, covering the three pillars: environmental, social, and governance [76,77,79].

3.4. Control Variables

The study included firm size defined as the ratio of the log of total assets to leverage, measured by the total assets-to-net worth ratio. The leverage ratio is included because higher leverage is associated with greater ESG disclosures [73,80]. Table 2 summarizes the measurement of all study variables.

Table 2. Measurement of Study Variables.

Variable	Nature of the Variable	Measurement
Return on Assets (ROA)	Dependent	Net Income before Tax/Total Assets
Return on Equity (ROE)	Dependent	Net Income before Tax and Preference Dividend/Total Shareholders’ Equity
Tobin’s Q	Dependent	Total Assets + Market Capitalization + Net Worth/Total Assets
ESG Score	Independent	Comprehensive ESG score from CSRHub.
Leverage	Control	Total Assets/Net Worth
Firm Size	Control	Log of Total Assets

3.5. Econometric Model

The current study examines the effect of ESG performance, measured by the ESG score, on the corporate financial performance of Saudi Arabian companies. To analyze the results, the study employed the pooled regression model [34,81]. Moreover, the pooled regression model applies OLS to panel data, and because OLS has limitations in addressing certain variables [82], the study also used quantile regression to assess the robustness of the results. The estimated pooled regression model is as follows:

$$RO{A}_{i,t}=\alpha +{\beta }_{1}ES{G}_{i,t}+{\beta }_{2}LE{V}_{i,t}+{\beta }_{3}SIZ{E}_{i,t}+{\epsilon }_{i,t}$$

(1)

$$RO{E}_{i,t}=\alpha +{\beta }_{1}ES{G}_{i,t}+{\beta }_{2}LE{V}_{i,t}+{\beta }_{3}SIZ{E}_{i,t}+{\epsilon }_{i,t}$$

(2)

$$Q_{i,t}=\alpha +{\beta }_{1}ES{G}_{i,t}+{\beta }_{2}LE{V}_{i,t}+{\beta }_{3}SIZ{E}_{i,t}+{\epsilon }_{i,t}$$

(3)

where $RO{A}_{i,t}$, $RO{E}_{i,t}$, and $Q_{i,t}$ are the variables measuring the corporate financial performance of firm i at time t; $ES{G}_{i,t}$ is the independent variable measuring the environmental sustainability of firm i at time t; $LE{V}_{i,t}$ and $SIZ{E}_{i,t}$ are the control variables.

3.6. Quantile Regression

The study uses quantile regression to evaluate the robustness of the results. This approach tackles unobserved individual and distributional heterogeneity [83,84]. Additionally, ref. [85] noted that quantile regression offers advantages over traditional models by analyzing the entire data distribution rather than just the conditional mean and median. A general quantile regression model is written as follows:

$$Y_i={x^{\prime }}_i{\beta }_{\theta }+{\epsilon }_{\theta i}$$

(4)

where i = 1… n sample companies, ${\beta }_{\theta }$ is a matrix of regression parameters related to the θth percentile, ${x^{\prime }}_i$ is the matrix of independent variables, $Y_i$ is the dependent variable, and ${\epsilon }_{\theta i}$ is the error term. Based on this, the study develops the following quantile regression model.

$$Q_{\tau }(CF{P}_{i,t})={\alpha }_{\tau }+{\beta }_{1\tau }ES{G}_{i,t}+{\beta }_{2\tau }LE{V}_{i,t}+{\beta }_{3\tau }SIZ{E}_{i,t}+{\epsilon }_{i,t}$$

(5)

where

$CF{P}_{i,t}$ = Corporate Financial Performance of firm i at time t

$ES{G}_{i,t}$ = Environmental Sustainability of firm i at time t

$LE{V}_{i,t}$ = Leverage of firm i at time t

$SIZ{E}_{i,t}$ = Firm Size of firm i at time t

4. Empirical Results

The present study examined the effect of ESG performance (measured by the ESG score, termed EP) on the corporate financial performance of Saudi Arabian companies using pooled and quantile regression approaches. The empirical results are presented as descriptive statistics, correlation analyses, and model estimation results.

4.1. Descriptive Statistics and Correlation Analysis

Table 3 presents descriptive statistics, including the mean, standard deviation (SD), minimum, and maximum, for the study variables.

Table 3. Descriptive Statistics.

