The effect of ESG practices on value creation: the moderating role of strategic risk

This study aimed to investigate the effects of ESG practices on value creation, as moderated by the strategic risk exposure of firms. The study contextualised listed firms quoted in the environmentally sensitive sectors of the Bursa Malaysia EMAS Index. Strategic risk was further examined from two aspects of its manifestations, amongst which were structural risk and agency risk, and their moderating influences were separately investigated. Four key research questions were posed to guide the achievement of the study objectives. To facilitate answering the research questions, a quantitative research methodology with an ex-post facto and analytical design was employed. The study, as part of its core objectives, separately examined the impact of combined ESG performance practices and their individual components practices (environmental, social, and governance practices) on value creation, measured by enterprise value multiple (EVM) and market value added (MVA). The proxies for the moderating variable included weighted average cost of capital and executive compensation, while the control variable proxies included firm size and enterprise growth. The study sampled all 161 companies across five environmentally sensitive sectors from 2019 to 2023. Data were analysed using descriptive statistics, cluster analysis, correlation, and regression techniques. Key findings revealed that combined ESG practices have a significant negative effect on EVM but have an insignificant effect on MVA. However, in considering the components of ESG practices, environmental practices had a significant negative effect on EVM and MVA, while social practices had a significant negative effect on MVA only. The governance practices component was found to have a significant positive effect on both value creation metrics. Regarding the moderation effects, structural risk does not significantly influence the overall ESG practices and value creation relationship, but it does have a significant moderating effect on the environmental practices and value creation association. Similarly, agency risk does not moderate the relationship between the combined ESG practices and value creation but significantly moderates the relationships between environmental and governance practices and value creation. Environmental and governance practices, which accounted for more than 60% of the overall ESG performance scores of the sampled firms, demonstrated that interactions with the proxies of strategic risk would significantly influence value creation. The study has unveiled a new dimension of pursuing corporate value creation through aligning corporate decision-making structures and sustainability strategies with the strategic risk management strategies, which could attract significant implications for corporate entities, regulatory authorities and policy makers.