Do ESG factors matter? An analysis of abnormal stock returns in ASEAN-5 countries

Environmental, Social, and Governance (ESG) factors have played a significant role in the recent development of financial instruments. Financial market players are increasingly demanding ESG transparency in their evaluation of a company's performance. In recent years, ESG reporting has gained substantial traction across the ASEAN-5 countries—Indonesia, Malaysia, Singapore, Thailand, and the Philippines. Singapore leads the region with mandatory ESG disclosures for all listed firms and substantial compliance. Malaysia, in particular, has seen an impressive 88% increase in sustainability reporting from 2019 to 2021, a testament to the country's growing sustainability efforts and the effectiveness of its enhanced regulatory frameworks. Thailand mandates ESG reporting through its stock exchange and has introduced a centralized ESG Data Platform. Indonesia has recorded a remarkable 150% rise in sustainability reporting in the last five years, driven by regulatory requirements. The Philippines also enforces ESG disclosures under a comply-or-explain model, with over 300 companies integrating sustainability into their operations. These trends underscore the growing role of ESG transparency in corporate performance evaluation within emerging ASEAN markets. This phenomenon raises the crucial question of whether ESG impacts a company's performance.

Numerous scholars have studied this area, such as Alghafes et al. (2024), Aloui et al. (2025), Danila (2022, 2023), Gupta and Chaudhary (2023), Liu et al. (2024), Nareswari et al. (2023), Rosley et al. (2023), Tekin and Güçlü (2023), Yousaf et al. (2024). The studies emphasize various perspectives, yielding diverse results, particularly regarding the influence on abnormal returns of the company's stock. The findings are categorized into positive, negative, or ambiguous effects. However, investigating the link between ESG performance and abnormal returns remains unexplored, particularly in emerging economies like the ASEAN-5 countries, which could yield different results than developed countries. This paper fills this gap in the existing studies.

This research examines the link between ESG ratings and a company's abnormal return, a topic with significant potential impact. It uses the size of the company (revenue), profit margin, D/E ratio, return on equity (ROE), and dividend yield as control variables in the ASEAN-5 countries of Indonesia, Malaysia, Singapore, Thailand, and the Philippines. In this study, we aim to uncover if there might be any complex variations in how ESG ratings could influence a company's performance within different contexts, underscoring the relevance of this research to the field of finance and sustainability.

The study is essential for several reasons. ESG plays a crucial role in a company's performance, ensuring resilience and a better position for long-term growth. Varying levels of ESG maturity characterize ASEAN-5 economies. Recognizing the link between ESG and abnormal returns offers insight into the financial advantages of ESG-focused investment in these markets. A robust ESG performance will draw capital, elevate valuation, and strengthen stakeholder trust, impacting long-term profitability. Moreover, considering the ASEAN-5 nations' dedication to the UN Sustainable Development Goals, a favorable relationship between ESG criteria and corporate performance will incentivize additional enterprises to embrace sustainable practices, thereby promoting national and regional sustainability initiatives. Thus, organizations exhibiting inadequate ESG policies may encounter risks such as regulatory sanctions, reputational harm, and operational interruptions over time.

The research contributes to existing theories, such as signaling theory, which posits that high ESG ratings signal superior corporate governance and risk management, potentially leading to positive abnormal returns. However, our findings indicate that ESG scores do not result in abnormal returns for ASEAN-5 countries when analyzed through cross-sectional abnormal returns. Factors such as ESG awareness, market behavior, regulatory influences, sectoral dominance, and investment horizons may explain the lack of significant impact of ESG scores on firm performance. Additionally, investors in these regions might prioritize short-term gains over long-term sustainability. Understanding these associations could assist firms in developing strategies that align their ESG initiatives with investor expectations, ultimately improving their market performance.

The remainder of the paper is structured as follows: Section 2 describes the literature review. Section 3 presents the study's data and methodology. Section 4 elaborates on the discussion and recommendations based on the data analysis. Section 5 contains the conclusion, which emphasizes the relevance of our findings.

The relationship between ESG performance and corporate financial outcomes has attracted considerable academic attention in recent years. Numerous studies have explored how ESG influences firms' valuation, risk, and return characteristics, especially in terms of abnormal returns. Yet, the empirical findings remain mixed—ranging from positive to negative or ambiguous effects—depending on the sample, market structure, and methodological approach.

