ESG, Corporate Governance, and Financial Performance of U.S. Biotechnology Firms

Abstract

This study examines, the relationship between ESG and the financial performance, and, corporate governance structures and ESG performance, of listed firms in the US Biotechnology Industry. The second Part specifically analyzes whether key governance components such as board independence, gender diversity, and CEO duality, are associated with variations in ESG outcomes. Using a comprehensive panel dataset of 810 listed biotech firms observed between 2015 and 2024, Part I of the study evaluates Financial Performance across the composite ESG score and its three individual pillars. Meanwhile, the second Part evaluates the composite ESG score and its E and S pillars. The disaggregated approach allows for a more thorough understanding of ESG behavior. The results from Part I indicate that ESG performance does not exhibit statistically significant effects on accounting profitability, as measured by Return on Assets (ROA) and Return on Equity (ROE). However, weak, and inconsistent associations appear in Tobin’s Q market valuation models, suggesting that ESG activities may influence investor expectations rather than contemporaneous operating performance. This pattern is consistent with the view that ESG initiatives primarily affect long-term risk, reputation, and growth expectations rather than short-term accounting return. The results from Part II indicate that traditional corporate governance characteristics do not exhibit statistically significant effects on ESG performance across any model specification. There is a strong and increasing significance of year fixed effects in both the S and E pillars, indicating a pronounced upward trend in environmental and social engagement over time. Environmental and social behavior is driven by external, time-varying factors such as regulatory developments, evolving investor preferences, and broader societal shifts toward sustainability while the composite ESG measure does not exhibit a similar pattern, highlighting the importance of analyzing ESG dimensions separately. Overall, the findings indicate that environmental and social engagement is primarily shaped by macro-level forces rather than firm level characteristics.

This study contributes to the literature on how ESG is associated with financial performance of firms in the Biotechnology sub-sector of the healthcare industry, and second, on corporate sustainability and governance by providing empirical evidence that challenges the assumption that internal governance mechanisms are the dominant driver in ESG performance.