In recent years, the importance of sustainability and corporate social responsibility (CSR) has grown significantly within the corporate sector, driven by evolving regulatory frameworks that emphasize sustainability reporting. The European Union’s Non-Financial Reporting Directive (NFRD), implemented in 2014, marked a pivotal moment by requiring large corporations to disclose non-financial information relevant to stakeholders. This directive sought to enhance transparency regarding environmental, social, and governance (ESG) practices. However, the non-binding nature of the NFRD led to inconsistencies in defining and measuring ESG performance. To address these challenges, further reforms were introduced, including the Corporate Sustainability Reporting Directive (CSRD) in 2022, which aims to strengthen sustainability reporting standards and align them with the EU’s broader sustainability objectives.

Research consistently demonstrates a positive correlation between robust ESG practices and improved financial performance, suggesting that organizations prioritizing sustainability may also gain competitive advantages in the marketplace. However, the existing literature presents a more nuanced picture, highlighting significant disparities in ESG ratings among evaluators. Firm size, in particular, emerges as a critical factor influencing ESG performance by shaping resource allocation and stakeholder scrutiny. Larger firms typically possess the financial capacity and expertise to develop and implement comprehensive ESG strategies, whereas smaller companies often face resource constraints that limit their sustainability initiatives.

Research also suggests that larger firms with higher revenues tend to exhibit more robust ESG practices compared to small and medium-sized enterprises (SMEs). This disparity is often attributed to the greater resources, formalized processes, and heightened scrutiny that larger firms experience from investors and regulators. Additionally, larger firms are typically subject to stricter regulations and elevated stakeholder expectations regarding transparency and sustainability, which drive the adoption of more comprehensive ESG reporting and initiatives.

Larger firms can allocate dedicated resources to ESG initiatives, whereas SMEs often lack the financial and human capital necessary to implement extensive ESG strategies. Moreover, larger firms face greater pressure from stakeholders, including investors and customers, to adopt sustainable practices. In contrast, SMEs often operate in less scrutinized environments, which may lead to a lower emphasis on formal ESG practices. Additionally, larger firms benefit from access to expertise and networks that facilitate the integration of ESG considerations, whereas SMEs may lack the same level of access or awareness.

Several studies have examined the relationship between gender diversity in leadership and ESG performance. The prevailing theory posits that diverse leadership teams are better equipped to understand and address the complexities of ESG issues. Research further suggests that companies with greater gender diversity in management often achieve superior ESG outcomes, as diverse teams contribute a wider range of perspectives and tend to adopt more innovative approaches to sustainability (Kerneïs, 2022).

Much of the existing research focuses primarily on large corporations, leaving a significant gap in understanding how SMEs adopt and implement ESG practices and how gender diversity influences this process (Nielsen & Huse, 2010; Robinson & Dechant, 1997). Consequently, there is a lack of studies examining the interplay between firm size and gender diversity in shaping ESG outcomes, particularly within the SME context.

The dataset for this study comprised 6,386 observations of board characteristics from 352 U.S. companies, sourced via BoardEx, along with 4,556 ESG ratings obtained from Asset4, spanning the years 2010 to 2022. Financial metrics were drawn from Amadeus, resulting in a total of 4,525 observations.

This paper examines the relationship between firm size and ESG scores, positing that smaller companies tend to exhibit lower ESG scores compared to their larger counterparts. Using an Ordinary Least Squares (OLS) regression model, the study analyzes various factors influencing ESG performance, including gender diversity and governance characteristics. Through this analysis, it aims to provide valuable insights into how firm size impacts ESG outcomes, offering guidance for future corporate strategies in sustainability practices. The findings are expected to enhance understanding of the dynamics shaping ESG performance and emphasize the importance of adopting comprehensive sustainability frameworks in the corporate sector.

This paper contributes to the understanding of the relationship between firm size, gender diversity, and ESG performance. It demonstrates that larger firms typically achieve higher ESG scores, driven by superior resources and greater stakeholder pressure. Additionally, the findings reveal that board gender diversity positively influences ESG scores. By employing an Ordinary Least Squares (OLS) regression model, this research offers valuable insights into these dynamics, providing guidance for the development of effective corporate sustainability strategies.

Sustainability and corporate social responsibility (CSR) have become increasingly prominent, particularly due to evolving sustainability reporting regulations. The European Union’s Non-Financial Reporting Directive (NFRD), enacted in 2014, requires large corporations to disclose non-financial information relevant to investors and stakeholders. These disclosures include environmental impact, social issues, labor practices, human rights, board diversity, and anti-corruption measures (European Commission, 2014). However, the non-binding nature of the NFRD has led to inconsistencies in how ESG (Environmental, Social, and Governance) performance is defined and measured.

