Nardin Farouk

Cross-industry and cross-country evidence from the ESG–firm value literature indicates no consensus on the ESG performance impact on corporate financial performance. Stemming from the ongoing debate over whether ESG principles enhance or hinder value creation, this study investigates the effect of Environmental, Social, and Governance (ESG) performance on firm value through three proxies: Tobin’s Q (TQ), Price to Book ratio (PB), and Price to Earnings ratio (PE). Using a cross-country and cross-sectoral comparative approach, the study employs static and dynamic panel regression analyses, along with principal component analysis, to test the hypothesized relationships across nine MENA region countries and ten sectors between 2017 and 2022. To the best of the authors’ knowledge, this is the first study to examine ESG’s impact on TQ, PB, and PE while offering a comparative analysis in the MENA region. Empirical results reveal a significantly positive relationship between ESG scores and firm value using TQ and PB ratios, but this relationship is insignificant with the PE ratio. This study contributes to the ESG and financial decision-making literature, providing insights for investors on portfolio optimization and sustainable investing. The findings offer recommendations that further benefit businesses, policymakers, and decision-makers in enhancing their understanding of ESG implications.

Cross-industry and cross-country evidence from the ESG-firm value literature indicates no consensus on the ESG performance impact on corporate financial performance. Stemming from the ongoing debate over whether ESG principles enhance or hinder value creation, this study investigates the effect of Environmental, Social, and Governance (ESG) performance on firm value through three proxies: Tobin's Q (TQ), Price to Book ratio (PB), and Price to Earnings ratio (PE). Using a cross-country and cross-sectoral comparative approach, the study employs principal component analysis and fixed and random effects panel regression techniques to test the hypothesized relationships across nine MENA region countries and ten sectors from 2017 to 2022. To the best of the authors’ knowledge, this is the first study to examine ESG’s impact on TQ, PB, and PE while offering a comparative analysis in the MENA region. Empirical results reveal a significantly positive relationship between ESG scores and firm value using TQ and PB ratios, but this relationship is insignificant with the PE ratio. This study contributes to the ESG and financial decision-making literature, providing insights for investors on portfolio optimization and sustainable investing. The findings offer recommendations that further benefit businesses, policymakers, and decision-makers in enhancing their understanding of ESG implications.

The main aim of this paper is to investigate the impact of Environmental, Social and Governance (ESG) rating on firm value through the three valuation channels of dividends, free cash flow to firm and cost of equity in the context of Egyptian firms listed on S&P/EGX ESG index. The study conducts static and dynamic regression analyses for the three firm value determinants models to test for the hypothesised relationships in all the examined firms from 2010 till 2022. Empirical results from the statistical analyses highlight that there is a significant positive relationship between ESG rating and dividend payout. In addition, ESG rating has a significant negative impact on free cash flow to firm and cost of equity. Findings offer valuable guidance to practitioners and regulatory bodies in emerging economies, particularly in Egypt, by providing empirical evidence on the potential advantages of firm alignment to ESG practices with increased firm value. Such insights can pave the way for enhanced ESG adoption and sustainability practices, ultimately contributing to the overall improvement of businesses and the environment. The study is the first in the context of Egypt and the Middle East and North Africa region to test for the impact of ESG on the collective three valuation channels of dividends, free cash flow to firm and cost of equity, while providing a comparative analysis between the three firm value determinants in the same context.