| Summary: | Since sustainable development became a topical issue and the subsequent emergence of the Environmental Social Governance (ESG) concept, firms have continued to invest corporate resources in ESG activities. This has attracted research on the impact of ESG activities on corporate financial performance. However, prior studies mostly focused on the link between corporate ESG performance and financial performance without sectoral analyses. Again, the moderating effect of Financial Slack Resource (FSR) on the relationship between ESG performance and financial performance has not been explored in South Africa. Therefore, this study aimed to examine the impact of ESG performance on the financial performance of South African firms, including the sectoral analysis of the impact. It also examined the moderating effect of FSR on the impact of ESG performance on the financial performance of the firms. Finally, this study also focuses on the comparison between the low-level ESG performance firms and the high-level ESG performance firms. A deductive research approach was adopted, with stakeholder theory and slack resource theory serving as the basis for testing the study’s hypotheses. A census approach was used for selecting a population of 266 South African listed firms, but due to a lack of required data, some firms were dropped, resulting in a sample of 110 firms with 10-year balanced panel data spanning from 2012 to 2021 with 1,100 data points. A feasible generalised least squares regression was used to assess the impact of ESG performance on financial performance and the moderating effect of FSR. Welch’s two-sample t-test and Cohen's d were used to compare the financial performance of low-level and high-level ESG performance firms. Based on the findings, ESG performance positively affects the firms’ market-based financial performance (measured by Tobin’s Q and market value per share). Also, the impact of ESG performance on financial performance varied across the economic sectors. While ESG performance positively affects the market-based financial performance in the basic material sector, whereas positively affects only the accounting-based financial performance (measured by return on assets and return on equity) in the consumer sector. However, ESG performance negatively affects return on assets and return on equity in the real estate sector, but has no impact on any of the performance measures in the technology sector. Interestingly, a high level of FSR positively moderates the impact of ESG performance on the financial performance of the South African firms. Finally, high-level ESG performance firms achieved better financial performance than low-level ESG performance firms in South Africa. The study contributes to knowledge on sectoral differences in ESG performance’s impact on financial performance and the variables that moderate the relationship between ESG performance and corporate financial performance. Practically, South African firms should strategically nurture more FSR to facilitate more investments in ESG activities to achieve better financial performance, especially market-based financial performance.
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