To explain these inconsistencies, this study adopts the signalling theory as its theoretical foundation. Signalling theory provides a coherent framework to interpret ESG disclosure and performance as a communicative mechanism through which firms convey unobservable qualities such as credibility, stability, and managerial efficiency to investors in markets characterized by information asymmetry.

According to Spence (1973), signalling theory describes how one party (the signal sender) conveys credible information to another party (the signal receiver) to reduce information asymmetry. In financial markets, firms send various signals—such as dividends, leverage, or CSR activities—to communicate their quality and trustworthiness to investors. ESG performance and disclosure can therefore be conceptualized as market signals that inform investors about a firm's long-term orientation, ethical behavior, and governance quality. A credible ESG signal enhances transparency, builds investor confidence, and potentially reduces the perceived risk of the firm. Conversely, weak or inconsistent ESG signals—often linked to greenwashing or fragmented reporting—can be dismissed as noise, leading to weak or even negative financial responses.

A significant stream of empirical research supports the proposition that strong ESG performance positively affects firm value and abnormal returns by conveying credible and value-enhancing signals. For example, Liu et al. (2024) demonstrated that ESG performance in China strengthens corporate resilience to extreme weather events, producing differentiated short-run market reactions and improved long-term profitability. Similarly, Williams and Apollonio (2024) found that firms with comprehensive Bloomberg ESG ratings—as opposed to incomplete ones—achieved higher abnormal returns, even though the correlation is not directly. Companies with comprehensive ESG ratings may be viewed as more transparent and disclosed by investors, leading to increased short-term stock performance and better long-term profitability potential. As a result, strong ESG practices can enhance a firm's market position and financial outcomes.

During crisis periods, credible ESG signals appear particularly valuable. Albuquerque et al. (2020), Wang et al. (2025) reported that firms with strong ESG profiles experienced lower stock return volatility and higher operating margins during the COVID-19 pandemic. These firms benefited from customer loyalty and investor segmentation, both consistent with signalling theory: strong ESG practices reduce uncertainty and attract stakeholders who value reliability and ethics. Luo and Bhattacharya (2009) also suggested that high ESG engagement builds customer loyalty and reduces price elasticity, which in turn enhances profit margins. As a result, the company experiences reduced operating leverage and systematic risk, leading to decreased stock price volatility. Furthermore, Heinkel et al. (2001), Renneboog et al. (2011) found that socially responsible investors are more loyal and less sensitive to short-term performance fluctuations, providing stability to ESG-compliant firms' capital bases.

Evidence from European markets reinforces these findings. Engelhardt et al. (2021) observed that ESG-adopted firms achieved higher abnormal returns and lower volatility during COVID-19, with the social component as the key driver. In addition, the value of ESG-adopted firms is more pronounced in the low-trust countries with low regulation enforcement and standards disclosure. Likewise, Xu et al. (2023) reported that in China, the environmental dimension of ESG was the dominant contributor to positive stock performance, particularly in regions with weaker law enforcement. These results emphasize that credible ESG practices substitute for institutional deficiencies, reinforcing trust and investor confidence—core mechanisms of signalling theory.

Collectively, these studies confirm that when ESG acts as a credible signal, it enhances a firm's valuation by reducing information asymmetry, attracting stable investors, and improving operational resilience.

Contradictory evidence also exists, suggesting that ESG does not always generate positive abnormal returns and may even yield negative or neutral outcomes. In low- and medium-income countries, such as India, there is a significant negative impact of ESG regulations on the abnormal returns of firms (Kumari and Pandey, 2025; Pandey et al., 2024a, b). Furthermore, Wu et al. (2024) reported that in China, firms with low ESG scores outperformed high-scored firms in terms of abnormal returns, indicating that excessive ESG investment may entail opportunity costs or resource misallocation. Chai et al. (2025) similarly argued that when ESG is pursued as a long-term strategic or moral goal rather than a financial one, its immediate return impact may be negative.

Studies in developed markets offer parallel conclusions. Landi and Sciarelli (2019), Vyletelka (2024) found no significant relationship between ESG scores and abnormal returns in Italy and Europe, implying that ESG does not consistently act as a priced market signal. Nevertheless, high ESG-ratings stocks perform better in the emerging market, and low ESG-score portfolios may outperform (Macdonald and van Vuuren, 2024). Do and Kim (2020) further noted that in the Korean market, ESG ratings showed a positive short-term but negative long-term impact—suggesting temporary investor sentiment effects and eventual return correction as the signal's novelty dissipates.

