The role of financial slack in enhancing ESG and organisations’ financial performance in the financial services sector

Abstract

This research examined the moderating role of financial slack in the complex relationship between Environmental, Social, and Governance (ESG) performance and financial performance within South Africa's financial services sector. As ESG considerations increasingly shape corporate strategy, companies must navigate the balance between ESG initiatives and profitability. Existing research presents contradictory findings on whether ESG investments enhance or hinder financial performance, particularly in emerging economies where regulatory frameworks and institutional trust remain inconsistent. Grounded in the Resource-Based View (RBV) theory, this research bridges a crucial gap by investigating the moderating role of financial slack in the relationship between ESG performance and financial performance. This research leveraged a Generalized Linear Model (GLM), incorporating ESG ratings and financial data from 21 publicly listed financial services companies on the Johannesburg Stock Exchange (JSE) over the period 2017 to 2024. This research proved that ESG performance is detrimental to financial performance of financial services companies in South Africa. Additionally, financial slack moderates the relationship between ESG performance and Tobin’s Q but not Return-on-Assets. The insights derived from this research holds profound implications for corporate leaders, policymakers, and stakeholders invested in financial sustainability. By unveiling the potential of financial slack as a catalyst for ESG success, companies can strategically align their sustainability efforts with profitability, driving informed financial resource allocation and policy development.