The Impact of ESG on the Financial Performance of Global Textile and Apparel Industry Firms

Abstract

This thesis explores the impact of Environmental, Social, and Governance (ESG) scores, combined and individual, on the financial performance of global textile and apparel industry firms. With the textile and apparel industry contributing to increasing environmental degradation and poor working conditions of workers employed in the supply chain process due to the proliferation of fast fashion, consumers and investors alike are pushing for increased ESG considerations and implementation in the firm’s operations, which in turn has an effect on the financial performance of these firms as well as on the brand image and reputation. Both static and dynamic panel models are applied to conduct the data analysis on 68 textile and apparel firms globally, with 5 years of data from 2019 to 2023. Pooled OLS, Fixed Effects (FE), and Random Effects (RE) are used within the static model. While within the dynamic model, System GMM (Generalized Method of Moments) is used. To conduct the analysis, ROA (Return on Assets) and ROE (Return on Equity) are taken as dependent variables, while combined and individual ESG scores are taken as key independent variables, along with control variables like total assets, capital expenditure, leverage, and closing prices for the shares of the company as well as global economic indicators like brent oil prices and current USD exchange rate. The pandemic is also introduced as a dummy variable (2020-2021). The results are mixed within both static models and dynamic models. Within the static models, when looking at the combined ESG scores (ESGC), ESGC has a significant negative effect on ROA while no significant effect on ROE. Based on the individual ESG scores, Environment significantly negatively affects both ROA and ROE. On the other hand, results based on System GMM show that ESGC has no significant influence on ROA and ROE. Based on the individual ESG scores, Environment has a negative significant effect on both ROA and ROE, while only Governance has a positive significant effect on ROA, and both Social and Governance scores have a positive significant influence on ROE. This research provides valuable insights into the growing body of literature on ESG evaluation, emphasizing the importance of considering industry-specific nuances in assessing financial performance. Keywords: ESG; financial performance; textile and apparel industry; fast fashion; panel data analysis.

Date of Award	2024
Original language	American English
Awarding Institution	HBKU College of Islamic Studies