Nuber, Velte and Hörisch (2019) found a U-shaped, time-lagged impact of sustainability performance, measured by Thomson Reuters Asset4 ESG scores, on the financial performance of large listed German corporations (DAX30, MDAX and TecDAX indices, 2008-2017), and closed by enumerating six unresolved issues: generalizability to small and medium-sized enterprises; robustness to alternative sustainability measures beyond the proprietary "black box" Asset4 ratings; the omitted moderating role of marketing and advertising intensity; the direction of causality, since a moderate reverse channel from return on assets to ESG performance was detected; the effect of the new EU disclosure and sustainable-finance regulatory regime; and the identification of the specific non-financial indicators that drive stakeholder and investor decisions. Later studies report conflicting functional forms (U-shaped, inverted U-shaped, and regime-switching), market-specific causality results with no causal identification for Germany, documented divergence across ESG rating providers, and only emerging SME and post-CSRD evidence. Each of the six issues remains open as a separate research direction.

Background

Whether corporate engagement with environmental, social and governance (ESG) issues - often called sustainability performance or corporate social performance - improves a firm's financial performance (FP) is one of the most heavily studied questions in management, finance and accounting. FP is typically measured either by accounting profitability such as return on assets (ROA) or by market-based valuation such as Tobin's q, the ratio of a firm's market value to the replacement cost of its assets. Early work debated only the sign of a linear association. Barnett and Salomon (2006) proposed instead a curvilinear relationship, in which the financial payoff first falls and then rises as social performance increases (a U-shape), because firms must pass a learning threshold before social initiatives pay off. A meta-analysis of more than 2000 empirical studies by Friede, Busch and Bassen (2015) found a broadly nonnegative association, but explicitly could not settle its causal direction.

Nuber, Velte and Hörisch (2019) studied large listed German corporations - members of the DAX30, MDAX and TecDAX stock indices - over 2008-2017, scoring sustainability performance with the Thomson Reuters Asset4 ESG ratings. Asset4 is a commercial database that scores firms on environmental, social and governance pillars from reported and estimated data; because its weighting and data-collection rules are proprietary, researchers describe it as a "black box". Drawing on stakeholder-agency theory - the view that managers, as agents, must balance shareholder claims against those of broader stakeholders (customers, employees, regulators) and that sustainability investment pays off through stakeholder support - the authors moved beyond earlier linear German evidence (for example Velte, 2017) by estimating time-lagged curvilinear regressions, in which sustainability performance in one period explains financial performance in later periods, with a squared term capturing curvature. They found a U-shaped, time-lagged relationship, implying that firms reap financial rewards only at high sustainability levels.

The design could not establish causality, however. Reverse causality is the concern that profitable firms simply invest more in sustainability, rather than sustainability creating profit; the authors detected a moderate reverse channel from ROA to ESG performance and acknowledge residual endogeneity, the general problem that the explanatory variable is not statistically independent of other determinants of the outcome. Credible identification tools exist in adjacent literatures: Flammer (2015) used a regression discontinuity design (comparing US firms whose CSR shareholder proposals barely passed against those whose proposals barely failed), and Servaes and Tamayo (2013) showed for US firms that CSR's effect on firm value depends on customer awareness, proxied by advertising intensity - precisely the moderator Nuber, Velte and Hörisch could not include for lack of data. Separately, Berg, Kölbel and Rigobon (2022) documented that ESG ratings from different providers diverge dramatically, so results conditioned on a single rater such as Asset4 may not generalize. This is the state of knowledge against which the source paper enumerates its open issues.

Problem Statement

In the formulation of Nuber, Velte and Hörisch (2019), six open issues remain concerning the curvilinear, time-lagged impact of sustainability performance on the financial performance of large listed German corporations (estimated as U-shaped in the source). They were raised by the authors as separate limitations and future-research directions: (1) Generalizability: does the curvilinear, time-lagged relationship extend beyond large listed German corporations to small and medium-sized enterprises, whose stakeholder environments, resource constraints and disclosure practices differ? (2) Measurement robustness: does the relationship survive alternative sustainability measures (for example, Bloomberg disclosure scores, sustainability index memberships, or hand-collected report data) rather than the proprietary Thomson Reuters Asset4 ratings whose black-box construction may drive the result? (3) Moderation: is the relationship moderated by marketing and advertising intensity, which prior work on customer awareness suggests conditions the financial payoff of sustainability? (4) Causal direction: does sustainability performance drive financial performance, or does profitability enable sustainability investment? The study detected a moderate reverse-causality channel from return on assets to ESG performance; what happens to the U-shaped lagged relationship once endogeneity is addressed with credible identification? (5) Institutional regime: how do recent regulatory changes (for example, EU directive 2014/95/EU on non-financial disclosure, the EU Sustainable Finance taxonomy, and the growing influence of the Principles for Responsible Investment) alter the sustainability-financial performance link? (6) Mechanism: which specific non-financial indicators drive the decisions of stakeholders and investors? All six issues are jointly at stake: resolving a single issue does not settle the task, and each concerns whether the U-shaped, time-lagged German result survives and under which boundary conditions, and the measurement or identification design that would settle it.

References

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