Did ESG Affect the Financial Performance of North American Fast-Moving Consumer Goods Firms in the Second Period of the Kyoto Protocol?

Abstract

Many agreements and protocols in the global framework call on industries and businesses to respond to threats related to climate change. New terminologies such as environmental, social, and governance (ESG) scores address this issue and responsibility. This study investigates the impact of sustainability (environment (ENV), social (SOC), governance (GOV), and ESG) on the financial performance of firms in the fast-moving consumer goods industry from 2013 to 2020, the second commitment period of the Kyoto Protocol (SCKP). The study sample covers 113 firms in the North American region (the USA and Canada did not participate in SCKP). The results showed that ESG is not an influencer of financial performance, while ENV and SOC components negatively affect financial performance. On the other hand, GOV is the most significant influencer that positively impacts financial performance. Based on these findings, ESG and its components are not conducive to promoting financial performance during the SCKP period. However, fast-moving consumer goods are ahead of other sectors in terms of sustainability disclosure. Moreover, the highest positive impact of GOV is attributed to the advanced system with rules, standards, and regulations that foster the better and more efficient governance of firms from developed countries.

1. Introduction

Today, various environmental, social, and economic challenges, such as climate change, environmental pollution, depletion of natural resources, population growth, socioeconomic inequality, and mass consumption habits, are some of the most common issues societies face. Apart from these, political, social, and financial crises continue to cause various problems in all countries on an international scale. The globalization phenomenon that trespasses beyond boundaries with technological improvements and capital movement has created competition among firms, and this pressure has forced them to pursue sustainable development in many developing and developed countries. On the other hand, consumers have begun to question the financial performance of the products and services they purchase and non-financial issues, such as the firm’s contribution to society and its environmental impact. These improvements have caused firms to make socially responsible investments that benefit society. In this context, reporting non-financial and financial information has become an essential tool for firms to express themselves to stakeholders, namely, investors, customers, employees, suppliers, government, and NGOs, within the scope of performance evaluation. Firms have gained sustainable competitive advantage and strengthened their brands and reputations by reporting their performance regarding risks, opportunities, and benefits through three categories: environment, social, and governance (ESG). With the growing ESG investment market, ESG activities arise from the firm’s primary operations and are closely related to corporate financial performance [1]. Thus, evaluating the relationship between ESG and financial performance for a sustainable world is critical.

Although ESG indexes are accepted as one of the most essential corporate sustainability criteria, no standardization has been achieved in this field yet. Therefore, various rating corporations have developed different methodologies for creating ESG performance indexes. At this point, developed countries, like North America and the European Union (EU), have made new decisions about including and strictly implementing the sustainability criterion in financial reporting methods [2,3].

Alternatively, increased wealth in developed countries leads to higher purchasing power and, thus, higher consumption demand. Additionally, in these countries, the number of individuals in business life is relatively high, and the tendency to make life practical by turning to fast-moving consumer goods due to time constraints is common. Nonetheless, customers of developed countries generally pay more attention to the progress of the products they consume in subjects such as sustainability, environment, and social responsibility, and they prefer the products of firms that are sensitive to these issues while spending money to promote their lifestyles. This is also incredibly relevant in the fast-moving consumer goods sector as the firms compete for highly loyal customers and interact with them. In this context, a better corporate social responsibility strategy than competitors can also enable fast-moving consumer goods firms to increase customer retention and, ultimately, higher financial performance.

The fast-moving consumer goods sector, one of the largest industries worldwide, produces and markets products consumed regularly by humans, are generally cheap, have a short shelf life, and are packaged with virgin materials, which may be challenging to recycle [4]. It has a wide range of product categories, the most prominent of which are personal care, cleaning supplies, food, and beverages. The global fast-moving consumer goods market has increased with the evolution of e-commerce and consumer demands and needs over the last decade. Consequently, changes in lifestyle along with the increase in the world population, the frequent launch of new products by the manufacturers and thus the increase in the industry’s visibility, and compelling brand promotion by firms have been mainly driving the growth of the fast-moving consumer goods market. The global fast-moving consumer goods market is expected to reach USD 18,939.4 billion from 2022 to 2031, with a compound annual growth rate of 5.1%. Considering this sector’s growth capacity and importance, we found it worth examining.

Undeniably, this sector, where disposable containers are widely used due to ineffective waste collection and recycling systems and limitations in product design, contributes to air and soil pollution and negatively affects the ecosystem and biodiversity. In recent years, the use of reusable packaging, eco-labeling, the lightening of materials in packaging, and even the removal of packaging in retail consumption are efforts to reduce the negative environmental impact in the fast-moving consumer goods industry [5]. Moreover, firms in this sector encourage their suppliers to report their sustainability practices and disclosures to the Carbon Disclosure Project and emphasize the concrete impact of their suppliers on this issue in their sustainability reports. A market research study has revealed that 1 in every 5 dollars spent on fast-moving consumer goods comes from an environmentally conscious consumer. The value of environmentally conscious consumers in the global fast-moving consumer goods sector has increased by USD 78 billion compared to a year ago, reaching USD 382 billion. Therefore, most environmental and social stigmas are attributed to this sector, as the fast-moving consumer goods pay more attention to sustainability and environmental issues.

The existence and direction of the relationship between social responsibility activities in general, ESG reporting, and corporate financial performance have been a debated issue for the last 50 years. Many studies examined the impact of ESG on profit and market value [6,7,8], on stock return and volatility in the financial crisis resulting from the COVID-19 pandemic [9,10], on financial risk [11,12,13], on economic policy uncertainty [14], and on credit ratings [15,16,17]. Furthermore, differences in financial performance, ESG measurements and calculations, and the development level of countries may affect the findings. Therefore, there is still a need to investigate the impact of ESG on financial performance in terms of a typical industry, region, and time interval to strengthen the literature.

This study examines the impact of ESG and its subcategories on corporate financial performance regarding the size and growth of fast-moving consumer goods firms in North America between 2013 and 2020, the second commitment period of the Kyoto Protocol (SCKP). The Kyoto Protocol introduced non-binding responsibilities for countries to reduce greenhouse gas emissions (GHG) that cause global warming. North American Canada, the second largest country in the world, fulfilled its responsibilities in the first commitment period (2008–2012), stated that it would not make any commitments to the SCKP, and withdrew from the protocol. On the other hand, another North American country, the USA, the fourth largest in the world, refused to ratify the protocol. Although they have not adopted the Kyoto Protocol, non-financial reporting by North American firms has been voluntary. Firms disclose their non-financial information primarily as ESG scores because these companies also have international sales networks. The fact that the largest North American countries have not imposed sanctions on firms and have not encouraged them due to their unratified of the Kyoto Protocol does not mean that these companies will not fulfill these obligations. It was found that the financial performance of 100 companies listed on the Bombay Stock Exchange improved when ESG disclosure and independent corporate social responsibility reports became mandatory in 2013 [18]. This article analyzes whether non-mandatory reporting regulation in terms of ESG improves financial performance. Hence, investigating to what extent non-mandatory disclosure of ESG scores affects the financial performance of the fast-moving consumer goods industry in North America, where industrial production is high and technologically advanced countries, would be exciting and is also more critical as the industry corporations increasingly engage in sustainability activities under the influence of external pressures from stakeholders.

