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

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.