Is ESG balance beneficial for the relationship between innovation and corporate financial performance?

This empirical study examines how the balance across environmental, social, and governance (ESG) dimensions impacts the relationship between innovation activities and corporate financial performance. Regression analysis on 336 listed Korean manufacturing firms reveals that greater ESG balance negatively moderates the effects of R&D intensity on profitability and growth. These findings prove robust when using separate environmental and social balance indicators instead of the composite ESG balance metric. Further analysis splitting the sample into higher versus lower ESG performance groups based on average scores shows ESG balance significantly negatively influences R&D investment and financial performance for firms in lower environmental and social performance categories. However, the moderating effect is insignificant for lower governance performers. The results suggest conflicting impacts of environmental, social, and governance aspects on innovation expenditures and financial metrics, making it inherently difficult to optimize the integration of innovation and ESG practices. Implications exist for corporate strategy around balancing R&D and ESG pursuits. Robust institutional frameworks are needed to better enable effective ESG-innovation integration.