Abstract:
1. Introduction
The global emphasis on Environmental, Social, and Governance (ESG)
performance has increasingly shaped corporate strategies, with Sri Lankan
regulators prioritizing ESG-driven initiatives. Despite this, stakeholders
such as investors, policymakers, and corporate leaders remain uncertain
about the financial implications of ESG performance. Focusing on Sri
Lanka's manufacturing sector, a key contributor to the country's economy
and sustainable development, the research fills the void in prior studies by
assessing the ESG-financial performance link within this industry.
2. Research Methodology
This study employed the two-step system Generalized Method of Moments
(GMM) model to address the persistent behavior of return on assets (ROA)
and firm size. The dataset comprised 20 manufacturing firms listed on the
Colombo Stock Exchange (CSE) over nine years (2015–2023), selected
based on adherence to ESG criteria. Data analysis included descriptive
statistics, correlation analysis, and the two-step system GMM regression,
with ROA as the dependent variable and environmental, social, and
governance performance as independent variables.
3. Findings and Discussion
The results indicated that environmental performance had a negative
impact on ROA, while social and governance performance positively
influenced it. The negative effect of environmental performance was
attributed to high implementation costs, which can outweigh short-term
financial benefits, whereas social and governance practices contributed to
improved stakeholder relationships and operational efficiency.
4. Conclusion and Implications
This study highlights the need to integrate environmental initiatives with
social and governance practices to achieve a balance between
sustainability and financial performance. The findings offer valuable
insights for investors, corporate leaders, and regulators align ESG practices
with financial goals to better ensuring long-term growth and stability.