This study contributes to the literature in two ways. First, this study models a specific period that coincides with the start and end dates of the SCKP, providing the opportunity to evaluate the impacts in the North American region where two advanced economies do not approve of this protocol. In this way, we seek to understand whether regular disclosure of non-mandatory pro-ESG policies drives corporate performance to improve. Second, to the knowledge of the authors, no previous studies analyzed the relationship between ESG and its pillars (as measured by Bloomberg) and corporate financial performance as measured by return on equity (ROE) and return on asset (ROA) for fast-moving consumer goods firms operating in North America during the SCKP between 2013 and 2020. Becher studied the corporate social responsibility and corporate financial performance relationship of multinational firms only in the fast-moving consumer goods industry and found a positive impact of corporate social responsibility on corporate financial performance in 2005–2020 [19]. A similar study was conducted on the consumer staples industry, which fell within the fast-moving consumer goods industry in 2005–2018 [20]. They also concluded that ESG performance positively influences short- and long-term financial performance. Considering the justifications explained above and the literature gap, the research question is as follows: Without mandatory disclosure requirements, did pro-ESG policies, an indicator of the environmental, social, and governance efforts, affect the financial performance of fast-moving consumer goods firms in North America during the period of SCKP, which is relatively short? If yes, in what direction? Although many scholars have extensively studied this subject, the choice of sector, region, and period enables this research to provide new empirical evidence for the relationship between sustainability and financial performance.

The pooled analysis of North American firms is designed to capture commonalities and divergences in ESG impact under the unique conditions of non-ratification of the Kyoto Protocol. While the largest North American countries, the USA and Canada, opted out of the SCKP, regulatory and market differences shape how firms from each country approach sustainability. For example, Canada’s previous commitment to the first Kyoto period (2008–2012) led to the implementation of various environmental policies and corporate expectations, establishing foundational regulatory frameworks that continued to influence corporate governance practices [21]. Conversely, the USA, with no ratification history, relied more heavily on voluntary initiatives and state-level mandates, resulting in a different landscape of corporate and market expectations for ESG performance [22].

2. Literature Review and Hypothesis Development

ESG, first included in the United Nations’ (UN’s) “Who Cares Wins” report in 2005, was created because corporations needed to express their social responsibility activities using measurable variables. Thus, corporate social responsibility studies have formed the theoretical basis and conceptual framework of the ESG literature.

In the 1970s, researchers conducted studies that analyzed the relationship between social responsibility and the financial performance of firms. Moskowitz found that the stock returns of 14 socially responsible firms outperformed indices such as the S&P 500 and Dow Jones and concluded that a positive relationship existed between corporate social responsibility and stock returns [23]. On the other hand, Vance found a negative relationship between social responsibility performance and stock return performance [24]. He concluded that using capital for social responsibility activities rather than for more profitable investments negatively affects financial performance. In the following years, Alexander and Buchholz found no significant relationship between risk-adjusted performance and corporations’ degree of social responsibility in the US between 1970 and 1974 [25]. Thus, their results did not support the studies of both Vance and Moskowitz. These studies became the starting point of a growing research field that continued with ESG in the subsequent years.

The impact of ESG ratings on financial performance is explained by stakeholder theory. The stakeholder theory suggests that a business should be managed not only for the benefit of all its shareholders but also for the interest of its stakeholders, who can be affected by business operations. Moreover, strategic management efforts will only be successful when the interests of different stakeholders, such as employees, suppliers, government, and society, are considered by corporations to be more effective and efficient [26]. Based on stakeholder theory, the good management hypothesis argues that corporate social responsibility can improve a firm relationship with various stakeholders, leading to improved financial performance [27]. With this approach, the positive impact of ESG on financial performance is expected. Firms that adopt ESG activities gain a competitive advantage and increase their financial performance in the long run. Company management uses ESG activities to achieve better company performance by meeting the demands and wishes of stakeholders [28]. ESG performance increases firms’ profits through cost reduction and revenue generation [8]. Atz et al. reviewed that the main reasons for improving the financial performance of firms with sound sustainability strategies are stakeholder relations, risk reduction, operational efficiency, and strength of innovation capacity [19]. Vishwanathan suggested that corporate social responsibility positively impacts financial performance via four mechanisms: enhancing firm reputation, increasing stakeholder interaction, mitigating risk, and strengthening innovation capacity [29]. The number of studies supporting stakeholder theory has been growing in recent years. Naeem for environmentally sensitive industries from developed countries, Aydoğmuş et al. for the sample companies chosen from the Bloomberg database, Chen for large-scale companies, Naeem and Çankaya for energy and power generation corporations, Saha and Khan for listed Nordic companies are just a few of the studies confirming the stakeholder theory [30,31] [32,33,34].

On the other hand, when arguing about the negative impact of ESG on financial performance, researchers generally refer to the shareholder theory. According to this theory, a business’s primary responsibility is maximizing shareholders’ profit. The company even implements its social responsibility activities with the expectation of profit. Therefore, all activities that do not bring profit to the company should be ignored [35]. An enterprise’s involvement in social and environmental activities causes a competitive disadvantage by increasing costs. Moreover, a conflict of interest exists without an organizational culture that strengthens these activities, and financial performance is reduced [36,37]. According to hypotheses based on shareholder theory, since the direct and indirect costs resulting from corporate social responsibility activities are more significant than the economic value generated by those activities, profit decreases, leading to low shareholders’ wealth [27].

In parallel with the shareholder theory, many studies argue that the impact of ESG on financial performance is negative. The survey by Garcia in sensitive industries from BRIC countries, Grisales and Caracuel for companies listed on Latin America’s stock market, Garcia and Orsato for companies from emerging countries, Langeland and Ugland for companies in Nordic, and Kalia and Aggarwal for healthcare companies in developing economies supported shareholder theory, indicating a negative association between ESG and financial performance [38,39,40,41,42]. In the context of legitimacy theory, corporations try to ensure the perception that they operate within the boundaries and norms of the societies in which they operate. Therefore, they engage in activities that are perceived as legitimate by outsiders. Corporations can influence society’s appraisal by adopting social and environmental responsibility practices to increase legitimacy [43]. The results indicated that top management commitment is an internal factor, and environmental legislative pressure, peer imitation pressure, and normative social pressure are external factors that powerfully and positively affect corporate social responsibility practices. From an ESG perspective, legitimacy theory explains that companies engage in ESG practices to comply with governments’ ESG regulations, satisfy external stakeholders, and validate the company’s presence in society [30].

