Transparency, innovation and growth: The triple wins of ESG in ASEAN firms

Findings reveal that environmental and governance disclosures strongly encourage green innovation initiatives, signaling that companies openly reporting their sustainability efforts are better positioned to develop technologies, processes, and systems that support low-carbon and environmentally conscious operations. Governance transparency, in particular, serves as a foundation for building internal systems that drive innovation through compliance, accountability, and structured decision-making processes.

A growing body of evidence is reshaping how companies in Southeast Asia approach sustainability and performance. A new study explores the intricate relationship between environmental, social, and governance (ESG) practices, green innovation, and financial performance across ASEAN firms.

The research, titled "ESG Practices, Green Innovation, and Financial Performance: Panel Evidence from ASEAN Firms" and published in the Journal of Risk and Financial Management (JRFM), provides one of the most comprehensive data-driven analyses of how responsible business practices translate into both immediate and long-term financial gains.

How ESG shapes green innovation across ASEAN markets

The study evaluates 174 publicly listed companies in ASEAN nations over the period of 2019 to 2023, leveraging a robust panel regression model to draw connections between ESG disclosure scores and key financial indicators such as return on assets (ROA) and Tobin’s Q. ESG data was sourced from Refinitiv, covering environmental, social, and governance disclosures, with green innovation scores derived from company reports.

Findings reveal that environmental and governance disclosures strongly encourage green innovation initiatives, signaling that companies openly reporting their sustainability efforts are better positioned to develop technologies, processes, and systems that support low-carbon and environmentally conscious operations. Governance transparency, in particular, serves as a foundation for building internal systems that drive innovation through compliance, accountability, and structured decision-making processes.

In contrast, social disclosure, representing labor practices, community engagement, and corporate responsibility, does not show a significant direct link to innovation capacity. Instead, it plays a stronger role in influencing short-term operational outcomes, highlighting the importance of understanding the different impacts of each ESG pillar.

The impact of ESG and green innovation on financial performance

A critical insight from the research is the differentiated timeline of ESG benefits. The social pillar of ESG shows immediate positive effects on both ROA and Tobin’s Q, reflecting how strong social practices can boost operational efficiency and enhance investor confidence in the short term. This could be attributed to better workforce engagement, improved reputational standing, and stronger stakeholder relationships, all of which contribute to better financial outcomes.

Meanwhile, environmental and governance disclosures deliver their strongest impact over the longer term, particularly through their influence on market valuation metrics such as Tobin’s Q. These findings suggest that companies that prioritize transparent environmental reporting and structured governance frameworks are rewarded by markets for their forward-looking strategies, even if immediate returns take time to materialize.

The study also establishes that green innovation acts as a partial mediator between ESG practices and financial performance. Firms that invest in innovation, supported by robust environmental and governance practices, experience stronger improvements in market value over time. This indicates that ESG is not just about compliance or risk management - it is a strategic pathway to building innovation capacity that sustains competitive advantage.

However, the research also identifies trade-offs. High governance compliance costs may exert short-term pressure on profitability, slightly dampening ROA while still enhancing longer-term market valuation. This finding highlights the need for companies to balance regulatory adherence with operational efficiency during their digital and sustainability transitions.

Strategic implications for businesses and policymakers

For ASEAN businesses, the research underscores a critical message: integrating ESG into core strategy is no longer optional. Firms seeking immediate gains should prioritize the social dimension, such as employee welfare, community engagement, and transparent stakeholder communications. These efforts deliver near-term financial returns while strengthening a company’s reputation in an increasingly competitive and socially conscious market.

For long-term resilience and growth, environmental and governance transparency are essential. These dimensions not only foster innovation but also enhance investor trust, signaling that firms are equipped to manage evolving regulatory landscapes and shifting consumer expectations around sustainability.

Policymakers in ASEAN economies also have a clear role to play. By fostering environments that support transparency and innovation, including incentives for green projects, standardized ESG reporting frameworks, and regional collaborations, regulators can help companies unlock the full potential of sustainable transformation. This policy support becomes especially critical in emerging markets where infrastructure gaps and inconsistent regulations can hinder the pace of green innovation adoption.

Additionally, the research highlights methodological advancements by combining panel regression models with granular ESG and financial data, offering a replicable blueprint for similar analyses in other regions. This analytical rigor ensures that the findings are both actionable and scalable for companies, investors, and regulators beyond Southeast Asia.

Future efforts should focus on sector-specific strategies to maximize the financial benefits of ESG. Industries with high environmental impact, such as energy, manufacturing, and transportation, stand to gain the most from transparent environmental reporting and robust governance systems that accelerate innovation adoption.