The impact of environmental, social, and governance performance on financial performance: Evidence from Japanese companies

: This study examines the impact of environmental, social, and governance (ESG) performance on the financial performance of companies using the Stakeholder Theory. Sustainability is recognized as one of the most significant concepts for all nations and organizations worldwide. The Japanese government, its corporations, and its culture are not exempt from delivering their nation's sustainability goal with the utmost support. Their initiatives taken towards sustainability include introducing Society 5.0, the 'improved society' concept Japan has contemplated before the rest of the world. Society 5.0 for Sustainable Development Goals (SDGs), which originated in Japan, is an aspiring concept that views changes and challenges as opportunities and proceeds to associate them with medium-to long-term development, which leads to the resolution of global challenges. Financial performance focuses on accounting performance through the Return on Equity (ROE). The ESG scores and financial data of 351 listed companies in Japan from 2018 to 2022 were collected from the Thomson Reuters Eikon data stream to study its impact. The regression analysis shows that all environmental performance (EP), social performance (SP), and governance performance (GP) positively and significantly affect profitability, or the Return of Equity (ROE). Meanwhile, the control variable, firm size (SIZE), does not support the study. The findings also found that all ESG performances positively correlate with each other. These results highlight the importance of ESG policy adoption by companies to improve their financial performance. The study ’s contributions add value to Japan ’s industry practitioners and stakeholders and highlight the importance of ESG to their nation.


Introduction
Business awareness and commitment to sustainability aspects are now a worldwide marvel.Review from Threlfall, et al. [1] shows a positive trend in sustainability reporting since 2020, with 11 countries including top countries, in Europe and Latin America, in which 70% or more of the top 100 companies focus on SDGs in comparison to 2017.From the same data, three of the top 11 countries originate in the Asia Pacific, namely Japan, Thailand, and Taiwan.Issues about sustainability reporting begin to increase as individuals today become more aware of the detrimental effects of economic activity that may endanger future generations, such as climate change, landslides, and the breakdown of climate and ecosystems; and social issues affecting humans, such as child labor Moellendorf [2].
Pfajfar, et al. [3] stated that businesses should be conducted not only for the purpose of achieving economic objectives or satisfying shareholder expectations but also to pay attention to social and environmental concerns that have a significant impact on businesses' existence, such as employees, government, and society.In this case, the environmental, social, and governance (ESG) concept plays a vital role since it is a component of non-financial performance indicators.According to Courtnell [4] ESG is an explicit criterion set out by legislators, stakeholders, and the ESG reporting organizations.environmental, social, and governance (ESG) in their annual public disclosure documents.This step is being taken by the agency to encourage and attract asset managers to invest in the companies and in return, boost the business's standing.However, even though many businesses in Japan are interested in ESG disclosure, many have found it difficult to comprehend wha t exactly investors want, and development has been uneven, particularly outside of the most well-known businesses [13].
The Japanese industry players are emphasized as having better ESG performance in tandem with other developed countries in the world.However, there are very limited studies on the influence of ESG performance on financial performance in Japan.Previous studies tried to relate the principles demanded of their agents by exploring the impact of the ESG pillars on the company's performance, specifically in financial aspects, but varying conclusions have been reached till today [15][16][17][18].In this context, it is important to examine the impact of ESG performance from a financial perspective to understand the mechanisms underlying this affiliation.

The Evolution of ESG
ESG (Environmental, Social, and Governance) criteria first appeared in the early 2000s in response to increasing distress over the role of companies in society.The view of ESG began to gain footing in the investment world when investors started to realize that companies that run with a responsible and sustainable approach are more likely to deliver long-term profit.At first, ESG was predominantly focused on environmental concerns such as climate change, pollution, and resource depletion.According to UN [19] climate change cannot be denied, and resources will substantially be reallocated in the future.However, with time, ESG concept has broadened and incorporated social and governance issues as well.Examples of social issues like labor practices, human rights, and community relations became increasingly important to investors.Similarly, investors were also gaining interest in governance issues such as executive compensation, board diversity, and transparency when viewing a corporation's profitability.
Of late, ESG has become more conventional, with many large, established investors integrating ESG factors into their investment decision-making processes.As a result, companies are now under growing pressure to display their dedication to ESG issues to attract more investment.The development of ESG reflects a growing awareness of the significance of sustainability and social responsibility in business and investment.As the world faces increasing environmental and social challenges, the role of ESG in influencing business behavior and investment decisions is expected to continue to increase in significance.

