Prior research on environmental, social and governance (ESG) has predominantly treated sustainability performance as a determinant of financial outcomes, leaving the reverse question – whether improving profitability prompts managers to scale back ESG investment – largely unexamined. It uses 7,405 firm‑year observations of Chinese A-share listed firms covering the period 2019-2023. It employs two-way fixed‑effects models to examine the feedback effect of return on equity (ROE) on the composite ESG rating. More importantly, it investigates this effect on its two separate sub‑components, namely management practice and controversy. It finds that a rise in ROE significantly depresses the management-practice score at the 5.000% level while leaving the controversy score unaffected, and the gap between the two coefficients is itself significant (p<0.05). The negative feedback is concentrated in the environmental dimension. Decomposing ROE reveals that only its firm-specific component – not the industry-common component – drives the effect (significant at the 5.000% or 1.000% level), which points to managers’ own profit volatility rather than sectoral conditions. The effect is amplified by intense analyst coverage and high carbon intensity. Taken together, financial performance crowds out proactive ESG management, and this crowding-out is confined to profitable intervals and driven by firm-specific earnings fluctuations.
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Share and Cite
Yang, A. (2026) Asymmetric Feedback from Financial Performance to Listed Firms’ ESG Investment: Two-dimensional Decomposition of Management Practice and Controversy. Hong Kong Financial Bulletin, 2(1), 57-65. https://doi.org/10.71052/hkfb2025/KOLD4250