Variable	Obs	Mean	SD	Min	Max
ROA	305	4.65	3.67	−0.53	17
ROE	305	13.36	17.29	−46.55	147
Tobin’s Q	305	1.79	0.96	0.24	6.26
ESG	305	44.20	8.81	20	69
LEV	305	2.23	1.64	1.01	13.33
Firm Size	305	3.67	0.73	2.19	5.74

Table 2 reports the descriptive statistics for all the study variables. CFP is measured by ROA, ROE, and Tobin’s Q, with mean values of 4.65, 13.36, and 1.79 and standard deviations of 3.67, 17.29, and 0.96, respectively. The financial measure ROE highlights significant variation among the Saudi Arabian companies in the sample. EP, measured by the ESG score, ranges from 20 to 69, with a mean of 44.20 and a standard deviation of 8.81. This indicates moderate variation around the mean, suggesting consistent growth in sustainable performance. Moreover, the distribution of control variables shows reasonable variation around the mean.

Table 4 reports the correlation diagnostics for the dependent, independent, and control variables. The correlation matrix shows no evidence of multicollinearity among the variables. Multicollinearity arises when the variables in the sample are strongly correlated.

Table 4. Correlation Analysis.

	ROA	ROE	Tobin’s Q	ESG	LEV	SIZE
ROA	1.0000
ROE	0.3220	1.0000
Tobin’s Q	0.1626	0.1913	1.0000
ESG	0.2857	0.0602	−0.0246	1.0000
LEV	−0.0278	0.0339	−0.0255	−0.0764	1.0000
SIZE	−0.1233	−0.0794	−0.1378	−0.0775	0.1507	1.0000

4.2. Regression Results

The current study examined the effects of EP on the CFP of Saudi Arabian companies using pooled regression and quantile regression. Table 5 presents the pooled regression results.

Table 5. Results of Pooled Regression.

DV: ROA		Constant (α)	Coefficient (β)	t-Value	p-Value
ESG			0.14	5.26	0.000
LEV			−0.03	−0.76	0.449
SIZE			−0.07	−2.76	0.006
CONS		−0.05		−0.16	0.870
N	305
Adjusted R2	0.13
F-statistic	16.34				0.000
DV: ROE
ESG			0.12	0.54	0.591
LEV			0.05	1.65	0.100
SIZE			−0.05	−2.07	0.039
CONS		0.62		2.12	0.034
N	305
Adjusted R2	0.02
F-statistic	3.12				0.008
DV: Tobin’s Q
ESG			−0.003	−0.30	0.763
LEV			−0.05	−3.01	0.003
SIZE			−0.03	−2.89	0.004
CONS		0.29		1.97	0.049
N	305
Adjusted R2	0.05
F-statistic	6.08				0.000

Model 1 findings show a positive and statistically significant association between EP and CFP, as measured by ROA. Specifically, EP has a coefficient of 0.14, significant at the 1% level, suggesting that higher EP is associated with improved profitability. Regarding the control variables, leverage exhibits a negative but statistically insignificant effect on ROA with a coefficient of −0.03, whereas firm size has a significant negative impact with a coefficient of −0.07, significant at the 1% level.

Model 2 examines the association between EP and ROE. The findings indicate a positive coefficient of 0.12 for EP, implying that improvements in EP may contribute to higher shareholder returns. However, the relationship is not statistically significant. Among the control variables, leverage is positively associated with ROE with a coefficient of 0.05 and is significant at the 10% level, while firm size demonstrates a negative and significant association with ROE with a coefficient of −0.05, significant at the 5% level.

Model 3, which uses Tobin’s Q as a market-based measure of CFP, shows a negative association between EP and CFP, with a coefficient of −0.003. Nevertheless, this relationship is not statistically significant, indicating that environmental performance does not appear to influence market valuation during the study period. Similar to Model 1, leverage has a negative but insignificant effect on Tobin’s Q with a coefficient of −0.05, while firm size is negatively related to CFP with a coefficient of −0.03, significant at the 1% level.

The results of the above-discussed models indicate that firms with stronger EP tend to achieve higher profitability in terms of asset utilization, exert a weak influence on shareholders’ returns, and have no influence on market-based firm value. Moreover, larger firms may face challenges, such as higher operational costs, inefficiencies, and complex management structures that hinder profitability and market performance. Similarly, moderate debt use might increase shareholders’ returns by improving the firm’s ability to generate profits through equity financing.

4.3. Quantile Regression Results

To assess the robustness of the pooled regression results, the study employed quantile regression. Table 6 reports the quantile regression results.

Table 6. Results of Quantile Regression.