In the US, Blomqvist and Stradi (2024) reported that political ideology moderates the ESG–return relationship: Democratic investors—who strongly favor ESG—exhibit negative abnormal returns due to willingness to sacrifice returns for ethical alignment, while Republican investors show no correlation. At last, Halbritter and Dorfleitner (2015) also emphasized that inconsistencies in ESG–return relationships may arise from differences in rating providers, sample composition, or temporal factors, which influence how investors interpret ESG signals.

These findings indicate that ESG signals can sometimes be noisy or costly, particularly when the market perceives them as symbolic or inefficient, or when investors' ideological and contextual biases distort signal interpretation.

While ESG–performance dynamics are well-documented in developed economies such as the United States, Europe, and China, the evidence from emerging markets remains limited. Emerging economies, particularly the ASEAN-5 countries, represent unique contexts where ESG disclosure frameworks, regulatory enforcement, and investor sophistication are still evolving.

From a signaling theory perspective, emerging markets provide a fertile ground for testing ESG as an evolving signal. On one hand, credible ESG disclosure in less transparent markets can serve as a differentiating signal that enhances investor trust and reduces perceived risk. On the other hand, inconsistencies in disclosure standards, low awareness, and weak enforcement can lead to ambiguous or delayed market responses to ESG signals.

Thus, examining the ESG–abnormal return relationship in ASEAN-5 markets provides new insights into how signaling mechanisms function under conditions of institutional transition and partial market efficiency. Understanding these dynamics is vital for policymakers, investors, and firms aiming to enhance the credibility and economic relevance of ESG practices in emerging economies.

Based on the theoretical reasoning and empirical evidence discussed above, the following hypotheses are proposed:

In summary, the application of signaling theory provides a unifying perspective to interpret the diverse findings on ESG and abnormal returns. When ESG acts as a credible signal—backed by transparent disclosure and investor confidence—it enhances firm value and resilience. However, when ESG information lacks credibility, is misinterpreted, or is implemented in inconsistent institutional environments, its financial benefits may not materialize or may even reverse.

This theoretical foundation thus motivates the present study's investigation into whether ESG scores can credibly signal firm value and generate abnormal returns in the ASEAN-5 context, where ESG disclosure and investor responsiveness are still maturing.

The study uses size (revenue), profit margin, D/E ratio, ROE and dividend yield as control variables for the listed companies in the Indonesian, Malaysian, Singaporean, Thai, and Philippine markets in 2023. The selection of the ASEAN-5 countries for our study is based on their varied levels of ESG development within their economies, as well as their notable dedication to the UN Sustainable Development Goals. Moreover, we selected the financial metrics as control variables since the metrics have a direct and measurable impact on a firm's valuation and stock returns, making them more suitable for controlling extraneous influences in an ESG-abnormal return study. Size and profitability affect a firm's capacity to invest in ESG initiatives, while the D/E ratio captures financial risk. ROE reflects operational efficiency, and dividend yield signals financial stability.

We only include companies that have ESG ratings. Sustainalytics provides companies with ESG ratings. After screening the ESG ratings of the companies, we come up with different numbers of total companies in our analysis in each country; for example, the Indonesian market has 74 companies, the Malaysian market has 79 companies, the Singaporean market has 77 companies, the Thai market has 88 companies, and the Philippine market has 21 companies. Table 1 displays the details of the variables.

To estimate the cumulative abnormal return, we follow several steps. First, we calculate the expected return using the Capital Asset Pricing Model (CAPM). This model is simple, widely used, and theoretically sound for estimating expected stock returns. The CAPM requires three components: a risk-free rate, beta, and the risk premium, which is the difference between the risk-free rate and the index returns. The 10-year government bond rate serves as a proxy for the risk-free rate in each country. The company's beta is based on the monthly average over a five-year period (2019–2023), while the index returns are calculated as the daily returns from 2020 to 2023.

Next, the daily actual stock return is calculated as daily returns from 2020 to 2023. Then, the daily abnormal return is then estimated by subtracting the daily stock's expected return (calculated using CAPM) from the daily stock's return. Finally, estimate the cumulative abnormal returns of each company. The models are outlined below:

Where $Ri,t$ is the actual return of stock I on day t; $Rf$ is the risk-free rate; $β$ is the stock's beta; $RP$ is a risk premium, defined as expected market return – risk-free risk (⁠$ERm−Rf$⁠). N represents the sample size.

The next step is to examine the relationship between the abnormal returns and ESG score including the control variables using cross-section regression analysis.

