Impact of ESG Factors on Profitability: An Empirical Analysis of JSE-Listed Firms in South Africa

The study examines the relationship between environmental, social, and governance (ESG) activity and firm shareholder wealth. This research is necessary because of increasing global pressure on companies to align with ESG standards while maintaining profitability, particularly in emerging markets such as South Africa, where ESG adoption is still evolving. We investigate whether ESG performance contributes to shareholder value creation and whether a firm’s investment in ESG might reduce shareholder returns in the short run. Despite a growing body of research on ESG performance, there remains a lack of consensus on its impact in emerging economies. Most of the literature is concentrated on developed markets, leaving a gap in understanding how ESG performance affects firms in South Africa's unique socioeconomic context. Our sample includes a panel of 74 Johannesburg Stock Exchange (JSE)-listed firms in South Africa over the period 2010–2022. We estimate panel regressions for disaggregated data via different industry groupings. The disaggregated data analysis shows mixed results concerning the impact of ESG factors on returns on equity and share returns. For example, financial institutions were found to have a negative relationship between ESG performance and return on equity, whereas other non-financial companies have a positive relationship between ESG performance and return on equity. Different ESG factors influence returns on equity and share returns differently. This study contributes to the literature by offering fresh empirical evidence from South Africa and uncovering the nuanced industry-specific effects of ESG activities, thus providing valuable insights for policymakers, investors, and corporate decision-makers