Dependent Variable ROA	25% Coefficients	50% Coefficients	75% Coefficients
ESG	0.032 (0.335)	0.091 *** (0.000)	0.126 ** (0.040)
LEV	−0.349 ** (0.021)	−0.458 *** (0.000)	−0.487 * (0.080)
SIZE	−0.453 (0.293)	−1.586 *** (0.000)	−2.139 *** (0.007)
CONS	3.198 ** (0.025)	8.134 *** (0.000)	9.549 *** (0.000)
N	305	305	305
Pseudo R2	0.02	0.03	0.04
Dependent Variable ROE	25% Coefficients	50% Coefficients	75% Coefficients
ESG	0.033 (0.716)	0.090 * (0.071)	0.135 (0.353)
LEV	0.921 ** (0.027)	2.847 *** (0.000)	2.998 *** (0.000)
SIZE	−1.169 (0.321)	−2.942 *** (0.000)	−4.353 ** (0.021)
CONS	7.220 * (0.064)	13.322 *** (0.000)	18.977 *** (0.002)
N	305	305	305
Pseudo R2	0.01	0.04	0.05
Dependent Variable Tobin’s Q	25% Coefficients	50% Coefficients	75% Coefficients
ESG	0.001 (0.879)	0.011 *** (0.006)	0.017 (0.155)
LEV	−0.023 (0.280)	−0.062 *** (0.001)	−0.083 (0.120)
SIZE	−0.222 *** (0.000)	−0.298 *** (0.000)	−0.376 ** (0.014)
CONS	2.129 *** (0.001)	2.462 *** (0.000)	2.765 *** (0.000)
N	305	305	305
Pseudo R2	0.05	0.06	0.06

*** significant at the 1% percent level, ** significant at the 5% level, and * significant at the 10% level.

Table 6 presents the results of quantile regression analyzing the impact of environmental sustainability (measured by EP) on CFP (assessed using ROA, ROE, and Tobin’s Q). The regressions were run at the 25th, 50th, and 75th quantiles to provide a more detailed understanding of these relationships. The regression results show that the association between the EP variable and CFP (measured as ROA) is positive and significant at the 50th and 75th quantiles at the 1percent and 5 percent significance levels. However, this significant effect was not observed at the 25th quantile. The leverage is negative and significant at the 50th, 25th, and 75th quantiles at the 1, 5, and 10 percent significance levels. Similarly, firm size is negative and significant at the 50th and 75th quantiles at the 1 percent significance level, but insignificant at the 25th quantile.

The regression examining the relationship between EP and CFP (measured as ROE) shows a positive and significant effect at the 50th quantile at the 10 percent significance level. However, this effect was not significant at the 25th and 75th quantiles. The leverage is positive and significant at the 25th, 50th, and 75th quantiles at the 5 and 1 percent significance levels. Moreover, firm size is negative and significant at the 50th and 75th quantiles at the 1 percent significance level, but insignificant at the 25th quantile.

Similar results were reported for quantile regression examining the relationship between EP and CFP (measured as Tobin’s Q), with a significant effect at the 50th quantile at the 1 percent significance level. However, this effect was not significant at the 25th or 75th quantiles. The leverage is negative and significant at the 50th quantile at the 1 percent significance level, but insignificant at the 25th and 75th quantiles. Further, the firm size is negative and significant at the 25th, 50th, and 75th quantiles at the 1 percent significance level.

5. Discussion of Results

The current study examined the impact of ESG performance (measured by EP) on CFP (measured by proxies ROA, ROE, and Tobin’s Q). In this regard, the study estimated pooled and quantile regressions to report the results. Firstly, Model 1 in the pooled regression shows a positive impact of EP on CFP, proxied by ROA, while the impacts on other proxies, such as ROE and Tobin’s Q, are positive and negative, respectively, and neither is significant in Models 2 and 3. Moreover, the results of quantile regression show that ESG is positively associated with CFP at the 50th and 75th percentiles, proxied by ROA, and at the 50th percentile, proxied by ROE and Tobin’s Q. The results of pooled and quantile regressions show that the ESG initiatives improve firms’ operational efficiency and resource utilization to a maximum extent that can be seen capturing by the ROA, compared to the improvement in shareholders’ net worth and market valuation measured by the ROE and Tobin’s Q. A positive relationship of ESG with ROA shows that ESG investments often generate benefits, such as asset utilization, stakeholder relations, risk management that are initially reflected in accounting-based measures, such as ROA. This explanation is supported by the past studies of Alareeni and Hamdan [86]. The positive effect of EP on ROA is supported by other studies, such as Farza et al. [35], who reported a positive effect of environmental innovation on CFP; Ivascu et al. [16] reported a positive impact of EP on lagged ROA; and Abukari et al. [18] reported a positive impact of lagged EP on ROA. Further, other past studies that reported a positive impact include Pham et al. [50], Gupta and Gupta [51], Kaffash et al. [56], Pahuja et al. [62], and Coelho et al. [40].

