The role of environmental, social and governance practices and green innovation in enhancing firm financial performance

Abstract This study investigates the strategic importance of environmental, social, and governance (ESG) practices for enhancing firm financial performance (FFP) in developing economies, where sustainability efforts are often underprioritized. Amid the global push toward sustainability, emerging markets still lag in integrating ESG into corporate strategy due to weak enforcement, limited awareness, and short-term financial orientations. This study is therefore necessary to clarify whether and how ESG practices can yield financial benefits in such contexts, providing evidence-based insights for firms and policymakers seeking sustainable competitiveness. Motivated by the growing need to align corporate strategy with sustainability goals, this research examines how ESG practices influence financial outcomes directly, and indirectly through green innovation (GI). Grounded in the natural resource-based view (NRBV) theory, we address a specific gap by clarifying the mixed evidence on ESG’s financial effects in emerging markets and testing the mediating role of GI using firm-level data in emerging market context. We collected data using a structured questionnaire from respondents at non-financial firms listed on the Pakistan Stock Exchange (PSX). Using partial least squares structural equation modeling (PLS-SEM), the results demonstrate that all three ESG dimensions significantly and positively influence return on assets (ROA); however, the ESG dimensions have a significant negative effect on return on equity (ROE). Moreover, GI mediates the relationship between ESG and FFP. The findings highlight that ESG, often overlooked in emerging economies, can be strategically leveraged through GI to achieve better financial outcomes. The study provides practical implications for policymakers and business leaders aiming to enhance firm performance.