ESG performance and human capital complementarity evidence from Asian listed firms

Abstract

This study examines the effect of environmental, social, and governance (ESG) performance on firm performance and the moderating role of human capital in this relationship. The analysis is grounded in Signaling Theory, the Resource-Based View, and Complementary Assets Theory, which together suggest that ESG creates financial value only when a firm has the workforce capability needed to implement its ESG commitments. ESG performance is measured by the Refinitiv ESG combined score, human capital by per-employee compensation (staff costs divided by the number of employees), and firm performance by return on assets (ROA) as the main measure and Tobin's Q as a robustness measure. The sample comprises 3,180 Asian listed firms and 10,709 firm-year observations across 20 economies over the period 2021 to 2024, estimated using two-way (industry and year) fixed-effects panel regressions with standard errors clustered at the firm level. The results show that ESG performance is positively and significantly associated with both ROA and Tobin's Q, supporting the view that ESG signals firm quality and reduces information asymmetry. Human capital, measured by per-employee compensation, is likewise positively and significantly associated with both performance measures, consistent with Human Capital Theory. For the moderating role of human capital, which is the core hypothesis, the interaction between ESG and human capital is not statistically significant for ROA but is positive and significant for Tobin's Q. This horizon-dependent pattern indicates that equity markets price the ESG–human capital complementarity before it appears in accounting profitability. In the pillar decomposition, the interaction is significant for Tobin's Q across all three pillars, with the Social pillar showing the largest effect. In the sub-sample analysis by market development, the complementarity is concentrated in emerging markets and does not appear in developed markets. This is consistent with an institutional interpretation in which ESG disclosure in developed markets has become a regulated minimum standard, compressing cross-firm variation. The findings remain robust across several alternative measures of human capital. Overall, the study indicates that ESG is not a uniform value creator across firms, but a capability-contingent resource whose value depends on internal firm capability, particularly the human capital needed to implement ESG in practice. The findings have practical implications for managers, investors, and policymakers. For managers, increasing ESG investment alone may not be sufficient; firms should also develop workforce quality to realise the complementarity. For investors, ESG scores should be read conditionally, taking human capital quality into account, because a firm with a high ESG score but low per-employee compensation may not convert that score into returns. For policymakers in emerging Asian markets, ESG disclosure requirements may be more effective when paired with policies that support human capital development.