ESG Effect on Sustainability Issues
The ESG effect on sustainability issues is important, as companies that perform well on these metrics are more likely to be sustainable and fruitful in the long run.Society is also progressively requesting companies to address ESG issues, as consumers and other stakeholders become more conscious of the effect of business on the environment and society.A study by Christensen, et al. [20] found that companies that reveal more information about their sustainability practices have better market appraisals and are less likely to receive negative comebacks such as environmental disasters or lawsuits.
A study performed by Deloitte [21] found that sustainable reporting facilitated the industry players to identify areas for enhancement.The report will synthesize and broadcast the information an organization decides to share regarding its commitments and actions in the social and environmental aspects.ESG and sustainability are both strategic considerations for businesses, executive teams, and investors, where their mutual objective is to improve the business practices and , in return, boost revenues and obtain favor from investors, customers, and regulators while upkeeping the environment and supporting communities.
Companies are also acknowledging the importance of ESG factors to manage risks, build confidence with stakeholders, and boost their reputation.The ESG concept is applied by investors, providing them with a framework to assess a company's performance and risk.Whelan, et al. [22] state that establishments with strong ESG ratings have better financial performance and are less risky investments.For instance, ESG investing can provide long-term sustainable revenues by recognizing corporations that are well-positioned to manage risks and take advantage of prospects related to ESG factors.It can also help to cope with risks by identifying companies that are exposed to risks related to ESG factors, such as climate change or labor practices.ESG investing can also have a positive influence on society and the environment by leading investment towards companies that are making a positive impact on these issues.

ESG Performance from Japan Perspective
The idea of ESG has been introduced for several decades, but it was not until the early 2000s that i t gained popularity in Japan.The 2004 introduction of the "Principles for Responsible Investment" by the United Nations was a significant turning point for ESG investing globally.ESG investing has expanded, notably in Japan, in recent years.According to a report by GSIA [23] sustainably managed assets in Japan showed the largest increase over the past two years, with approximately $2,180 billion in 2018, an increase from $474 billion in 2016.This increase can be attributed to several reasons, including increased awareness of ESG issues, regulatory changes, and investor demand.In 2015, the Japanese government introduced the "Stewardship Code" and the "Corporate Governance Code," which invigorated established investors to engage with businesses and endorse good corporate governance while encouraging them to consider ESG factors in their decision-making processes.
Based on the World Economic Forum's Global Competitiveness Report 2019, it was found that Japan ranks sixth out of 141 economies [24].Japan ranked 18th amongst 169 countries in achieving SDGs in 2022.Clavecilla [25] found that numerous Japanese firms have made commitments to their neighboring communities and civilization to provide lifelong employment, environmentally mindful production processes, client-oriented products and services, and product protection.This commitment is believed to have increased business longevity in Japan, where they account for more than 40% of the world's corporations that are over 100 years old [26].Enhancing sustainability can therefore be linked to competitive advantages in both the long and the short term.
ESG matters have quickly become a critical condition for investment making-decisions in Japan since Japan's Government Pension Investment Fund (GPIF), the world's major pension trust, became a signatory to the UN's Principles for Responsible Investment (PRI) in 2015 [27].Japanese people use the phrase Sampo Yoshi, which means good for everyone.The idea is that business must benefit all people, not justa seller and client's relationship.So, Japanese merchants understand that they owe their business success to the communities and must give something back in return [28].This shows that Japanese companies always had an enthusiasm to increase engagement while dealing with their stakeholders.Sampo Yoshi is also related to Mirai Yoshi, which means good for the future.These two ideas in Japanese give a particular reason for industrialists to think about the future of their society.
Study by Vuong [29] found that firms with better ESG performance are more likely to have better reputations and financial performance.The study also states that companies with better environmental and social performance tend to attract more highly skilled employees, which can be beneficial for the company's prolonged success.Further adding to the limited studies on the ESG pillars in Japanese companies, Broadstock, et al. [30] conducted a study among 320 Japanese firms' engagement in ESG policies on their invention capability levels from 2008 to 2016.They found that companies that implement the ESG policy confidently affect their worth, financial performance, and operational performance.
The future of ESG in Japan looks promising, with the government setting a target of attaining carbon neutrality by 2050 and technology projected to play a major role in the future.However, studies on the impact of environmental, social, and governance (ESG) performance on the financial performance of Japanese firms are still limited to this date.Hence, this research will look at these variables specifically in this country of the rising sun.These aspects should be stressed for each company, as ignoring ESG matters will cause the business to suffer a negative performance in terms of limited access to private equity and high capital costs, which will eventually destroy the shareholders' value in the company.

