Does ESG performance affect financial performance? Evidence from Japan

Japanese firms have been known for being stakeholder-oriented, but it seems like they are lagging behind in terms of ESG performance, namely environmental, social and governance issues. To clarify and enhance the understanding of this phenomenon, this study examines the relationship between financial and ESG performance in Japan. The sample considers all firms listed in the Nikkei 225 from 2019 to 2024 and information was collected from Bloomberg database. The results show a weak negative impact of ESG score on accounting measures. Analysing the individual pillars, an overall negative association was found for environmental and social scores, although not always significant, while significant and positive for governance. As for market measures, they seem to have no correlation with ESG performance. Further analyses considering the most and least polluting firms exhibit the same trend, indicating that compliance costs might offset ESG benefits in profitability. Meanwhile, the market is not affected by ESG performance, perhaps unable to recognise when ESG initiatives are creating value. For this reason, the government should develop a comprehensive law for ESG regulation to reduce compliance burden, while Japanese firms should find a reliable way to communicate their sustainability commitment to the market. This study contributes to ESG literature, enhancing the comprehension of its relationship with firms’ performance in a unique context like Japan.