According to new research led by Assistant Professor of Finance Dr. Tawfiq Tahtamoni, Fortune 500 companies with strong environmental, social, and governance (ESG) policies are viewed more positively by investors, even if the company faces criticism for high executive compensation and high company debt. The study was recently published in the journal Management Decision.

“This matters because companies today are judged on both financial performance and how they act toward society,” Tahtamoni said. “The main takeaway is that ESG works better when it is connected to real decisions like executive incentives and financing. Companies should not treat ESG as just reporting; it needs to be part of how the firm is run.”

Tahtamoni and his co-authors examined data from 200 Fortune 500 firms between 2007 and 2022, including companies such as Apple, Amazon, and Microsoft. They found that high executive compensation and high company debt are often linked to weaker performance overall, but that investors can overlook those issues when a company pursues strong ESG practices.

“Going into the study, I expected ESG to have a positive effect on performance on its own,” he said. “But what we found is that ESG by itself doesn’t always improve performance. What really stood out is that ESG matters more when it works together with executive compensation and firm debt.”

Tahtamoni previously led a study looking at how ESG practices impacted the financial performance of United States-based IT firms. This time around, Tahtamoni and his co-authors expanded their scope to companies in a wider range of industries.

“Most studies look at one area at a time, like executive compensation, firm debt, or ESG,” he explained. “This paper brings them together and studies how they interact. It also looks at ESG as something that shapes decisions, not just something firms report.”

Dr. M. Kabir Hassan and Dr. Nayef Alkabbaa of the University of New Orleans, along with Dr. Mamunur Rashid of Canterbury Christ Church University (UK), co-authored the study. This research began when Tahtamoni was completing his PhD studies at the University of New Orleans. While there, he worked with his PhD supervisor and colleagues, and through his supervisor connected with Rashid in the UK. Regular meetings and consistently sharing drafts made the process smooth, even with the distance, according to Tahtamoni.

Asked to provide a tip to the Fortune 500 companies he looked into, Tahtamoni harkened back to what he considers the key takeaway from the study.

“ESG creates value when it is real and connected to decisions that firms make, not just when it is used for image,” he said.