ESG Performance and Financial Performance
Among the issues highlighted by previous studies related to ESG were the integration of ESG pillars on investment decision, the relevancy of ESG ratings connected to financial risk, and the ESG score effect on stock returns [31][32][33].Indeed, there is a rising awareness among boards and firms of the significance of operating responsibly and the impact of ESG concerns on society and economic sustainability, which is directly related to long-term financial success and company value.
The influence of ESG factors on financial performance is one of the topics of debate, with some arguing that ESG factors are not relevant to financial performance, and others arguing that ESG factors are critical to financial performance.A study by Lee and Moscardi [34] observed that corporations with high ESG scores had higher profitability and lower risk in comparison to companies with low ESG scores.One of the methods to measure a firm's financial performance is by return on assets (ROA), which shows the ratio of profit.Other alternatives also consist of working capital, current ratio, inventory turnover, leverage ratio, and return on equity (ROE).Qureshi, et al. [35] find a bidirectional or mixed association between ESG performance and financial performance for ROE, whereas no correlation was found for ROA.They also noticed that there is a substantial negative impact of ESG on ROE that may cause the expenses on environmental and social activities to decrease the current profitability of the firms.
While Ramić [36] found that there was a discrepancy observed between the environmental rating and ROA, it is considered significant in the medium term but not significant in the short term.When comparing the impact of ESG performance on financial performance in the short a nd long term, the results show that a company with a greater return on assets (ROA) will be better ranked by the market.These factors function as quality indicators, so it stands to reason that businesses with high ROA and ROE over time will produce a profit.
The study by Garcia, et al. [37] looked at the profitability (ROA) and ESG scores of 365 companies from BRICS nations (Brazil, Russia, India, China, and South Africa) between 2010 and 2012.Also, research by Lin, et al. [38] determines profitability using ROA.The subject consists of 500 largest American companies listed in the S&P 500 (Standard & Poor's).Both studies proved that the effect of ESG performance on financial performance could be valued differently between sectors.Since no single model can account for the sustainability of all businesses, business cases must constantly be developed to maintain sustainability [39].Another study done by Amel-Zadeh and Serafeim [40] shows that out of 500 investors, 63.1% of them agreed that the ESG performance impacts the investment returns, especially in Europe, and eventually it also results in a higher rate of financial returns than ethical reasons.However, Matakanye, et al. [41] stated that businesses respond in a different way to pressures for ESG performance.Many studies have been done that examine the effect of ESG performance on financial performance for a particular industry [42,43].A study by Chui, et al. [44] found that establishments in the transportation, retail, and information technology sectors tend to have better financial performance than establishments in other sectors.The study by Velte [45] also showed a positive correlation when same variables were used to measure ESG performance and company financial performance.
Based on prior literature, a conclusion can be drawn that ESG performance will have a positive effect on financial performance.Therefore, engagement with all stakeholders can improve ESG operations.To achieve sustainable development goals, businesses must incorporate social and environmental factors into their core business strategies.Over time, this will give them a competitive advantage [39].

