The ESG Tipping Point: Nonlinear Effects and Thresholds in ESG Scores and Financial Performance of Selected African Firms

This study investigates the nexus between environmental, social, and governance (ESG) performance and corporate financial outcomes, with a focus on sustainable disclosure and Sustainable Development Goal (SDG)-aligned business practices in Africa. Based on a panel of 173 firms over the 2010–2022 period, the analysis employs the system generalized method of moments (SGMM) to address endogeneity and capture dynamic effects. Results indicate that ESG dimensions exert asymmetric impacts on firm performance: environmental and social scores significantly enhance market capitalization, while no robust positive association emerges for accounting-based performance measured by return on assets (ROA). Pronounced nonlinearities are observed as environmental and governance practices improve ROA only beyond critical engagement thresholds, underscoring the need for substantive and transparent ESG commitments to generate profitability gains. The social dimension follows an inverted U-shaped trajectory, suggesting diminishing returns when firms overinvest in social initiatives. The U-shaped relationship between the governance score and market capitalization shows that governance quality is a critical issue for investors in the financial markets. The heterogeneity of the identified thresholds, with governance requiring the highest level of engagement, offers new insights into the optimal design of ESG strategies. These findings highlight the crucial role of credible ESG disclosure in aligning corporate practices with stakeholder expectations, mobilizing sustainable capital, and advancing the Sustainable Development Goals in emerging markets.