$CARi,t$ is the CAR of stock i on day t, $ESGi,t$ is the ESG rating of a stock, $andControls$ are the control variables included, such as size, profit margin, debt to equity ratio, ROE and dividend yield.

Table 2 provides the descriptive statistics of all variables for all countries. The mean CAR is positive for all countries except the Philippines, which means that the Philippine market performance is the lowest among the other ASEAN-5 countries. The high skewness of CAR is shown in the Singaporean and Indonesian markets; in other words, the distribution is right-skewed. The highest kurtosis belongs to the Indonesian market, which indicates that the Indonesian market is highly volatile. The mean ESG scores are high in the Indonesian and Philippine markets, followed by the Singaporean market. Thai and Malaysian markets are slightly below. The practice of sustainability in the ASEAN-5 countries is at the same level. Moreover, a negative kurtosis of ESG score in Philippine markets indicates less variation in ESG practices among companies. The skewness of ESG scores is slightly right in all countries, with slight variations.

Regarding company size, Singaporean companies have the highest mean, followed by Thai, Philippine, Indonesian, and Malaysian companies. Singaporean companies not only have the highest mean size but also the highest standard deviations, indicating high company size variability. However, Singaporean companies have the smallest average profit margin. In the meantime, Malaysian and Indonesian companies have the highest mean profit margin. A high excess kurtosis of profit margin in the Thai market shows that a few extreme values significantly influence the distribution.

Malaysian companies have the highest mean debt ratio with the highest excess kurtosis, indicating that they rely on leverage, and a few have incredibly high leverage. On the other hand, Thai firms possess the lowest average debt-to-equity ratio, which means fewer firms prefer leverage. The Malaysian market has the highest average ROE, while the Singaporean market has the lowest. The negative skewness of ROE in the Indonesian and Singaporean markets means that more companies have lower ROE than the average. Furthermore, extreme outliers in the firm performance in the Indonesian market are reflected by the high excess kurtosis. Finally, the dividend yields are relatively consistent for all countries. However, the Malaysian market has a high kurtosis, suggesting a few companies have incredibly high dividends. The negative skewness shows that Singaporean firms tend to have a lower dividend yield than average.

Furthermore, we test the variance inflation factors (VIF) to determine whether the variables have collinearity issues. Table 3 reports the VIF for all countries, which detects no collinearity problems found among variables.

Table 4 presents the data regression results. The constant is negatively significant for all countries except the Philippine market. The negative sign of the constant indicates that the baseline business performance is low. The lowest performance is in the Malaysian market. Surprisingly, ESG scores do not impact the abnormal returns of the stocks for all companies; in other words, ESG scores are not the factor that determines the companies' performances in the ASEAN-5 countries. The finding is consistent with Landi and Sciarelli (2019), Wu et al. (2024) research results. Koziol and Kuhn (2023) suggested the opposite findings. The authors stated that the ESG score has a positive impact on the abnormal returns in the developed countries, namely the USA and European Economic and Monetary Union (EMU) markets. Breaking down the ESG components, Carvalhal and Nakahodo (2023) argued that the governance component is not a significant effect on the abnormal returns, even though the overall ESG score has a significant impact on the Brazilian market. Additionally, Engelhardt et al. (2021) reported that the most dominant driver of ESG components on the abnormal return in European countries is a social component with a high positive impact. In the meantime, Yoo et al. (2021) provided evidence for the environmental component as the leading component of the positive effect on the abnormal return in the European market during COVID-19.

The insignificant ESG score on the abnormal returns in ASEAN-5 has possible reasons, including ESG awareness, market behavior, regulatory factors, sectoral dominance, and investment horizon. The ESG investment in four of five ASEAN markets, namely Indonesia, Malaysia, Thailand, and the Philippines, is still developing. The investors put importance scale on the traditional financial metrics over the sustainability assessments. In other words, the ESG is not a key factor in assessing the risk. As for the Singaporean market, investors also rely on traditional financial measurements, even though ESG awareness is much more advanced (Puongsophol et al., 2022).

Furthermore, market behavior is dominated by short-term speculators, while ESG benefits tend to materialize over the long term. Since abnormal returns typically correlate with short-term stock price fluctuation, the ESG factor might not have an immediate effect. Thus, market sentiment drives abnormal returns (Orsagh, 2019).

Another factor might relate to regulation and enforcement. As ESG regulations in the Indonesia, Malaysia, Thailand, and Philippines markets are still progressing, regulatory enforcement might be relatively weak compared to the developed market. In addition, companies' greenwashing to attract investors is still widespread. However, as a developed market, Singapore is still considered moderate regarding ESG law enforcement and investors' pressure on ESG issues compared to developed Western markets (Tan, 2023).