Theory Related to ESG Performance and Financial Performance 2.5.1. Stakeholder Theory
ESG reporting has helped companies engage with stakeholders such as investors, customers, and employees.Companies that engage in sustainable reporting have better relationships with stakeholders and are more likely to attract investment Barko, et al. [46].Pfajfar, et al. [3] also stated that stakeholders who want to make sustainable changes in their lives will also purchase goods and services from companies that are environmentally and socially responsible, thus making an immediate contribution to the bottom line.Acting within the Stakeholder Theory framework, the intention of this study is to understand the influence of the three ESG's pillars on the performance of the company, which primarily focus on firm financial performance that will be measured using the Return on Equity (ROE).Stakeholder theory has long been used as the foundation for research into the effect of corporate social performance on financial performance and company value [47].The stakeholder theory is the concept whereby managers need to consider the interests of essential stakeholders as well as shareholders to boost the owners' assets.
Freeman, et al. [48] define stakeholders as a group of individuals that can influence a company, assert a corporation, and are affected by its productivity.According to this theory, organizations engaged in ESG agendas will have a favorable influence on financial performance and are expected to have a positive relationship with one another.Stakeholder theory offers a realistic approach that urges companies to be conscious of their relationships with all stakeholders to be more successful [49].Surprisingly, the stakeholder's theory introduced by Freeman [50] is closely related to one of the Japanese principles that have been expanding since the Edo and Meiji periods, which is the Sampo-Yoshi principle, which means three-way satisfaction.This idea came from the group of merchants known as Omi Shonin.The idea is that every business must benefit all parties involved.This is referring to three specific groups, which are the seller (Urite Yoshi), the buyer (Kaite Yoshi), and that society (Seken Yoshi) as a whole.This idea has been growing throughout the centuries and has become the main principle for most merchants after all these years.This shows that the earlier centuries were getting the ideas and the importance of the principle specifically on how important these ideas are to protecting the performance of their companies.
In recent years, research has explored the ways in which stakeholder theory can inform and enhance corporate ESG performance and the potential for such performance to positively impact financial outcomes.ESG aspects are under pressure by stakeholders to ensure the companies they engage with remain competitive.Zhang and Liu [33] support instrumental stakeholder theory in understanding the impact of ESG performance on the flexibility of China's listed firms' financial performance and found that ESG performance substantially improves financial flexibility.Environmental assessment criteria will help stakeholders recognize an organization's influence on the environment and climate, like its greenhouse gas emissions and its management's stewardship over natural resources like fresh water.
Next, the social pillar analyses an organization's social effects.It analyses how well the organization's leadership supervises the relationships with stakeholders.Aspects commonly taken into consideration are fair wages for the employees, generating an optimistic mindset in the community's workplace, and taking responsibility for the schedules and decisiveness of supply chain partners in other parts of the world.Stakeholder participation in management has an impact on the social component of ESG's operational efficiency [51].
On the other hand, the governance pillar focuses on how the firm is led and managed.According to Ouni, et al. [52] the stakeholder theory offers a more comprehensive paradigm for deriving the structure of a board and the diversification of its members.What stakeholders are aiming at is another method of evaluating a company without looking at its balance sheet but instead, at how it influences the general external society.This shows that the higher the degree of corporate governance, the better the organization's financial performance, as it prioritizes the best interests of both the shareholders and stakeholders.
Overall, the results of these studies indicate that there may be a positive association between stakeholder theory, ESG performance, and financial performance.By prioritizing the interests of all stakeholders and striving for long-term sustainability, corporations may be able to improve th eir ESG performance, which in turn will lead to improved financial returns.

Theoretical Framework
The figure shows the theoretical framework for the study (Figure 1).The study adopts stakeholder theory in explaining the causal effect of the topic.In essence, a corporation's ability to achieve prolonged sustainability is defined by its interactions with abundant stakeholders.Pulino, et al. [53] also agree with the fact that the stakeholders will be happier with a higher level of non-financial performance, which illustrates that the firm has a high level of responsibility and transparency.The study expects a significant positive effect on the environmental, social, and governance (ESG) performance of the financial performance of publicly listed companies in Japan.This is in line with the study by Shakil [54] which shows that higher environmental, social, and governance (ESG) performance will lead to higher financial performance.This study includes those three factors as the independent variables to support the dependent variable.

