The Moderating Role of Strategic Investment in R&D and Advertising in Firms' ESG–Performance Relationship

This paper examines the association between environmental, social, and governance (ESG) ratings and firm performance, taking into account the role of firms' strategic investments in research and development (R&D) and advertising. Drawing on resource-based view and signalling theory perspectives and employing the generalised method of moments (GMM) estimator for a sample of UK firms over the 2002–2018 period, our findings suggest a significantly positive association of firms' aggregate ESG rating with accounting and market-based measures of firm performance. Further, we find that R&D and advertising expenditures positively moderate firms' ESG–performance relationship. The moderating role of R&D and advertising persists when we analyse the three (environmental, social, governance) pillars of ESG separately. The results suggest that strategic investments in R&D and advertising complement firms' ESG efforts. The findings remain robust after using alternative measures of performance, an ESG combined score that takes both positive and negative aspects of ESG into account, propensity score matching and controlling for self-selection bias. Our findings provide useful insights for managers in the evaluation of the efficacy and disclosure of strategic investments in ESG, R&D and advertising and for policy makers and standard setters in the deliberation of sustainability standards and disclosure regulations.