Moreover, a positive yet insignificant effect of EP on ROE suggests a muted impact. This may be because ROE measures profit relative to stockholders’ equity and is strongly influenced by capital structure, leverage, and financial decisions. The dilution of ROE may relate to the high upfront costs of ESG investments, changes in equity financing and retained earnings, and the long-term rather than short-term accrual of ESG implementation benefits, as reported by Rabiu et al. [87]. Alareeni and Hamdan [86] reported mixed relationships between ESG and ROE, suggesting that ESG’s impact on stockholders’ profitability is less consistent than its impact on operational performance. Similarly, Firmansyah et al. [73] suggest that ESG and its components do not increase the CFP of Saudi Arabian firms; rather, they decrease it or have an insignificant effect. Shobhwani and Lodha [88] reported an insignificant positive impact of ESG scores on ROE. Similarly, Gregory [89] reported an insignificant effect of ESG on ROE in S&P 500 financial and non-financial firms. Moreover, Buallay [34] found no significant relationship between ESG and CFP, as measured by ROE. The insignificant relationship between ESG and ROE may be because ESG investments generally generate long-term benefits, whereas ROE reflects current profitability. Investing in ESG may reduce short-term earnings and yield benefits only after several years. Another reason is that profits are shared among different stakeholders, such as employees, customers, suppliers, government, communities, etc., so the increase in profits attributable specifically to shareholders may be limited, weakening the ROE effect. Moreover, measurement inconsistencies in agencies’ ESG ratings might also weaken the association between ESG and ROE.

The insignificant association between EP and Tobin’s Q might arise because the latter is a market-based measure that reflects investors’ expectations of future firm value rather than current operational performance. ESG initiatives, such as sustainability investments, employee programs, and governance reforms, may not be immediately reflected in market value (Al-Tarawneh et al. [90]). Moreover, Tobin’s Q reflects growth opportunities, innovation, macroeconomic conditions, investor sentiment, and other factors; therefore, ESG’s incremental explanatory power may be too limited to achieve statistical significance after controlling for these factors. Further, investors mostly recognize that ESG scores may reflect disclosure quality rather than actual sustainability performance. Concerns about low ESG scores can weaken the credibility of ESG information and reduce its impact on market valuation (Sahin et al. [91]). Furthermore, inconsistencies in ESG ratings across providers may weaken the relationship between ESG and Tobin’s Q.

Other studies have reported a negative association between EP and CFP, including Jyoti and Khanna [64]. Moreover, the past studies by Ching et al. [37], Jha and Rangarajan [65], Azizah and Haron [70], and Basali [72] reported no association between EP and CFP.

The quantile regression results suggest that the effect of ESG on ROA is heterogeneous across the conditional distribution of firm profitability (Veeravel et al. [92]). The insignificant effect of EP on ROA at the 25th quantile suggests that ESG activities do not materially affect firms at low profitability levels. However, this effect becomes significant at the 50th and 75th quantiles, suggesting that ESG contributes more strongly to profitability among firms in the median and high-performing categories (Liu et al. [93]). Moreover, the significant effect of ESG on ROE and Tobin’s Q only at the 50th quantile is interesting, as it suggests a threshold effect of EP on CFP. The results suggest that EP’s impact is not homogeneous across firms and is strongest among moderately performing firms. For low-performing firms, profitability and market valuation may be driven primarily by financial constraints and operational challenges, limiting the effectiveness of ESG initiatives. Conversely, among highly performing firms, the benefits of ESG may already be incorporated into firm value, hence resulting in diminishing marginal returns and a ceiling effect. Veeravel et al. [92], Liu et al. [93], and Kang and Liu [94] support the EP effect on ROE and Tobin’s Q.