According to Thomson Reuters, the environmental pillar of ESG consists of three categories: resource use, emissions, and innovation. Porter’s hypothesis suggests that environmental regulations facilitate the adoption of environmental practices, which provide businesses with higher competitiveness and performance by providing cost and differentiation advantages. Furthermore, solid environmental regulations may reinforce technological innovation to offset costs resulting from obeying the rules, which leads to higher profit and total productivity [44]. Furthermore, investment in environmental issues may cause additional costs, leading to a transition from equity capital to debt financing, which brings an advantage due to the tax shield effect [45]. Naeem, Çankaya, and Aydoğmuş; Khalia; and Aggarwal indicated that the environment pillar positively affects financial performance [31,32,46]. The positive impact confirms the resource-based theory, which denotes that ESG is a resource used to add value to the company, and stakeholder theory.

Conversely, shareholder theory implies that since acting responsibly on environmental issues causes additional costs, a trade-off arises between environmental and financial performance. Improvement of resource use, emission, and innovation activities that comprise the environmental pillar score require costly investments, and the resulting benefits are shared with the public. Hence, it may not benefit the firm economically in the short term. However, developing environmental standards and sharing the costs of environmental compliance activities by society, the state, and other stakeholders can alleviate this negative impact [47].

The social pillar measures the firm’s activities, generating trust and loyalty with its shareholders, employees, customers, and society. The social score comprises four categories: workforce, human rights, community, and product responsibility. There is convincing evidence that implementing selected social issues relevant to a firm’s activity can, over time, have a significant economic impact on companies and even entire industries. However, only some corporate leaders and investors realize the power of social issues on monetary value. On behalf of shareholder theory, many investors view corporate social spending as a waste of shareholder resources and argue that it would not increase company performance or shareholder returns [48]. Using a firm’s existing resources to support social issues beyond stakeholders may negatively impact its capacity for shareholder wealth. Therefore, conflict may arise between implementing a social responsibility strategy and expanding shareholder wealth. Since using a firm’s resources always has an opportunity cost, applying a strategy of engagement in social issues appears to come at the expense of missing opportunities to increase shareholder value. If social practices are complex and challenging for rival companies to imitate, they may positively impact firm performance [49].

Faleye and Trahan focused on stakeholder-class employees and concluded that the benefits of labor-friendly practices significantly outweigh the costs, translating into higher productivity and profitability [50]. Fisman analyzed the community stakeholders and found that socially responsible behavior positively affects profitability in consumer-oriented and competitive industries [51]. Agency theory suggests that management can use social activities to achieve its own goals at the expense of shareholders [50]. Jensen stated that although society views managers positively with their corporate social responsibility activities, agency costs increase due to the consumption of business resources [52]. He also argued that business managers encourage stakeholders to consider their interests by turning to low-return investments because they are satisfied with corporate social responsibility activities. In this term, stakeholder theory encourages managers to avoid being held responsible for the decisions regarding social responsibility activities and not to have accountability.

Corporate governance is a system that includes harmonious policies and processes and a consistent management style. It aims to improve the firm’s efficiency, effectiveness, and performance by balancing economic goals with individual and social goals [53]. The governance pillar in the ESG context is related to consistent management, cohesive policies, and a regulatory framework that balances stakeholders’ interests.

Recent studies showed that the agency problem, which arises from the separation of ownership from management and causes conflicts of interest within the company, is reduced by accountability and restricted discretion of managers, which are the indicators of corporate governance [53,54,55,56,57,58]. Thus, companies that align the interests of managers with those of shareholders increase their financial performance. Good governance disclosure aligns the interests of managers and shareholders, ultimately reducing the agency problem [59]. Agency theory asserts that governance applications increase supervision, leading to a boom in reputation and a positive impact on performance [59]. Thenmozhi and Sasidharan revealed that as a parameter of corporate governance, an independent director with effective control enhances firm performance, minimizing agency conflict in state-owned enterprises in China and India [60].

According to the shareholder theory, corporate governance is concerned with maximizing shareholder wealth and compensating shareholders for their risks. To this end, a corporate entity should find methods to align managers’ interests with investors’ interests, ensure the flow of external funds to companies to finance investments, and, finally, achieve a return on investment.

Stakeholder theory describes how an enterprise should be managed to maximize stakeholders’ welfare. Accountability, transparency, and justice, which are the essential characteristics of good corporate governance, contribute to meeting stakeholders’ demands [35]. Professional corporate structures can more efficiently access low-cost funds and increase performance by adding value to all stakeholders. Effective corporate governance strengthens a company’s financial structure by ensuring sound resource management and sharing improved profits with stakeholders [55].

On the other hand, Bauer found a negative relationship between governance standards and earnings-based performance ratios in Europe [61]. In their analysis of Nordic companies, Langeland and Ugland attributed the negative relationship between governance and ROA to managers making decisions that will gain private benefits rather than acting in the best interest of shareholders [62]. Lee stated that an improvement in the degree of corporate governance above the optimal level is the reason for a negative correlation between the corporate governance score and Tobin’s Q measurement [63]. A strong adoption of the general categories of the governance index may create lower financial performance. For example, four governance categories represented by the board of directors, board meetings, audit and nomination, and compensation committee have negatively affected earnings management in Jordan [64].

Consequently, there are different views on the impact of ESG activities on financial performance. In addition, the impact of each sub-dimension of ESG on financial performance varies according to different financial performance indicators, models, period intervals, geographical features, country’s development level, and industry. However, since corporations’ sustainability activities are becoming increasingly important to investors daily, this is an irreversible direction. In the long term, environmental, social, and governance activities can provide guiding information in a company’s investment decisions, improve its sustainability capabilities in planning activities, manage risks, and ultimately positively impact corporate financial performance [65]. Based on these assertions, we developed the following hypotheses:

H1: 

ESG has a significant impact on the corporate financial performance of fast-moving consumer goods firms in North America.

H2: 

ENV has a significant impact on the corporate financial performance of fast-moving consumer goods firms in North America.

H3: 

SOC has a significant impact on the corporate financial performance of fast-moving consumer goods firms in North America.

H4: 

GOV has a significant impact on the corporate financial performance of fast-moving consumer goods firms in North America.

3. Research Methodology

3.1. Sample Data and Variables

This study employs the Bloomberg database to collect data on fast-moving consumer goods firms operating in North America. In previous studies, Bloomberg has been widely used to examine the relationship between non-financial and financial performance [66,67]. Bloomberg collects ESG and financial performance data and evaluates ESG activities and performance using annual reports, press releases, third-party research, and sustainability reports. The data set consists of 113 firms in North America from 2013 to 2020, which is the start and end date of the SCKP, with a total of observations. This period was chosen for two main reasons. First, we aimed to evaluate the impact of ESG scores on the financial performance of the fast-moving consumer goods firms, which have made many efforts to promote sustainability in a region not predominantly included in the SCKP protocol. Secondly, large firms in North America’s fast-moving consumer goods sector began to disclose ESG scores with pillars without any “empty” data in 2013, whereas the number of firms that regularly disclosed ESG and pillar scores decreased after 2020. After excluding any firm with “null” data, our final sample consists of 113 firms from North America in the data panel for analysis.