The last possible reason the ESG score is not the key factor in the company's performance is the sectoral dominance and economic structure. Indonesia, Malaysia, and Thailand's capital markets might be dominated by energy, mining, and palm oil sectors, which have high carbon footprints, making ESG improvements costly and ESG complex implications (Why the Indonesian Stock Market Is Booming, 2024). Financial services, real estate, and shipping/logistics dominate the Philippines and Singapore capital markets (Stepat, 2023). The industries are not ESG-driven, so they do not significantly affect the stocks' volatility.

In addition, firms with declining or poor stock performance may adopt ESG initiatives as a strategic response to deflect negative investor sentiment or to enhance reputation, rather than ESG being a cause of improved performance. This scenario would bias empirical estimates of ESG effects. Furthermore, unobserved firm characteristics—such as managerial competence or corporate culture—may influence both ESG adoption and financial performance.

Moving on to the control variables, profit margin does not influence the performance of the companies in all countries. The result is not consistent with the finding of (Alshehadeh et al., 2024). There are several possible reasons why profit margin has an insignificant impact on returns in ASEAN markets. In these markets, investors often prioritize factors such as growth potential, sector exposure, and market liquidity over traditional accounting-based profitability measures. This is especially true in Indonesia and the Philippines, where people tend to make short-term, risky investments. This focus reduces the relevance of fundamental indicators, such as profit margin, in explaining stock performance. Additionally, the prevalence of high-emission and resource-based industries—including oil, mining, and palm oil—creates significant profit margin volatility, which is influenced more by commodity price cycles than by firm-level efficiency or ESG performance. Therefore, profit margin and other profitability measures have limited ability to explain abnormal returns in these emerging markets.

The rest of the variable controls, such as company size, debt-to-equity, ROE, and dividend yield, have a different impact on the abnormal returns of the companies' stocks in all countries. For example, company size has a negatively significant effect only in the Malaysian and Thai markets, meaning the larger the firms, the worse they perform. The potential reasons might be that larger enterprises in the Malaysian and Thai markets may have reached a mature development phase, which limits their growth potential and reduces opportunities for excess returns. In contrast, smaller enterprises often demonstrate greater growth potential and tend to attract speculative, growth-oriented investors, particularly in markets where ESG investing is still developing. This situation creates a negative correlation between firm size and abnormal returns, illustrating the traditional “size effect” commonly seen in emerging and transitional markets.

In addition, the debt-to-equity ratio only negatively affects companies' performance in the Thai market, which is contradictory with (Cherkasova and Zakharova, 2024; D'Mello and Sivaprasad, 2015) research findings. The negative sign shows that investors in the market view debt negatively. Higher-leverage firms reduce the firm's performance. For the rest of the countries, the impact is not significant. This disparity highlights the varying perceptions of financial leverage and firm size across different markets. Understanding these distinctions allow investors make more informed decisions and tailor their strategies to align with the specific dynamics of each country's economic environment.

Furthermore, the positive significance of the coefficients indicates that investors in Indonesian, Malaysian, and Singaporean markets place a greater emphasis on ROE. The finding is supported by Alshehadeh et al. (2024). This pattern suggests that country-specific characteristics—such as differences in market maturity, investor behavior, regulatory frameworks, and sectoral composition—may exert a more decisive influence than originally accounted for. For instance, in more mature markets, investors might reward high-ROE firms due to greater confidence in governance and transparency. In contrast, in less mature markets, such indicators might be overshadowed by macroeconomic instability or less efficient market mechanisms. Additionally, the dominance of specific sectors in each market could further explain these disparities. Regarding ESG sectors, such as high- and low-ESG sectors, sector-specific dynamics may modulate the effect of financial indicators, like ROE, on abnormal returns, thereby offering a more comprehensive understanding of the ESG-performance relationship across different economic and regulatory environments.

Lastly, dividend yield has a negative relationship only with the performance of firms in Indonesian and Malaysian markets. The higher dividend yields reduce performance in these countries, which is not in line with a positive correlation result by Chakraborty et al. (2021), Nugroho and Saragih (2022). The negative sign suggests that investors in these markets may prioritize growth and reinvestment over immediate returns, reflecting a different investment philosophy from their Thai counterparts. As a result, firms in Indonesia and Malaysia might need to adjust their financial strategies to align with investor expectations and enhance overall market performance.