Hypotheses Development
To gain an extensive review of the impact of environmental, social, and governance (ESG) performance on the financial performance of publicly listed companies in Japan, this study explores three hypotheses to support the variables.The following is the development of hypotheses:

The Impact of Environmental Performance on Financial Performance
Environmental consciousness has grown in importance as a result of increased awareness of climate change and global warming.The environmental factor consists of how a company manages environmental issues such as pollution, waste management, deforestation, carbon dioxide emissions, and climate change.Globally, corporations adopt sustainable initiatives to lessen the environmental impacts generated and thus improve their financial performance.
According to Alsayegh, et al. [55] there has been an increased demand from investors for sustainable environmental performance, which reflects the more environmentally friendly approach practiced by more corporations.Naughton, et al. [56] stated that investors view companies with healthier social and environmental practices as a safer option to invest in.However, the structure of the environmental score could vary between different establishments that measure these ratings.
Since endorsement of green initiatives has been growing progressively, corporations might lose the prospect of sustainable business if they do not begin investing in environmentally friendly ventures [57].The meta-analytical results of Nguyen, et al. [58] designate a positive affiliation between environmental performance, accounting, and market-based financial performance.Most businesses plan environmentally friendly operations to comply with regulations or to satisfy the public.Even though the environmental pillar's new regulations are being vigorously intensified to improve reporting standards, the complexity of the indicators and reporting on environmental data can still be challenging [4].
A study by Naeem and Cankaya [59] examines the influence of ESG-based operations and performance scores of environmentally conscious firms on corporate financial performance in comparison to developed and emerging countries.The findings demonstrate that environmentally friendly companies' ESG performances are more well-known in developed country markets and have a greater impact on their financial performance than do those of their counterparts in emerging markets.Research by Chen, et al. [60] studied the relationship between environmental performance and a company's reputation and financial performance.The study found that companies with healthier environmental performance tend to have better reputations, which promotes customer loyalty and higher sales.According to the higher profitability and stock returns, the study also discovered that businesses with better environmental performance are more likely to have better financial performance.Using data from 38 airlines from 2009 to 2019, Abdi, et al. [15] observed the impact of ESG scores on establishment's value and profitability in the aviation sector.It is reported that investment in governance increases a company's market-to-book ratio, whereas participation in social and environmental causes increases financial efficiency.Therefore, this current study formulated the first hypothesis (H1) as follows: H1: There is a significant positive relationship between environmental performance and financial performance.

The Impact of Social Performance on Financial Performance
Social performance is the outcome of the company's leadership method for managing relationships and treatments given to their clients or stakeholders.This includes actions such as paying a fair salary to personnel, producing a positive working environment, and being responsible for the arrangements and delays of supply chain partners across the world.Ajina, et al. [61] explain that clienteles, who have better familiarity with the environment and society favors establishments that have an appropriate CSR strategy, as it produces a direct reflection on business performances.So [57] also agrees with this fact, whereby society is more likely to contribute to and maintain support for companies that reinforce their social contract by performing sustainable activities.Some businesses engage in CSR projects to counter their business practices that have an adverse impact on their stakeholders, society, or the environment, including their working teams.Saly [62] mentioned that better employee contentment leads to higher business performance.Hence, it is crucial to consider factors like employee relations, working environment, local community, diversity, conflict resolution, health, and safety to achieve better social performance.In other words, social performance can also be associated with the principles, practices, and consequences of a corporation's relations with people, administrations, foundations, communities, and societies.Businesses must incorporate Corporate Social Responsibility (CSR) into all facets of their company plans to fulfill expectations that they will contribute to a sustainable development [63].Social performance has been proven to have an indirect , positive, and substantial impact on an organization's financial performance.
Ghardallou and Alessa [64] found that the corporate social performance of a company is positively correlated with its corporate financial performance.Using Tobin's Q ratio and operational performance (ROE and ROA) as dependent variables, the same study conducted by Bhaskaran, et al. [65] reviewed the impact of ESG on financial performance of 4,887 companies from 2014 to 2018.It was concluded that companies with high achievement and emphasis on their social pillars can generate and obtain better market value.Research by Jigjiddorj, et al. [66] observed the relationship between social performance on customer loyalty and employee satisfaction.The study determined that companies with better social performance are more likely to have higher customer loyalty , and employee satisfaction, which in turn leads to increased sales and lower turnover rates.The research also found that companies that have better social performance tend to be more reputable, which is beneficial for the company's long-term success.
Another study by Coelho, et al. [67] on the influence of social performance on a company's financial performance found that companies with better social performance tend to have better financial performance, as indicated through higher revenues and stock returns.The study also noted that those companies are ranked with lower risk levels, which are more beneficial and favorable to investors.Meanwhile, Jan, et al. [68] evaluated that companies listed in the Dow Jones Sustainability Index have a positive relationship between CSR and accounting-based financial performance.
The study on the influence of CSR on financial performance in specific industries, like food and beverage manufacturers, also shows a positive connection between CSR and financial performance [18].However, Matakanye, et al. [41] agree that financial performance can be viewed differently depending on the nature of the industries, their surrounding regions, and specific ESG criteria.Based on this previous literature, this study suggests the following hypothesis (H2): H2: There is a significant positive relationship between social performance and financial performance.