The control variables, such as firm size and leverage, reveal interesting findings across performance measures. Leverage shows a positive and significant relationship with ROE, implying that debt financing enhances shareholder returns through the leverage effect, whereas it does not significantly influence ROA or Tobin’s Q, suggesting that the costs and benefits of debt financing may offset one another (Ibhagui and Olokoyo [95]). Trade-off theory argues that firms balance the tax benefits of debt against bankruptcy and agency costs. However, firm size shows a negative and significant relationship with both ROA and Tobin’s Q, suggesting that larger firms may suffer from diseconomies of scale, bureaucratic inefficiencies, and reduced growth opportunities. The quantile regression results for the control variables suggest that leverage and firm size affect performance differently across the performance distribution. Leverage consistently reduces operating profitability (ROA) rather than increases shareholder returns (ROE), indicating a classic leverage effect, while the market penalizes leverage only among median firms (Tobin’s Q), suggesting heterogeneous investor reactions. Firm size generally reduces profitability and market valuation, especially among medium and high-performing firms, supporting the diseconomies of scale. The reported results support previous studies by Hussain et al. [29], Veeravel et al. [92], and Hamdouni [96].

The results suggest that Saudi Arabian firms are at an introductory stage in adopting and implementing ESG activities and are not ready to invest more because they believe such investments could lead to short-run losses. Another suggestion is that the insignificant effects of ESG stem from Saudi firms’ limited familiarity with ESG activities or ineffective implementation strategies (Firmansyah et al. [73]). The Saudi Stock Exchange issued ESG guidelines for Saudi Arabian firms in 2021 (Institutional Investor [97]). Therefore, under this regulation, Saudi Arabian firms shall consistently adopt and implement ESG disclosures and become familiar with them, which may ultimately enhance their CFP. Therefore, the findings of the present study support the hypothesis (H1) that there is a positive relationship between ESG performance (EP) and corporate financial performance (CFP); however, this relationship is negative for some measures. Further, the study supports the hypothesis (H2) that the relationship between ESG performance (EP) and corporate financial performance (CFP) is heterogeneous across the conditional distribution of financial performance, such that the effect of EP is not uniform for low-, medium-, and high-performing firms.

6. Conclusions

Environmental, Social and Governance (ESG) performance has become a significant aspect of corporate strategy, reflecting a firm’s commitment to sustainable and responsible business practices. Similarly, corporate financial performance remains a key indicator of organizational success, influencing investor confidence, competitiveness, and long-term value creation. Therefore, understanding the association between EP and CFP is essential for examining whether ESG initiatives contribute to firm profitability and market valuation. In this regard, the current study examined the impact of EP on CFP in the Saudi Arabian industrial sector using accounting- and market-based measures, such as ROA, ROE, and Tobin’s Q. The data were collected from 89 non-financial companies over five years, from 2020 to 2024. The study employed pooled and quantile regression models to estimate the effect of EP, measured by the ESG score, on CFP. The pooled regression results indicate that EP has a positive and significant impact on ROA, while its effects on ROE and Tobin’s Q are positive and negative, respectively, but are not statistically significant. The pooled regression findings suggest that ESG initiatives primarily increase firms’ operational performance and asset utilization rather than immediately improving shareholder returns and market valuation. Moreover, the quantile regression results show that the impact of EP varies across performance levels, indicating heterogeneous effects among firms. ESG significantly improves ROA among median and high-performing firms, while its influence on ROE and Tobin’s Q is significant only among median firms. These results indicate that ESG benefits are stronger for firms with stable operational performance and may be less effective for low-performing firms facing financial or operational constraints. Further, the insignificant effects on ROE and Tobin’s Q suggest that ESG investments generate benefits that materialize gradually and may not be immediately reflected in shareholder profitability and market valuations. The results for control variables suggest that firm size negatively affects profitability and market valuation, whereas leverage positively affects shareholder returns. The leverage results suggest heterogeneous investor reactions, while the firm-size results indicate diseconomies of scale, bureaucratic inefficiencies, and reduced growth opportunities. Overall, the results suggest that ESG adoption among Saudi Arabian firms is in its early stages, with firms still developing familiarity with and effective implementation of ESG practices. As ESG disclosure requirements were introduced only recently, stronger and more consistent adoption may enhance financial performance over time.

The study provides managerial and regulatory implications based on the results achieved. The managerial implications include integrating ESG into core business strategy rather than treating it as a compliance activity; strengthening ESG implementation mechanisms in Saudi firms; improving ESG disclosure quality and transparency to enhance stakeholder trust; and framing ESG strategies according to firm performance levels, such as low-, medium-, and high-performing firms. Moreover, the regulatory implications include strengthening ESG reporting standards and disclosure requirements to improve consistency, encouraging ESG adoption through incentives such as tax benefits and financial support, and standardizing the ESG rating framework to reduce assessment inconsistencies.

Future research could examine the separate effects of the Environmental, Social, and Governance dimensions on financial performance; conduct cross-country comparisons; adopt additional financial performance measures, such as stock returns, EPS, and EVA; and explore lagged ESG effects to better understand its impact.