The dependent variables of this study are ROA and ROE, which are used to proxy the financial performance. Both performance measures in our empirical study are accounting-based because accounting data are audited and, therefore, more reliable than market-based measures [3,35]. In parallel with many empirical studies [30,31,35,55,59,68,69], we used ROA and ROE, which measure the firm’s ability to generate financial performance from assets and equity, respectively. We added two control variables, SIZE and GROWTH, to model the relationship between ESG and financial performance by ensuring homogeneity. SIZE, which is measured by the logarithm of total assets, brings economies of scale associated with ESG [28,30,35,54,59,70,71,72]. More prominent firms that benefit from economies of scale can improve their financial performance by reducing unit costs [73]. Due to the intense interest of their stakeholders in sustainability and social responsibility activities, more giant corporations employ relevant professionals in their management staff, resulting in significant experience in ESG dimensions [3,30,35]. The second control variable, GROWTH, measured by the logarithm of operating income, is included in the model following the study [66]. Companies in the growth phase with a long business cycle had higher corporate governance value and profitability correlation. However, Zhou found that improvement in ESG performance does not affect the growth ability of the company [74]. The variables used in this study and their explanations are presented in

Table 1. Variables of study.

Dependent Variables	Explanation
Return on asset (ROA)	Net profit/total assets
Return on equity (ROE)	Net profit/shareholder’s equity
Independent Variables
Independent Variables	Explanation
ESG	Overall score of environmental, social, and corporate governance performance
Environment (ENV)	Environmental practices: resource use, emissions, and innovation
Social (SOC)	Social practices: workforce, human rights, community, and product responsibility
Governance (GOV)	consistent management, cohesive policies, and regulatory framework for balancing stakeholders’ interests
Control Variables	Explanation
Firm size (SIZE)	Natural logarithm of total assets
Corporation growth (GROWTH)	Operating income growth rate

.

Table 2. Descriptive statistics.

Variables	Obs	Mean	Std. Dev	Min	Max
ROA	904	5.350354	13.70345	−117.2	55.16
ROE	836	16.91807	44.462	−226.17	626.74
ESG	902	38.16571	12.74531	7.11	79.58
ENV	894	15.89638	20.64723	0	79.61
SOC	902	16.18937	13.15882	0	66.26
GOV	902	82.48524	9.589867	17.7	100
SIZE	904	20.63236	5.144448	−19.85791	25.69495
GROWTH	904	16.14521	10.86199	−22.02889	25.51417

provides descriptive statistics of all variables employed in this study. Among two dependent variables, the variations of dependent variables, ROA and ROE, are close to each other considering the coefficient of variation (std. dev/mean), which are 2.5612 and 2.6281, respectively. Since the logarithm of SIZE and GROWTH are used in the analysis, their variations are relatively minor. Among independent variables, GOV is the least volatile (0.11626), and ENV is the most volatile (1.2988). Additionally, GOV has the highest mean and lowest standard deviation. The difference between the maximum and minimum values of ESG and the pillars indicates a considerable gap between the best and worst ESG performance in fast-moving consumer goods firms in the dataset.

As shown in

Table 3. Correlation matrix.

	ROA	ROE	ESG	ENV	SOC	GOV	SIZE
ESG	0.1942	0.3276
	(0.00) *	(0.00) *
ENV	0.1233	0.2681	0.9556
	(0.00) *	(0.00) *	(0.00) *
SOC	0.1716	0.3279	0.916	0.8415
	(0.00) *	(0.00) *	(0.00) *	(0.00) *
GOV	0.2928	0.2902	0.6754	0.5008	0.4676
	(0.00) *	(0.00) *	(0.00) *	(0.00) *	(0.00) *
SIZE	0.2153	0.1836	0.3356	0.3037	0.2961	0.2708
	(0.00) *	(0.00) *	(0.00) *	(0.00) *	(0.00) *	(0.00) *
GROWTH	0.5098	0.3674	0.259	0.2333	0.2559	0.1847	0.1119
	(0.00) *	(0.00) *	(0.00) *	(0.00) *	(0.00) *	(0.00) *	(0.00) *

* denotes statistically significant at the 1% level.

, all correlations between variables are significant at the 1% significance level. Additionally, there is a significantly positive correlation between ESG and ENV, ESG and SOC, ESG and GOV, and ENV and SOC. It illustrates that those independent variables—ESG, ENV, SOC, and GOV performance scores—should not be included in the same model [32]. Furthermore, ROA and ROE are positively correlated with independent variables, namely ESG and its pillars, ENV, SOC, and GOV, with a significance level of 1%. This result strengthens our assumptions that ESG affects the financial performances of fast-moving consumer goods firms in North America. ROA and ROE correlate positively with both SIZE and GROWTH, which are control variables in the analysis. GROWTH appears to be the most potent variable that correlates with both ROA and ROE, which is to be expected.

This section examined the cross-sectional dependence and unit root test results and tested the following hypothesis, H0.

H0: 

Cross-sectional aspect is independent, or cross-sectional dependency is weak.

Based on the results reported in

Table 4. CD (cross-sectional dependence) test results [75,76].

Variables	CD Test	p-Value
ROA	5.892 *	0
ROE	2.448 **	0.014
ESG	150.936 *	0
ENV	67.916 *	0
SOC	133.169 *	0
GOV	106.698 *	0
SIZE	199.427 *	0
GROWTH	121.421 *	0

* and ** denote statistically significant at the 1% and 5%, respectively.

, the H0 hypothesis was rejected for all model variables, meaning there is cross-sectional dependence in the variables. In this case, we can make two inferences. Firstly, we need to perform second-generation unit root tests since there is cross-sectional dependence. However, cross-section dependence is essential in macro panels with long time series. Therefore, cross-section dependence in micro panels where T is small and N is large will help the model design for our research [32]. We can continue with the second inference.

The LLC, ADF, and PP unit root test (intercept and intercept + trend) results showed that all variables are stationary, I (0), according to at least two unit root tests (see

Table 5. Unit root test results: LLC, ADF, and PP.

Variables	LLC		ADF		PP
	Int.	Int-Tre	Int.	Int-Tre	Int.	Int-Tre
ROA	−19.215	−42.151	314.268	276.267	442.185	523.066
	(0.00) *	(0.00) *	(0.00) *	(0.00) *	(0.00) *	(0.00) *
ROE	−21.478	−19.202	296.926	281.293	387.606	473.842
	(0.00) *	(0.00) *	(0.00) *	(0.00) *	(0.00) *	(0.00) *
ESG	−30.56	−37.678	317.015	274.454	187.566	295.996
	(0.00) *	(0.00) *	(0.00) *	(0.00) *	−0.95	(0.00) *
ENV	−7.512	−3.082	206.665	212.123	112.925	205.68
	(0.00) *	(0.00) *	(0.00) *	(0.00) *	−0.99	(0.00) *
SOC	−20.733	−40.695	263.278	247.878	183.836	331.818
	(0.00) *	(0.00) *	(0.00) *	(0.05) **	−0.93	(0.00) *
GOV	−535.552	−555.874	243.022	183.871	194.019	194.136
	(0.00) *	(0.00) *	(0.00) *	(0.09) ***	(0.02) **	(0.03) **

*, **, and *** denote statistically significant at the 1%, 5%, and 10% levels, respectively.