The next step involves using the least absolute deviation (Table 5) and quantile regression (Table 6) as robust estimation methods for the above-mentioned regression. Table 5 exhibits a consistent result with the cross-sectional regression: ESG scores do not affect the firm's performance in all ASEAN-5 countries. In the meantime, Table 6 shows that the majority of ESG scores at all quantiles do not impact the abnormal returns, except for the Malaysian market at the 0.25 quantile and the Singaporean market at the 0.75 quantile. From the analysis, we can say that the results from both robust estimation methods about how ESG scores affect the company's performance are consistent with the regression findings. Appendix A provides a summary of the study's hypothesis and findings.

This study explores the relationship between ESG scores and abnormal returns in the ASEAN-5 countries—Indonesia, Malaysia, Singapore, Thailand, and the Philippines. Motivated by growing global interest in sustainable investment practices and the limited research on ESG implications in emerging markets, this research seeks to fill a crucial gap by examining whether ESG performance has any meaningful influence on stock market returns in these rapidly developing economies.

The findings reveal that ESG scores do not significantly impact abnormal returns in any ASEAN-5 markets. Despite increasing global emphasis on sustainability, ESG factors have yet to become a decisive metric for investors in this region. Several contextual factors, such as low ESG awareness, underdeveloped regulatory environments, short-term market behavior, and sectoral dominance in high-emission industries, may contribute to this outcome. These findings align with previous studies in emerging markets, diverging from results found in developed countries where ESG performance has been shown to correlate with stock performance positively.

On a deeper level, our findings underscore the importance of control variables such as company size, ROE, debt-to-equity ratio, and dividend yield, which show inconsistent effects across the different countries. For instance, company size negatively impacts performance in the Malaysian and Thai markets, while ROE positively influences performance in Indonesia, Malaysia, and Singapore. The dividend yield negatively affects performance in Indonesia and Malaysia, suggesting that investors in these markets might value reinvestment potential over immediate payouts.

The future implications of this study are significant. As ASEAN markets continue to mature and ESG awareness and regulatory pressure increase, the role of ESG in determining firm performance may evolve. Longitudinal studies in the future may reveal stronger correlations as investor sentiment shifts toward sustainability. Therefore, continued research and monitoring are essential to track how ESG considerations influence financial markets over time, particularly in emerging economies undergoing structural transitions.

Moreover, the implications for the investors and governments are as follows. Long-term investors should prioritize ESG factors and robust financial fundamentals to avoid speculative ESG-driven investments. Investors should be careful with greenwashing companies due to weak government regulations on ESG. As for policymakers, developing and implementing mandatory ESG disclosure standards aligned with international frameworks such as Global Reporting Initiative (GRI) or Sustainability Accounting Standards Board (SASB) with sector-specific ESG reporting guidelines, especially for extractive industries (mining, palm oil, energy) that dominate Indonesia, Malaysia, and Thailand, must be encouraged. Furthermore, tax breaks or subsidies for industries like mining and energy with high ESG compliance costs for all countries should be considered. For countries with stronger institutional environments, such as Singapore, Malaysia and Thailand, the government may require financial institutions and asset managers to integrate ESG in risk assessment frameworks, disclose ESG metrics in fund performance, and develop ESG credit rating systems through central banks. Lastly, for countries with a large number of SMEs, such as Indonesia and the Philippines, the government needs to launch ESG readiness programs offering training, toolkits, and digital platforms and set up ESG incubators that guide companies through compliance.

Strengthening ESG regulation (e.g. stronger ESG regulations and increased transparency) and providing incentives for ESG-compliant companies may have positive reactions from institutional and retail investors. Institutional investors will perceive companies as lower-risk and more resilient for the future. Institutional investors emphasize long-term returns, and government support for ESG-compliant firms reduces risk exposure. A stable and well-incentivized ESG regulatory framework may yield more predictable returns, increasing investor confidence. Additionally, the market expects a surge in retail investors. Investors, especially younger generations, are already intensely interested in ESG investing. Government incentives for ESG-compliant companies will make these investments even more attractive.

The paper presents limitations and proposes recommendations for further research. The research utilizes the ESG score ratings provided by Sustainalytics. Evaluating several ESG rating sources, including MSCI, Bloomberg, and Refinitiv, may enhance precision. Moreover, the findings may not be universally applicable across all sectors. A sector-specific analysis (e.g. ESG in banking versus ESG in oil and gas) may provide more complex results.

The supplementary material for this article can be found online.