Agencies such as MSCI (2020), Asset4, and Sustainalytics evaluate ESG performance using distinct frameworks, often resulting in significant differences in the quality and comparability of sustainability reports (Christensen et al., 2022). To address the challenges exacerbated by the COVID-19 pandemic, the European Parliament introduced the Corporate Sustainability Reporting Directive (CSRD) in 2022 (European Parliament, 2022). The CSRD strengthens the sustainability reporting requirements established by the NFRD (EFRAG, 2022). Taking effect in 2024, the CSRD provides comprehensive coverage of key ESG aspects, aiming to improve the transparency and standardization of sustainability reporting across organizations.

This directive builds on the European Sustainability Reporting Standards (ESRS), developed by the European Financial Reporting Advisory Group (EFRAG), which outline standards across core ESG domains. These domains include pollution, climate change, biodiversity, water management, and the circular economy (Environmental); workforce issues, value chain workers, impacted communities, and consumers (Social); and corporate governance, risk management, internal controls, and ethical business conduct (Governance). Together, the CSRD and ESRS aim to standardize and enhance the quality of sustainability reporting, aligning with the EU’s sustainability objectives while addressing stakeholders’ demands for greater transparency and accountability.

Improved transparency in sustainability reporting is expected to enhance decision-making for investors and stakeholders, positively affecting both financial and non-financial company performance (Eccles et al., 2014; Khan et al., 2016). A substantial body of literature on the financial implications of ESG ratings indicates that approximately 90% of studies report a non-negative impact, with more than half identifying a positive correlation between ESG ratings and financial performance (Friede et al., 2015). Research by Shanaev and Ghimire (2022), Kang and Jung (2020), and Berg et al. (2022) further demonstrates that higher ESG ratings are associated with greater abnormal returns, whereas lower ratings often result in significant declines in stock value. These findings highlight the financial market’s sensitivity to ESG ratings and their critical role in shaping investor perceptions.

The absence of a standardized framework among ESG evaluators diminishes the benefits of sustainability reporting, emphasizing the need for unified and transparent standards (Eccles et al., 2014). The positive correlation between ESG ratings and corporate financial performance also mediates the relationship between ESG practices and firm value (Zhou et al., 2022). Companies with higher ESG ratings tend to improve their reputation and market credibility while enhancing financial performance through risk mitigation, operational efficiencies, and stronger stakeholder relationships (Clark et al., 2014).

This chapter outlines the data sources and methods used to test the research hypotheses. It begins with a description of the sample selection process and data collection methods, followed by an explanation of the econometric model employed to analyze the hypotheses.

The results of the linear regressions are presented in Table 2.

The Ordinary Least Squares (OLS) regression analysis provides valuable insights into the relationship between the independent variables and the ESG Score as the dependent variable. The variable of interest, Firm Size, exhibits a significant positive effect on the ESG Score, with a coefficient of 2.534 and a standard error of 0.602. This indicates that as Firm Size (measured by the logarithm of Total Assets) increases, the ESG Score also increases. This relationship is statistically significant at the 1% level (p<0.01), denoted by (***) in the results, underscoring a strong and reliable impact.

Similarly, Gender Diversity demonstrates a significant positive effect on the ESG score, with a coefficient of 39.983 (p<0.01, ***). This finding suggests that a higher proportion of female directors is associated with improved ESG performance. These results support the hypotheses that larger companies and those with greater gender diversity on their boards tend to achieve better ESG scores.

Moreover, the analysis of control variables reveals additional insights. Nationality Mix has a negative effect on the ESG score (β=−10.085) and is significant at the 5% level (p<0.05, **), suggesting that diverse national representation on the board may introduce challenges to achieving strong ESG performance. Similarly, Network Size exhibits a highly significant negative coefficient (β=−0.165, p<0.01, ***), indicating that larger director networks might dilute focus or reduce decision-making efficiency related to ESG initiatives.

Regarding model fit, the regression results show R² =0.676 and Adjusted R² =0.610, indicating that approximately 61% of the variance in ESG scores is explained by the model. The overall model is highly significant (p<0.001) as indicated by the F-statistic, underscoring the reliability of the findings.

In summary, these results highlight the significant roles of Firm Size, Gender Diversity, and Network Characteristics in shaping ESG Outcomes, while also illustrating the potential challenges associated with Nationality Mix and Network Size.

This study provides valuable insights into the factors influencing ESG performance, with a focus on firm size and gender diversity on corporate boards. The results of the OLS regression analysis reveal significant relationships between these firm characteristics and ESG scores, shedding light on the dynamics of corporate governance and sustainability practices.

Firm size emerges as a strong positive determinant of ESG performance. Larger firms, equipped with superior financial and human resources, are better positioned to implement and sustain robust sustainability initiatives. These findings align with stakeholder theory and legitimacy theory, which suggest that larger firms face heightened scrutiny from stakeholders. This increased accountability drives them to adopt and disclose effective ESG practices, thereby enhancing their ESG performance, strengthening their reputation, and ensuring long-term competitiveness.

Gender diversity on corporate boards also significantly and positively influences ESG scores. The findings underscore the role of diverse perspectives in fostering better decision-making and more innovative sustainability strategies. These results reinforce existing literature that advocates for gender balance as a catalyst for improved organizational outcomes and more effective corporate governance.