).

3.2. Methodology

We determined regression models with two different structures. Accordingly, our regression models were created as eight separate models to estimate results as given below:

$${ROA}_{it}={\beta }_0+{\beta }_1{ESG}_{it}+{\beta }_2{SIZE}_{it}+{\beta }_3{GROWTH}_{it}+{\epsilon }_{it}$$

(1)

$${ROA}_{it}={\beta }_0+{\beta }_1{ENV}_{it}+{\beta }_2{SIZE}_{it}+{\beta }_3{GROWTH}_{it}+{\epsilon }_{it}$$

(2)

$${ROA}_{it}={\beta }_0+{\beta }_1{SOC}_{it}+{\beta }_2{SIZE}_{it}+{\beta }_3{GROWTH}_{it}+{\epsilon }_{it}$$

(3)

$${ROA}_{it}={\beta }_0+{\beta }_1{GOV}_{it}+{\beta }_2{SIZE}_{it}+{\beta }_3{GROWTH}_{it}+{\epsilon }_{it}$$

(4)

$${ROE}_{it}={\beta }_0+{\beta }_1{ESG}_{it}+{\beta }_2{SIZE}_{it}+{\beta }_3{GROWTH}_{it}+{\epsilon }_{it}$$

(5)

$${ROE}_{it}={\beta }_0+{\beta }_1{ENV}_{it}+{\beta }_2{SIZE}_{it}+{\beta }_3{GROWTH}_{it}+{\epsilon }_{it}$$

(6)

$${ROE}_{it}={\beta }_0+{\beta }_1{SOC}_{it}+{\beta }_2{SIZE}_{it}+{\beta }_3{GROWTH}_{it}+{\epsilon }_{it}$$

(7)

$${ROE}_{it}={\beta }_0+{\beta }_1{GOV}_{it}+{\beta }_2{SIZE}_{it}+{\beta }_3{GROWTH}_{it}$$

(8)

Here, ${\beta }_0$ and ${\epsilon }_{it}$, denote the error term and constant term, respectively. i and t represent the number of firms and periods.

Regression Findings and Discussion

We used three alternative panel data estimation techniques in the analysis: pooled OLS, fixed effects, and random effects regression models. A Chow(F) test is performed to check which model is appropriate for panel-pooled OLS and fixed effects models. Hausmann test is employed to determine which one—the fixed or random effect—is more efficient. Finally, the LM (Breush–Pagan) test determines which is more appropriate between panel-pooled OLS and random effects models. Test results revealed that the fixed effects model is more appropriate for regression Equations (1)–(8) (see

Table 6. Chow(F), LM (Breusch–Pagan), and Hausman test results for ROA and ROE.

Dependent Variables and Testing Models	Model Selection Diagnostic Tests
ROA	Chow(F) [Panel OLS-Fixed]	LM (Breusch–Pagan) [Panel OLS-Random]	Hausman [Random-Fixed]	Test Results
${ROA}_{it}={\beta }_0+{\beta }_1{ESG}_{it}+{\beta }_2{SIZE}_{it}+{\beta }_3{GROWTH}_{it}+{\epsilon }_{it}$	7.232 (0.00) *	461.614 (0.00) *	46.269 (0.00) *	Fixed
${ROA}_{it}={\beta }_0+{\beta }_1{ENV}_{it}+{\beta }_2{SIZE}_{it}+{\beta }_3{GROWTH}_{it}+{\epsilon }_{it}$	5.786 (0.00) *	297.103 (0.00) *	48.30 (0.00) *	Fixed
${ROA}_{it}={\beta }_0+{\beta }_1{SOC}_{it}+{\beta }_2{SIZE}_{it}+{\beta }_3{GROWTH}_{it}+{\epsilon }_{it}$	7.333 (0.00) *	458.948 (0.00) *	51.103 (0.00) *	Fixed
${ROA}_{it}={\beta }_0+{\beta }_1{GOV}_{it}+{\beta }_2{SIZE}_{it}+{\beta }_3{GROWTH}_{it}+{\epsilon }_{it}$	7.241 (0.00) *	491.105 (0.00) *	39.569 (0.00) *	Fixed
ROE
${ROE}_{it}={\beta }_0+{\beta }_1{ESG}_{it}+{\beta }_2{SIZE}_{it}+{\beta }_3{GROWTH}_{it}+{\epsilon }_{it}$	8.576 (0.00) *	369.57 (0.00) *	37.405 (0.00) *	Fixed
${ROE}_{it}={\beta }_0+{\beta }_1{ENV}_{it}+{\beta }_2{SIZE}_{it}+{\beta }_3{GROWTH}_{it}+{\epsilon }_{it}$	9.016 (0.00) *	362.01 (0.00) *	44.039 (0.00) *	Fixed
${ROE}_{it}={\beta }_0+{\beta }_1{SOC}_{it}+{\beta }_2{SIZE}_{it}+{\beta }_3{GROWTH}_{it}+{\epsilon }_{it}$	8.577 (0.00) *	346.05 (0.00) *	51.577 (0.00) *	Fixed
${ROE}_{it}={\beta }_0+{\beta }_1{GOV}_{it}+{\beta }_2{SIZE}_{it}+{\beta }_3{GROWTH}_{it}+{\epsilon }_{it}$	9.377 (0.00) *	421.76 (0.00) *	15.104 (0.00) *	Fixed

* denotes statistically significant at the 1% level.

).

The fixed effects panel data model helps to control for unobserved differences between the USA and Canada. Unobserved heterogeneity refers to differences between the analyzed countries that are not measured or included in the data, such as environmental policies, corporate governance traditions, or sustainability awareness of the public. In this study, a fixed effects panel data model is used to control for unchanging (fixed) characteristics specific to both countries. In addition, the effect of the factors is separated from the results of the analysis. This model allows the analysis to focus on the relationships between variables while taking into account the specific conditions of each country. In other words, this method prevents unobserved fixed effects specific to the USA and Canada from obscuring the effects of variables included in the model (e.g., ESG scores) on financial performance [77].

Lastly, the fixed effects model is fixed across countries (i.e., time (unchanging) differences are included in the model to prevent these differences from affecting the results of the analysis); thus, the impact of ESG on financial performance is analyzed more reliably. Moreover, the model we use captures natural country-level characteristics that enable the assessment of the impact of ESG without the need to model country-specific factors separately within each year, which is in line with approaches in comparative studies on policy impact [22,67].

Since it was assumed that systematic variables specific to years did not have a significant effect, only firm (unit) fixed effects were included in the results. Accordingly, post-estimation model diagnostic tests were applied in the appropriate panel data fixed effects model regression analysis. The results of the heteroscedasticity (modified Wald test) and serial correlation have been reported [68]. LM test as post-estimation illustrates a heteroscedasticity problem in all our models (see

Table 7. Model diagnostic test results.

