EXTERNAL GOVERNANCE AND THE ESG–PERFORMANCE NEXUS: EVIDENCE FROM BRICS COUNTRIES

Abstract

This study employs advanced econometric methods to investigate the impact of external governance mechanisms on the relationship between corporate sustainability initiatives and firm performance across the BRICS countries (Brazil, Russia, India, China, and South Africa). Using a comprehensive dataset of 2,987 non-financial firms from major stock exchanges from 2016 to 2023, we address key methodological limitations through two-stage least squares (2SLS), system GMM, and threshold regression models to control for endogeneity, simultaneity bias, and non-linear effects. Our robust empirical methodology incorporates multiple instrumental variables, dynamic panel specifications, and extensive robustness checks, including propensity score matching and quantile regression analysis. The findings indicate that external governance quality has a significant influence on the ESG-performance relationship, with a threshold effect observed at an External Governance Index of 0.52. Below this threshold, ESG investments tend to have lower returns, while above it, they deliver significant performance benefits. Market-based governance mechanisms have a stronger moderating impact than regulatory mechanisms, with the interaction effect being 1.8 times larger for institutional investor presence compared to government effectiveness measures. This study provides valuable insights for policymakers and managers seeking to optimize sustainable investments in emerging markets.

Keywords: External Governance, Corporate Sustainability, ESG, Firm Performance, BRICS, Threshold Effects, Dynamic Panel Models