The Impact of Governance Performance on Financial Performance
Governance is the final component of ESG performance.Governance performance refers to the effectiveness of a company's management, board of directors, and advisors in supervising the company's operations and ensuring compliance with legal and ethical standards.It is becoming increasingly important for companies to prioritize governance performance, as regulators and investors place more emphasis on corporate governance practices.The structure by which an organization is managed, as well as the procedures by which it and its employees are held liable, are all covered i n governance.Constituents of governance comprise administration, compliance, risk management, and integrity.Governance Performance enhances the reputation of the corporation by showing how they work morally towards society and environment [42].Governance also considers a company's management style.The factory comprises various laws, tax planning techniques, charitable contributions, lobbying, corruption, and bribes.An organization's annual report generally includes governance reporting.Investing in companies with a higher rating of corporate governance offers investors higher returns compared to investing in companies with lower rating of corporate governance [60].
Rajesh [69] investigated which ESG component should be enhanced in develop ing nations like India.The author concluded that companies in developing countries should improve their governance performance to achieve sustainability scores.The influence of corporate governance on corporate financial performance is an interesting category in the influence of ESG on corporate financial performance.In an attempt to understand the effects of a non-market transnational sustainability strategy on company's performance, Shaikh [70] analyzed approximately 510 firm's ESG scores across 17 countries around the world.A study by Kim and Li [71] examined the association between governance performance, financial performance, and stock returns.The research found that businesses with better governance performance tend to have better financial performance, as evidenced by the higher profitability and stock returns received.The study also found that companies with better governance performance are more likely to have lower risk levels, which are more attractive to investors.
Meanwhile, Ray and Goel [72] focused on the relationship between governance performance and corporate financial performance.The authors discovered that there is a positive correlation between governance performance and financial performance.In general, good corporate governance practices

Methodology
The methodologies used in recent studies on the influence of ESG performance on financial performance are diverse and wide-ranging.While some studies have limitations such as data availability or the use of self-reported ESG data, the overall findings propose a positive affiliation between ESG performance and financial performance.

Data Collection Procedures
The data for this study used secondary data.The data were retrieved from ESG rating providers, Thomson Reuters Eikon DataStream.Secondary data are used since the research inv olves variables and the nature of that data, which would be difficult to collect with any other method.The use of Thomson Reuters Eikon DataStream was inspired by previous researchers in understanding of the impact of ESG performance on a firm's financial performance [59,73,74].The database focuses mainly on finance, corporate governance, environmental, and social aspects.It provides 70 key performance indicators for different ESG categories and has comprehensive reporting across 450 ESG data points, which date way back to 2002.It offers ESG scores of listed companies worldwide from 0-100, with 100 being the best score.There are three (3) independent variables, one (1) dependent variable, and one (1) control variable in this current research, as shown in Table 1.This study will focus on the data of each E, S, and G pillar's score as the independent variables precisely for publicly listed companies in Japan.The profitability of a firm will be used to determine the firm's financial performance and is the dependent variable.The profitability will be measured as return on equity (ROE).Both variables will be provided by the Thomson Reuters Eikon DataStream.

