Abstract

The corporate world has been increasingly shifting from short-term profit maximizing strategies to more sustainable long-term ones. As a result, large organizations have been exerting extra effort to adopt environmental, social, and governance (ESG) performances, as a tool to improve their societal behaviors and public reputation. However, the loop question remains unsolved: is ESG a driver of financial performance (FIN) or is it financial performance that drives ESG? Building on the slack-resources theory, and bridging finance, sustainability, and operations management literatures, a dynamic lagged regression model is proposed to empirically investigate the impact of FIN performance on ESG along with the moderating effect of total quality management (TQM) from a multi-industry and cross-national perspective. The analysis relies on a panel dataset from the years between 2012 and 2018, with a sample of multinational organizations from Europe, the United States, and Asia. The findings provide robust statistical evidences supporting a stimulus effect of operational financial measure (i.e., free cash flow, FCF) on ESG scores. While the interaction between TQM and FCF has a negative effect on ESG scores, the interaction between TQM and Tobin’s Q (i.e., firm market value) reveals a positive relationship with ESG. This study sheds further insights for both research and practice advancing knowledge toward better operationalization of sustainability management.