However, the results also highlight complexities in the relationship between diversity and ESG outcomes. A diverse nationality mix among directors negatively correlates with ESG scores, suggesting potential governance challenges, such as misaligned priorities or communication barriers. Similarly, larger director networks appear to hinder effective decision-making, reflecting the trade-offs inherent in complex governance structures. These findings suggest that while diversity is a valuable asset, it requires careful management to maximize its benefits and mitigate inefficiencies.

The study’s findings align with existing research advocating for robust ESG strategies as critical to fostering financial performance and building stakeholder trust. By demonstrating strong explanatory power, the model underscores the importance of firm characteristics in shaping ESG performance, offering valuable insights for both policymakers and corporate leaders seeking to enhance sustainability practices.

The discussion in this study aligns closely with the theoretical framework by supporting and expanding upon established concepts related to sustainability, stakeholder theory, legitimacy theory, and the role of diversity in corporate governance. The findings reaffirm the importance of regulatory frameworks, such as the NFRD and CSRD, in shaping ESG outcomes. The positive relationship observed between firm size and ESG scores highlights the critical role of resource availability, consistent with the framework’s emphasis on larger firms’ capacity to implement comprehensive sustainability practices. Larger firms benefit from economies of scale and are better equipped to meet regulatory standards, as highlighted by Barney (1991) and Lepoutre and Heene (2006).

Additionally, the findings on firm size and ESG performance resonate with stakeholder theory, which posits that larger firms face greater scrutiny from diverse stakeholders. This increased visibility pressures larger firms to adopt more robust ESG practices to maintain stakeholder trust, aligning with the theoretical insights of Jones (1995). Furthermore, the discussion emphasizes how stakeholder expectations drive higher ESG performance in larger firms, supporting the view that firm size amplifies both visibility and accountability.

The study’s findings align with legitimacy theory, which suggests that organizations must conform to societal norms to maintain legitimacy (Deegan, 2002). Larger firms, due to their heightened visibility and role as industry representatives, are incentivized to adopt ESG practices that align with societal and stakeholder expectations. Additionally, the positive correlation between board gender diversity and ESG scores underscores the critical role that diverse perspectives play in fostering effective decision-making and innovation. These results align with the framework’s emphasis on the benefits of diversity, as supported by research from Galbreath (2018) and Rao and Tilt (2016).

The main contribution of this study lies in its empirical support for stakeholder theory and legitimacy theory, demonstrating how firm size and stakeholder scrutiny drive higher ESG performance. This reinforces the theoretical connection between corporate visibility, stakeholder expectations, and sustainability practices. The findings highlight the significant positive impact of firm size on ESG scores, emphasizing that larger firms benefit from superior resources, economies of scale, and more robust compliance mechanisms. These structural advantages enable larger firms to achieve better sustainability outcomes compared to smaller firms.

Additionally, the study underscores the positive correlation between gender diversity on corporate boards and ESG performance. By providing evidence that diverse perspectives enhance decision-making and corporate governance, it contributes to ongoing discussions on the importance of gender-inclusive policies in driving sustainability and corporate responsibility.

In conclusion, this study highlights several key findings. It provides compelling evidence that firm characteristics, particularly size and board composition, play a critical role in shaping ESG performance. Larger firms demonstrate superior sustainability outcomes due to their greater resources and capabilities, while gender diversity on boards emerges as a significant driver of effective ESG practices. Conversely, the negative associations with nationality mix and director network size underscore the complexity and multifaceted nature of governance dynamics.

The findings have practical implications for corporate leaders and policymakers, emphasizing the importance of fostering organizational environments that support sustainable practices. Promoting gender diversity on boards and addressing the governance challenges associated with diverse nationalities and expansive networks are essential for improving ESG outcomes and advancing corporate sustainability goals.

The limitations of this study primarily concern data availability and scope. The analysis relies on publicly available ESG scores and firm characteristics, which may not comprehensively capture all dimensions of sustainability performance. Furthermore, the dataset is constrained to specific geographic regions and industries, potentially limiting the generalizability of the findings.

Another limitation lies in the sectoral and regulatory differences. This study does not account for variations across industries or differences in regulatory environments, both of which may significantly influence the relationship between firm characteristics and ESG outcomes. These contextual factors could affect the applicability of the findings to diverse sectors and regions, underscoring the need for caution when generalizing the results.

Future research should investigate industry-specific dynamics to better understand how sectoral factors shape the relationship between firm size and ESG performance. Additionally, expanding diversity metrics to encompass dimensions such as age, educational background, and professional experience could provide deeper insights into their impact on ESG outcomes. Exploring these areas will contribute to the development of more targeted and effective strategies for advancing corporate sustainability practices.

We would like to express our gratitude to the organizers of the ICSF 2024 conference, held in Málaga (Spain), for their efforts in supporting research in this field.