Citation:

Foza Hadyu Hasanatina, Astiwi Indriani, Shoimatul Fitria. "ESG Performance and Corporate Profitability: Investigating a U-Shaped Relationship" International Research Journal of Economics and Management Studies, Vol. 5, No. 5, pp. 166-172, 2026. Crossref. http://doi.org/10.56472/25835238/IRJEMS-V5I5P119

Abstract:

This study examines the effect of Environmental, Social, and Governance (ESG) performance on firm profitability measured by Return on Assets (ROA) using panel data analysis. The research employs panel data from 33 manufacturing companies companies observed over a six-year period (2017-2022), resulting in 198 observations. The analysis incorporates a non-linear specification by including the squared ESG variable (ESG²) to examine the potential curvilinear relationship between ESG and profitability. The regression results reveal that ESG has a negative and statistically significant coefficient, while ESG² has a positive and statistically significant coefficient. These findings confirm the existence of a U-shaped relationship between ESG and ROA. The results suggest that ESG implementation may initially reduce profitability due to adjustment and implementation costs; however, after reaching a certain threshold, ESG performance contributes positively to firm profitability. Overall, the study highlights that ESG should be viewed as a long-term strategic investment capable of enhancing sustainable financial performance once firms achieve an optimal level of ESG implementation.

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Keywords:

ESG, Firm Profitability, Return on Assets, Sustainable Finance, U-shaped Relationship.