Does ESG Drive Performance or Does Performance Enable ESG ? Evidence of Reverse Causality From Korean Firms

ABSTRACT The Environmental, Social, and Governance (ESG)‐performance literature has grown substantially, yet a fundamental question remains underexplored: do ESG investments improve firm performance, or do high‐performing firms simply invest more in ESG? We empirically address this question using panel vector autoregression with Granger causality tests on Korean listed firms rated by the Korea Corporate Governance Service (2013–2021), examining disaggregated ESG components alongside both financial performance and innovation outcomes. After controlling for firm and year fixed effects, we find no evidence that ESG improvements predict subsequent profitability or innovation within firms. However, profitability significantly predicts subsequent Environmental ESG investment, consistent with organizational slack theory. These findings suggest that much of the observed ESG‐performance association may reflect selection rather than causation. We discuss implications for the broader sustainability, CSR, and innovation literatures, arguing that the field should routinely test for reverse causality before drawing causal conclusions informing corporate strategy and public policy.