Dependent Variables and Testing Models	Model Post-Estimation Residual Tests
ROA	Heteroskedasticity	Serial Correlation
${ROA}_{it}={\beta }_0+{\beta }_1{ESG}_{it}+{\beta }_2{SIZE}_{it}+{\beta }_3{GROWTH}_{it}+{\epsilon }_{it}$	93 × 107 (0.00) *	16.36 (0.23)
${ROA}_{it}={\beta }_0+{\beta }_1{ENV}_{it}+{\beta }_2{SIZE}_{it}+{\beta }_3{GROWTH}_{it}+{\epsilon }_{it}$	41 × 105 (0.00) *	15.98 (0.25)
${ROA}_{it}={\beta }_0+{\beta }_1{SOC}_{it}+{\beta }_2{SIZE}_{it}+{\beta }_3{GROWTH}_{it}+{\epsilon }_{it}$	78 × 107 (0.00) *	17.11 (0.19)
${ROA}_{it}={\beta }_0+{\beta }_1{GOV}_{it}+{\beta }_2{SIZE}_{it}+{\beta }_3{GROWTH}_{it}+{\epsilon }_{it}$	24 × 10 7 (0.00) *	24.62 (0.03) **
ROE
${ROE}_{it}={\beta }_0+{\beta }_1{ESG}_{it}+{\beta }_2{SIZE}_{it}+{\beta }_3{GROWTH}_{it}+{\epsilon }_{it}$	26 × 1033 (0.00) *	16.40 (0.23)
${ROE}_{it}={\beta }_0+{\beta }_1{ENV}_{it}+{\beta }_2{SIZE}_{it}+{\beta }_3{GROWTH}_{it}+{\epsilon }_{it}$	19 × 1031 (0.00) *	16.19 (0.24)
${ROE}_{it}={\beta }_0+{\beta }_1{SOC}_{it}+{\beta }_2{SIZE}_{it}+{\beta }_3{GROWTH}_{it}+{\epsilon }_{it}$	27 × 1033 (0.00) *	16.10 (0.24)
${ROE}_{it}={\beta }_0+{\beta }_1{GOV}_{it}+{\beta }_2{SIZE}_{it}+{\beta }_3{GROWTH}_{it}+{\epsilon }_{it}$	44 × 1032 (0.00) *	24.49 (0.03) **

* and ** denote statistically significant at the 1% and 5%, respectively.

). Additionally, there is no serial correlation problem in all our models except models with the GOV. The models with only the GOV independent variable have a serial correlation and a heteroscedasticity problem. To solve these problems, we rebuilt all fixed effects models with robust (Huber/White/sandwich VCE estimator) estimators.

The results of F-statistics in

Table 8. ROA and ROE robust, fixed effect panel regression results.

	Dependent Variable: ROA
Coefficients	Model-1	Model-2	Model-3	Model-4
ESG	−0.064 (0.51)
ENV		−0.099 (0.00) *
SOC			−0.122 (0.02) **
GOV				0.385 (0.08) ***
SIZE	0.183 (0.00) *	0.178 (0.00) *	0.180 (0.00) *	0.160 (0.011) **
GROWTH	0.30 (0.00) *	0.297 (0.00) *	0.304 (0.00) *	0.322 (0.00) *
Constant	−0.729 (0.87)	−1.499 (0.36)	−1.158 (0.54)	−34.815 (0.05) **
F	19.94 (0.00) *	36.70 (0.00) *	26.95 (0.00) *	13.54 (0.00) *
R-square	0.65	0.65	0.65	0.67
	Dependent Variable: ROE
Coefficients	Model-1	Model-2	Model-3	Model-4
ESG	0.003 (0.99)
ENV		−0.234 (0.08) ***
SOC			−0.16 (0.42)
GOV				1.332 (0.02) **
SIZE	0.511 (0.00) *	0.500 (0.00) *	0.507 (0.00) *	0.414 (0.00) *
GROWTH	0.701 (0.00) *	0.686 (0.00) *	0.702 (0.00) *	0.768 (0.00) *
Constant	−5.00 (0.74)	−0.928 (0.85)	−2.182 (0.72)	−114.129 (0.02) **
F	16.38 (0.00) *	18.35 (0.00) *	17.68 (0.00) *	12.47 (0.00) *
R-square	0.64	0.65	0.64	0.67

*, **, and *** denote statistically significant at the 1%, 5%, and 10% levels, respectively.

reveal that all the models are significant at the 1% level. ESG, as shown in Table 8, was found to be statistically insignificant related to ROA and ROE. Thus, H1 is rejected. This result is consistent with the study of [30] who found no significant relationship between ESG and ROA of environmentally sensitive corporations from developed and emerging countries. The studies by Atan indicated no impact of ESG on financial performance proxied by ROE [16]. There may need to be more than the ESG activities of the firms included in this study to influence accounting-based financial performance measures that combine a wider variety of activities than ESG operations and reflect past and short-term performance. Theoretically, the insignificant relationship of ROA and ROE with the ESG opposes both shareholder and stakeholder theories. On the other hand, ESG has a significant positive impact on ROA [6,22,51,59] and a negative relationship [19,34,36]. According to refs. [22,55], ESG-improving activities negatively affect ROE. The positive effect of ESG on ROE is supported by the studies of refs. [8,19,59].

Regarding the control variables, the coefficients of SIZE and GROWTH have a statistically significant positive effect on both ROA and ROE in all models. A 1% increase in the SIZE and GROWTH has an increasing impact on ROA by approximately 0.18% and 0.30%, respectively, in all models. There is no significant impact of SIZE on ROA measured as an indicator of financial performance [6,70,71]. The prior studies also found the negative influence of SIZE on ROA [22,28,30,31]. Concerning ROE, SIZE and GROWTH are statistically positive influencers, increasing by approximately 0.50% and 0.70%, respectively. These results are consistent with economies of scale.

Moreover, larger companies may face more pressure from stakeholders regarding ESG performance because larger companies are more visible and have a business reputation. The findings related to the positive impact of GROWTH on ROA and ROE support the argument that company GROWTH positively affects the long-term sustainability of that company by providing income from its activities. This result is partially in line with the study of [45]., who found a positive contribution of GROWTH to ROE [45].

Concerning the pillars of ESG, ENV has a statistically significant negative effect on ROA and ROE, confirming that it aligns with previous studies. It has also been reported significant negative impact of ENV on financial performance [55,59]. These results do not support H2, implying that increased environmentally sustainable activities negatively affect accounting-based profitability. The concept of cost-benefit strategy can explain it. When companies prefer to improve in the categories of environment, namely, resource use, emissions, and innovation, their profitability is negatively affected when the costs exceed the benefits. Improving these categories requires high-cost investments and the resulting benefits are shared with the public. This finding is in line with shareholder theory. Although fast-moving consumer goods companies are ahead of many sectors regarding environmental sustainability disclosures, this still needs to be reflected positively in financial performance. The positive impact of ENV on ROA was found [3,6,8].

