Bridging sustainability and profitability: The moderating role of financial distress

Abstract

This study examines the relationship between environmental, social, and governance (ESG) performance and firm financial performance, with a particular focus on the moderating role of financial distress in an emerging market context. Using panel data of VN30 firms from 2018 to 2024, we employ multiple estimation techniques, including fixed effects and system GMM, to address potential endogeneity concerns. The results show that ESG performance does not significantly affect accounting-based performance (ROA), but has a positive and significant impact on market-based performance (Tobin’s Q). Importantly, financial distress significantly weakens the positive effect of ESG on both ROA and Tobin’s Q, suggesting that firms under financial pressure are less able to realize the benefits of ESG. These findings highlight the contingent nature of the ESG-performance relationship and underscore the importance of financial health in enabling firms to translate sustainability initiatives into economic value. This study contributes to the literature by providing new evidence from an emerging market and offering practical implications for managers, investors, and policymakers regarding strategic ESG implementation.