Environment and Interdisciplinary Development

Examining the Impact of Environmental, Social and Governance (ESG) Performance on Future Operating Cash Flows: The Moderating Role of Profitability

Document Type : Original Article

Authors

Mohammad Javad Zare Bahnamiri 1
Fatemeh Talkhabi 2
Reza Yaqobi Berijani 2

1 Department of Accounting, Faculty of Economic Sciences and Administration, University of Qom, Qom, Iran

2 Department of Accounting, Faculty of Management and Accounting, Tolouemehr University, Qom, Iran

10.22034/envj.2025.506861.1472
Abstract
Introduction: Environmental, Social, and Corporate Governance (ESG) activities are vital for sustainable growth, and prior studies have shown that Environmental, Social, and Corporate Governance performance has both financial and non-financial consequences for firms. Future operating cash flows are also among the key constructs in firm valuation. Moreover, profitability is expected to influence the relationship between Environmental, Social, and Corporate Governance performance and future operating cash flows, as strong profitability indicates that a firm has sufficient financial margins to cover the costs of implementing Environmental, Social, and Corporate Governance practices without creating significant financial risk. Consequently, an increase in future operating cash flows for such firms is not unexpected. Therefore, the objective of this study is to examine the effect of environmental, social, and governance performance on future operating cash flows and, subsequently, to provide evidence on the moderating role of profitability in the relationship between Environmental, Social, and Corporate Governance performance and future operating cash flows.
Materials and Methods: The statistical population of this study consists of companies listed on the Tehran Stock Exchange. The sampling method is based on availability using a screening approach. From among the listed companies, those without limitations such as being financial institutions, holding companies, banks, insurance companies, or having incomplete information were selected. Additionally, companies were required to be active members of the Tehran Stock Exchange from the beginning of 2015 to the end of 2023. By referring to various databases of the Tehran Stock Exchange, the required data were collected from annual financial statements, accompanying notes, financial activity reports, and board of directors’ reports. This research is strategic/quantitative in nature, descriptive in purpose, empirical in approach, and applied/library-based in methodology. To test the research hypotheses, a mathematical model was estimated using multivariate regression. The data were structured as panel data, and the Generalized Method of Moments (GMM) estimator along with Stata software version 17 was used to test the research hypotheses.
Results: The results of the first hypothesis test indicate that companies’ environmental, social, and governance performance is positively associated with future operating cash flows. This implies that improvements in environmental, social, and governance activities can lead to an increase or intensification of future operating cash flows. Furthermore, the results of the second hypothesis test show that profitability has a positive effect on the relationship between Environmental, Social, and Corporate Governance performance and future operating cash flows. Thus, it can be stated that profitability strengthens the positive relationship between corporate Environmental, Social, and Corporate Governance performance and future operating cash flows.
Discussion: This study examined the relationship between environmental, social, and governance performance and future operating cash flows in companies listed on the Tehran Stock Exchange. In addition, this relationship was analyzed under conditions of corporate profitability. The findings support the resource-based theory and theoretical reasoning that suggest a positive relationship between corporate Environmental, Social, and Corporate Governance performance and earnings quality. By demonstrating that corporate environmental, social, and governance performance provides information about firms’ future financial prospects and earnings quality, this study enriches the existing literature in this field.

Keywords

Environmental
Social and Governance Performance
Operating Cash Flows
Profitability

Subjects

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Environment and Interdisciplinary Development
Volume 10, Issue 90
Autumn 2025
Pages 31-43

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