The impact of SOC on ROA was negative and statistically significant. It supports the argument that if companies spend their funds to achieve nonprofit social goals such as donations and sponsorships to community activities and employee benefit applications, they will have fewer funds to invest in positive net present value projects in the long run, reducing profitability and competitiveness [69]. Also, the analysis indicated a statistically insignificant impact of SOC on ROE. These results are entirely consistent with the findings of ref. [8] but inconsistent with refs. [3,6], who found a positive relationship between SOC and ROA. Our findings are supportive of shareholder theory. Refs. [22,45,55] found no significant impact of SOC on ROA and ROE, while ref. [59] concluded the adverse relation of SOC with both ROA and ROE. Another argument for the negative and nonsignificant relation might be explained by agency theory. Top management executives often work on social policies for their benefit, which are incompatible with the firm’s strategy. In that case, such social activities bring about extra costs, thus lowering competitive advantage and firm performance [67]. According to these findings, H3 is rejected.

Contrary to ENV and SOC, GOV positively influences accounting-based financial indicators, ROA, and ROE, pointing out that corporate governance practices improve performance by enhancing internal control, external audits, and reputation, infusing better management practices [52]. It supports stakeholder theory, and H4 has failed to be rejected. Thus, firms leading more responsible and transparent toward stakeholders have the potential to enhance financial performance compared to firms that do not. On the contrary, firms with weak and ineffective governance practices are subject to higher agency conflict and lower profitability [52]. Among the three ESG subcategories, GOV significantly affects ROA more than three times and in a positive direction compared to ENV and SOC. Also, the coefficient related to GOV has a positive impact on ROE slightly more than five times than the ENV. These results are inconsistent with ref. [6], who found that ENV has the highest impact, and ref. [34], who found that SOC has the highest negative impact, while also being inconsistent with the study of ref. [70], who found the most significant impact on corporate profitability only when the firm suffers from weak governance. Table 2 shows that GOV has the highest mean, minimum, maximum value, and lowest standard deviation among all independent variables, implying an achieved standard in the industry. Thus, the firms in our study sample have solid governance cultures and have adopted corporate governance principles. This is not a surprising result for firms located in developed countries. As a result, North American fast-moving consumer goods firms can strengthen their long-term financial structure by implementing their corporate governance activities under internationally accepted standards and integrating sustainability policies into all their activities. Our finding about the relationship of GOV with ROA is consistent with the studies by refs. [3,6,22,59]. Nonetheless, this finding contradicts other studies [34,52,67]. Regarding ROE, our finding supports the study of ref. [8] while contradicting those of refs. [59,67].

Accordingly, with the coefficients obtained, our models were formed as follows. In these equations, bold text indicates statistically significant coefficients.

$${ROA}_{it}=-0.729-0.064{ESG}_{it}+\mathbf{0.183}{\mathit{l}\mathit{n}\mathit{S}\mathit{I}\mathit{Z}\mathit{E}}_{\mathit{i}\mathit{t}}+\mathbf{0.302}{\mathit{G}\mathit{R}\mathit{O}\mathit{W}\mathit{T}\mathit{H}}_{\mathit{i}\mathit{t}}+{\epsilon }_{it}$$

$${ROA}_{it}=-1.499-\mathbf{0.099}{\mathit{E}\mathit{N}\mathit{V}}_{\mathit{i}\mathit{t}}+\mathbf{0.178}{\mathit{S}\mathit{I}\mathit{Z}\mathit{E}}_{\mathit{i}\mathit{t}}+\mathbf{0.297}{\mathit{G}\mathit{R}\mathit{O}\mathit{W}\mathit{T}\mathit{H}}_{\mathit{i}\mathit{t}}+{\epsilon }_{it}$$

$${ROA}_{it}=-1.158-\mathbf{0.122}{\mathit{S}\mathit{O}\mathit{C}}_{\mathit{i}\mathit{t}}+\mathbf{0.180}{\mathit{S}\mathit{I}\mathit{Z}\mathit{E}}_{\mathit{i}\mathit{t}}+\mathbf{0.304}{\mathit{G}\mathit{R}\mathit{O}\mathit{W}\mathit{T}\mathit{H}}_{\mathit{i}\mathit{t}}+{\epsilon }_{it}$$

$${ROA}_{it}=-34.815+\mathbf{0.385}{\mathit{G}\mathit{O}\mathit{V}}_{\mathit{i}\mathit{t}}+\mathbf{0.160}{\mathit{S}\mathit{I}\mathit{Z}\mathit{E}}_{\mathit{i}\mathit{t}}+\mathbf{0.322}{\mathit{G}\mathit{R}\mathit{O}\mathit{W}\mathit{T}\mathit{H}}_{\mathit{i}\mathit{t}}+{\epsilon }_{it}$$

$${ROE}_{it}=-5.005+0.003{ESG}_{it}+\mathbf{0.511}{\mathit{S}\mathit{I}\mathit{Z}\mathit{E}}_{\mathit{i}\mathit{t}}+\mathbf{0.701}{\mathit{G}\mathit{R}\mathit{O}\mathit{W}\mathit{T}\mathit{H}}_{\mathit{i}\mathit{t}}+{\epsilon }_{it}$$

$${ROE}_{it}=-0.928-\mathbf{0.234}{\mathit{E}\mathit{N}\mathit{V}}_{\mathit{i}\mathit{t}}+\mathbf{0.500}{\mathit{S}\mathit{I}\mathit{Z}\mathit{E}}_{\mathit{i}\mathit{t}}+\mathbf{0.686}{\mathit{G}\mathit{R}\mathit{O}\mathit{W}\mathit{T}\mathit{H}}_{\mathit{i}\mathit{t}}+{\epsilon }_{it}$$

$${ROE}_{it}=-2.182-0.167{SOC}_{it}+\mathbf{0.507}{\mathit{S}\mathit{I}\mathit{Z}\mathit{E}}_{\mathit{i}\mathit{t}}+\mathbf{0.702}{\mathit{G}\mathit{R}\mathit{O}\mathit{W}\mathit{T}\mathit{H}}_{\mathit{i}\mathit{t}}+{\epsilon }_{it}$$

$${ROE}_{it}=-114.129+\mathbf{1.332}{\mathit{G}\mathit{O}\mathit{V}}_{\mathit{i}\mathit{t}}+\mathbf{0.414}{\mathit{S}\mathit{I}\mathit{Z}\mathit{E}}_{\mathit{i}\mathit{t}}+\mathbf{0.768}{\mathit{G}\mathit{R}\mathit{O}\mathit{W}\mathit{T}\mathit{H}}_{\mathit{i}\mathit{t}}+{\epsilon }_{it}$$

4. Conclusions

Our study aims to answer the following research question: “Without mandatory disclosure requirements, did pro-ESG policies, an indicator of the environmental, social, and governance efforts, affect the corporate financial performance of fast-moving consumer goods firms in North America during the period of SCKP, which is relatively short? If yes, in what direction?” The question of how non-mandatory sustainability reporting affects financial performance is given an outlook through our analysis. We determined the appropriate panel data fixed effects model and performed pre- and post-estimation diagnostic tests. Our findings align with the findings of many studies in the literature.

