Nexus of Green Finance, ESG Ratings, and Financial Performance: Evidence from G20 Economies

Abstract

Purpose— Prior evidence on green finance and ESG ratings is mixed because studies normally test the two constructs in isolation, in single-country settings, and without addressing dynamic endogeneity. Grounded in Stakeholder Theory, the Resource-Based View (RBV), and Legitimacy Theory, this study jointly examined the direct and interactive effects of green finance engagement and ESG ratings on firm financial performance across the institutionally diverse G20 economies, where regulatory regimes, capital-market development, and ESG disclosure maturity vary widely. Study Design/methodology/approach—Using firm-level data from Refinitiv Eikon and Refinitiv ESG databases for an unbalanced panel of 489 firms across G20 economies over 2010-2022, System GMM was used to address endogeneity, dynamic panel bias, and firm-specific heterogeneity. Financial performance was measured through two proxies: Return on Assets (ROA) and Tobin's Q. Findings—Both green finance engagement (b = 0.028, p < .001 for ROA; b = 0.094, p < .01 for Tobin's Q) and ESG ratings (b = 0.019, p < .001 for ROA; b = 0.061, p < .001 for Tobin's Q) were positively and significantly associated with financial performance. The environmental pillar was the strongest single ESG driver (b = 0.024, p < .001), and the green finance × ESG interaction was the strongest joint effect, significant for Tobin's Q (b = 0.038, p < .01) but only marginal for ROA (b = 0.011, p < .10). Findings were robust to pooled OLS, fixed-effects, sub-period, and ESG pillar robustness checks. Practical Implications— The G20 evidence suggests that ESG performance and green finance contribute to financial value despite institutional differences across countries. These findings highlight the importance of integrating both dimensions into corporate sustainability strategies. Firms should pursue green finance and ESG performance jointly, while policymakers strengthen green finance frameworks and ESG disclosure standards, and investors incorporate both into investment assessments. Originality/Value— Whereas most prior studies test green finance or ESG performance separately, in single-country samples, and without formally addressing dynamic endogeneity, this study makes three specific contributions: it jointly tests green finance and ESG ratings as interacting predictors; it applies System GMM across a 489-firm, 13-year G20 panel to address reverse causality and persistence; and it decomposes ESG into environmental, social, and governance pillars to identify environmental performance as the dominant driver.