Business strategy and Environmental, Social, and Governance (ESG) performance: Does a firm's strategic orientation matter?

This study investigates whether business strategy influences firms’ holistic Environmental, Social, and Governance (ESG) performance, and which strategic orientation has the greatest impact both across and within the distinct ESG pillars. Drawing on the Miles and Snow (1978) business strategy typology, we analyse a panel of 6,408 firm-year observations mostly drawn from the US. Our findings reveal a positive association between business strategy and aggregate ESG performance. Specifically, firms adopting a Prospector strategy exhibit significantly higher ESG performance relative to Defender firms, with notable advantages in the Environmental and Social dimensions. This differential, however, does not extend to the Governance pillar, likely due to the homogenisation of governance practices across industries. Importantly, even firms operating under substantial financial constraints or within environmentally sensitive sectors can enhance their ESG outcomes through a Prospector strategic orientation. These insights have significant implications for firms navigating evolving sustainability reporting regimes, particularly amid the growing adoption and implementation of mandatory IFRS Sustainability Standards. For managers and stakeholders, our results emphasise the importance of understanding both the intended and unintended consequences of strategic choices on ESG performance and demonstrate how strategic orientation can shape a firm’s capability to meet emerging sustainability compliance demands.