THE LINK BETWEEN ESG, FIRM’S FINANCIAL AND MARKET PERFORMANCE IN MALAYSIA: THE MODERATING ROLE OF FIRM SIZE, INDEX RECOGNITION, AND SHARIAH COMPLIANCE

Abstract

This study investigates the relationship between Environmental, Social, and Governance (ESG) performance and firm performance among 338 firms (747 firm-year observations) listed on Bursa Malaysia from 2018 to 2023. Using a fixed-effects panel regression approach, the analysis evaluates the direct impact of ESG performance on financial performance, measured by return on equity (ROE), and market performance, measured by Tobin’s Q (TQ). The results show that ESG performance alone does not significantly enhance firm outcomes, with ESG scores displaying a significant negative association with market valuation, suggesting that the high costs and complexities of implementing ESG initiatives may outweigh short-term benefits in investor assessments. Firm-specific characteristics are found to moderate the ESG - performance relationship. Larger firms show weaker market outcomes when ESG engagement is high, reflecting delayed returns and greater implementation challenges. In contrast, external validation through inclusion in the FTSE4Good Bursa Malaysia Index (F4GBM) positively moderates the ESG-TQ relationship, underscoring the importance of recognition by sustainability indices in strengthening market confidence whereas Shariah compliance does not exhibit significant moderating effects. The findings highlight the multifaceted and context-dependent nature of ESG outcomes in Malaysia, offering valuable implications for firms, investors, and regulators seeking to align sustainability with financial and market success.