ESG and Financial Performance: The Mediating Role of Risk Management and the Moderating Effect of Board Independence and Audit Committees

Abstract

This study investigates the impact of Environmental, Social, and Governance (ESG) practices on the financial performance of Pakistani firms, examining the mediating role of Risk Management (RM) and the moderating effects of Board Independence (BI) and Audit Committee Effectiveness (AC). A quantitative research design was employed using a panel dataset of 250 firms covering 2010–2024 (3,500 observations). Descriptive statistics, correlation analysis, fixed- and random-effects regressions, mediation, and moderation analyses were conducted using STATA 17. Robustness checks were performed using lagged ESG measures and dynamic panel GMM. The results show that ENV, SOC, and GOV positively influence financial performance (ROA and ROE). ESG Disclosure (ESGD) and Corporate Sustainability Strategy (CSS) also contribute positively. Risk Management mediates the ESG–performance relationship, while BI and AC strengthen the effect of RM on financial outcomes. Robustness tests confirm the persistence and reliability of these findings. This study provides empirical evidence from an emerging market context, highlighting that ESG practices, supported by effective risk management and governance mechanisms, enhance profitability and shareholder value. It contributes to the literature by integrating ESG, risk management, and governance frameworks to explain financial performance. Managers are encouraged to implement ESG initiatives alongside comprehensive risk management, while policymakers can promote strong corporate governance structures to improve firm performance and financial resilience.