Strong corporate governance delivers the clearest and most consistent financial gains for Philippine listed firms, while environmental and social initiatives show more uneven and delayed payoffs, according to state-run policy think tank Philippine Institute for Development Studies (PIDS).

Philippine Stock Exchange (PSE)-listed firms with higher governance scores tend to post better asset growth, liquidity, operational efficiency, and market valuation, reinforcing the view that sound oversight, transparency, and board effectiveness are critical to sustaining investor confidence, said PIDS senior research fellow John Paolo R. Rivera and Ritsumeikan Asia Pacific University (APU) Graduate School of Management professor Michael Angelo A. Cortez in their discussion paper titled “Governance and Value: A Disaggregated Environmental, Social, and Governance (ESG) Analysis of Corporate Financial Performance (CFP) in Philippine Publicly Listed Firms.”

According to the paper published on Tuesday, March 17, these findings are based on an analysis of 18 non-financial firms listed on the PSE from 2015 to 2023, covering 162 firm-year observations and drawing on Bloomberg ESG data alongside multiple financial performance metrics.

In particular, both aggregated ESG scores and disaggregated pillars—environmental, social, and governance—were examined across a wide set of financial performance indicators, including profitability, liquidity, solvency, efficiency, growth, and market valuation.

PIDS noted that the broader ESG framework yields mixed results when taken as a whole. While overall ESG scores are linked to improvements in profitability indicators such as return on assets (ROA) and return on equity (ROE), these gains are often modest and can be offset by weaker short-term market valuation metrics, it said.

The think tank highlighted that ESG benefits are not uniform: governance initiatives produce immediate and measurable impacts, while social investments—such as workforce development and community engagement—tend to support growth only over time, and environmental efforts show limited and less consistent effects across firms.

Market-based indicators further illustrate this divergence, PIDS said, citing that governance improvements were found to significantly lift valuation metrics, including market capitalization and Tobin’s Q—a commonly used measure that compares a firm’s market value to the replacement cost of its assets, with higher values indicating stronger investor expectations of future growth.

In contrast, aggregate ESG scores sometimes correspond to weaker short-term readings in Tobin’s Q and price-to-earnings (P/E) ratios, suggesting that markets may initially price in the costs of ESG investments before recognizing their longer-term benefits, the think tank said.

The PIDS study also showed that external conditions play a decisive role in determining whether ESG efforts translate into financial gains. High financing costs, as measured by the weighted average cost of capital (WACC), were found to consistently dampen ESG-related benefits across profitability, efficiency, and valuation indicators, it added.

This implies that even well-governed firms may struggle to realize the full value of ESG strategies in a high-interest-rate environment, while stronger economic growth tends to amplify returns from such investments.

PIDS’ analysis also considered macroeconomic factors, noting that gross domestic product (GDP) growth had little impact on ESG-related outcomes.

The authors said their findings underscore the need for firms and policymakers to prioritize governance reforms while addressing structural constraints, particularly financing costs, to unlock the broader and longer-term benefits of ESG adoption.

As such, PIDS urged PSE-listed firms to strengthen board structures, improve transparency, and maintain rigorous compliance systems to enhance governance outcomes, while also implementing social initiatives strategically to generate measurable long-term financial returns.

The think tank also called on policymakers and regulators to provide guidance on corporate governance standards, facilitate access to affordable financing, and create incentives that allow firms to integrate ESG practices effectively without being constrained by high capital costs.

Also, the authors stressed that environmental initiatives, while currently underweighted, should be gradually strengthened, particularly in capital-intensive industries, to align corporate strategies with sustainability and long-term value creation among listed firms.