ESG Scores and Firm Productivity: Evidence from South Korea

This study tests the relationship between environmental, social, and governance (ESG) scores and firm productivity in South Korea. We employ a lagged-term regression analysis and instrumental variable approach to find that the composite score of ESG is inadequate in explaining total factor productivity (TFP). This finding is due to the mixed direction that each E, S, and G component has on TFP. The governance component consistently impacts firm productivity while Environment and Social components do not. Additionally, labor productivity is positively linked with ESG scores. We argue that the labor market is the channel through which the ESG performance and firm productivity are linked and whether firms can exploit this channel depends on financial restrictions.