Results from the regression models suggest that the ESG score has no significant impact on the financial performance (ROA and ROE). In contrast, ESG pillars have different directions regarding both performance indicators. ENV and SOC are found to be negatively associated with the ROA of fast-moving consumer goods firms, indicating that these categories decrease the efficiency of assets. Further, ENV negatively affects ROE, while SOC has an insignificant impact. These results indicated that increased environmental and socially sustainable operations might require more financial funds, thus having fewer funds to invest in valuable projects and lower financial performance.

Additionally, firms that focus on environmentally and socially responsible practices incur high financial costs, resulting in poor financial performance in the long term. For the 113 fast-moving consumer goods firms in North America analyzed from 2013 to 2020, the period of SCKP, it is unsurprising to find insignificant and negative influences of ESG and two components, ENV and SOC, due to the policy of governments neglecting protocol. As the most significant influencer compared to ENV and SOC, GOV positively affects firms’ financial performance indicators, ROA, and ROE. Higher GOV supports the efficiency and effectiveness of equity and assets, which overly improves financial performance. Developed countries tend to have rules and regulations that force better corporate governance and more socially responsible behavior for corporations. The existence of a sound financial system in developed countries can improve financial performance by providing funds at lower costs to firms with better corporate governance practices. Better corporate governance can also add value by improving firm performance through transparency and accountability, independence, protection of shareholders’ rights, better labor policies, and productivity improvements.

Even though the Kyoto Protocol has not fully fulfilled its function, many studies suggest that it is an international mechanism that has created a starting point for shaping policies to combat climate change worldwide [71,72]. After enacting the protocol, firms from countries committed to reducing greenhouse gas emissions were subject to legal sanctions and scrutiny from investors, NGOs, and other stakeholders. Thus, the Kyoto Protocol has forced firms to improve their ESG [73]. Our results support this issue because most of the firms in the sample are from Canada and the USA, which did not commit to SCKP. Further, ENV and SOC serve shareholders’ interests in our study’s findings, implying that ESG expenditures do not pay off in the short term.

Improving ESG activities requires costly investments, and the resulting benefits are shared with society. Therefore, it cannot be expected to provide economic benefits to the company in the short term. However, sharing the ESG costs from developing standards and compliance activities with society, the government, and other stakeholders can mitigate this negative impact.

Considering the choice of population and period, the study results have important implications for policymakers, researchers, and regulators in the North American region and other developed countries. While North America continues to lag behind its European Union peers on ESG regulations, broader adoption by market participants should remain relatively strong. North America has been an attractive region for foreign investors over the past decade. Foreign firms investing in this region may require regulatory bodies to implement several essential ESG reporting standards, rules, and requirements that will significantly impact the country’s investment environment. Such pressures could also lead to the emitting industries adopting clean technologies in the two major North American countries. Since North America did not already support this protocol, civil society organizations can play an important role in facing these challenges and promoting sustainable development through their multifaceted activities. During this period, they can encourage the efforts of the business world to create markets together with compliance and competition. Public institutions and professional NGOs should implement incentive policies in different areas, such as products, services, and financing, so stakeholders prefer businesses that carry out ESG activities.

Further, states should undertake essential duties and shift public resources and incentives in this direction. Environmental and social responsibility activities of corporations that are more exposed to state sanctions and rules also meet public expectations and produce results in favor of stakeholders. These implications are consistent with the 2030 Agenda for Sustainable Development Goals, which was adopted by all United Nations members in 2015.

Considering that approximately 20 of the 113 fast-moving consumer goods firms in North America included in this study are multinationals, fully integrating sustainable policies into the management decision-making process is of critical value from a strategic perspective. Investing in ESG scores will enable firms to improve their stakeholder relations, especially since the budgets and initiatives of multinationals have a more substantial impact. If a firm continues its activities by being adopted by its stakeholders, it can gain a competitive advantage and increase its financial performance. For example, firms that invest in reducing their carbon footprint and comply with environmental regulations can differentiate themselves from their competitors and improve their financial benefits in the medium and long term.

This study has several limitations. First, the sample is restricted to fast-moving consumer goods firms with complete data on Bloomberg. Data were collected from firms in the North American region from 2013 to 2020. Second, only the Bloomberg ESG rating is used to obtain data. No unified accounting standard exists to measure ESG ratings, which may affect the findings.

Regarding the measure of the dependent variable, this study includes only accounting measures that assess financial performance. For this, future studies could contribute to the literature by comparing the North American fast-moving consumer goods industry to those in other regions, for instance, Western Europe, which ratified SCKP with its 28 member states and made ESG mandatory by implementing the “comply or explain” principle. Other future studies could perform similar analyses using individual ESG subcategories such as CO₂ emissions, board size, board structure, and general assembly rights as independent variables to investigate the ESG impact on different financial performance measurements rather than accounting ratios. Additionally, future studies can contribute to the literature by comparing the effects of ESG on financial performance before and after the COVID-19 pandemic.

Some Caveats Related to the Findings

In this section, we address some alternative interpretations of the findings from the study. From a managerial perspective, in North America, non-mandatory ESG disclosure during this period led to higher financial performance due to greater firm trust in external stakeholders. Could the increase in ESG scores of the multinational companies included in this study (Procter & Gamble, Unilever, Coca-Cola, Kellogg’s, Metro, Pepsico, Herbalife, etc.) over the years, thus attracting more institutionalized foreign investors, have increased financial performance? Dantas suggested that the source of the positive impact on firm performance is not ESG activities but rather capital flows from institutional investors due to the attraction of a high ESG score [74]. Although this is not the purpose of this article, it could be a topic for future research. This article found that non-mandatory reporting disclosure without public sanction would improve financial performance, especially within the corporate governance framework.

Since this study covers the aftermath of the Global Financial Crisis and the beginning of the COVID-19 pandemic, it is essential to note that North American economies (notably the USA) implemented massive fiscal and monetary stimuli as a matter of public policy, which in turn should have positively affected firms’ financial performance. Fiscal stimuli weaken implicit guarantees, leading to less credit supply [75] and incentivizing firms to go to equity markets to finance their projects. Given the monetary stimuli, the cost of equity is lower; thus, ROE improves.

The last factor to be discussed as a caveat is the role of policy uncertainty [76]. Uncertainty affects corporate financial performance through reversible equity investments’ real option value and exhaustion [76]. Given that this study included significant events such as the Brexit referendum (which had essential spillover effects for North American firms) [77] and the onset of the COVID-19 pandemic, it may be possible that firm performance and ESG investments moved together due to uncertainty and the increasing popularity of ESG during the period.