Independent variable
Firm's environmental scores The ROE in Eikon Refinitiv typically ranges from negative to over 50%, depending on the country and industry, as shown in Table 2.A higher ROE signifies that the company is producing more profit compared to the quantity of shareholder equity, which is usually viewed as a positive indicator.The average percentage of ROE (Return on Equity) can vary by sector due to the different characteristics of each industry.
Companies within each industry may have significantly higher or lower ROEs based on their specific business models, financial strategies, and competitive positions.

Data Analysis Technique 3.3.1. Data Analysis Procedure
To address the research questions and the study's objective, which is to examine the relationship between environmental, social, and governance (ESG) scores and financial performance, a quantitative study with data regression analysis was selected.Data regression allows researchers to estimate the relationship between variables while controlling for individual heterogeneity and time-invariant omitted variables [32].
The SPSS version 28.0 software was used to perform statistical data analysis, which includes descriptive statistics, factor analysis, and categorical data analysis.
This research data will also be comprise of the following analysis:

Descriptive Analysis
A descriptive statistical analysis will be used to analyze the data.It is a process of transforming raw data into a form that is easy to understand and provides valuable insights.This analysis was conducted to illustrate and summarize the behavior of the data.It is appealing to analyze these results to examine if the developments in the scores reflect the company's effort to enhance their ESG performance due to increasing interest in the issues [75].

Correlation Analysis
The correlation coefficient represents a positive or negative influence between ESG performance and financial performance.Schober, et al. [76] stated that Pearson Correlation could range from -1 to +1, whereby a positive value indicates that one variable increases simultaneously with the other.On the other hand, a negative value indicates that one increases while the other decreases.The highly significant p < 0.01 correlation reflects a high level of confidence association level.

Multiple Regression Analysis
A multiple regression model is generally utilized to study the connection between the dependent, independent, and control variables.This analysis will be used to quantify the link between the dependent and independent variables, which is the relationship between the ESG performance and the financial performance.
The hypotheses were also tested using multiple regressions (Table 3).The multiple regression model for this study is shown in Equation 1.

Preparing the Data
Preparing the data involves cleaning, organizing, and transforming the raw data into a format suitable for analysis.This research utilizes secondary data to examine the relationship between ESG performance and financial performance.
Data was collected using screener apps in Thomson Reuters Eikon DataStream by filtering the country of corporations, industries, and sectors, as well as the variable data (ROE and E, S, and G scores) for 5 years of observation.Out of 3,810 samples of publicly listed companies in Japan collected from the Thomson Reuters Eikon DataStream, only 360 samples contain complete information and are suitable to be used in this analysis.Since Krejcie and Morgan [77]recommend a minimum of 351 samples, the final number of 351 companies, which also involve 1,755 observations, is selected to proceed with the data analysis.Before transferring the data into SPSS, it was first filtered and sorted in Microsoft Excel 2019.Figure 2 illustrates the overall overview of the population and sample of this study.

Frequency Distribution of Demographic Variables
The unit of analysis in this study is the organization.The sample for the study varies concerning several demographic variables, one of which is the industry sector.  4 demonstrates the sample description for this study, which is in the industry sector.The sample comprised companies from eight sectors: basic materials (12.5%), consumer cyclicals (20.8%), consumer non-cyclicals (10%), energy and utilities (4.3%), healthcare (6.8%), industrials (25.9%), real estate (2.8%), and technology (16.8%).

Descriptive Statistics
The descriptive statistics for this study are listed in Table 5.The specific labels contain items (the variables in this study, including dependent, independents, and control variables), N (number of samples), Min (minimum value), Max (maximum value), Mean (average value of the data scores), SD (standard deviation or average distance each value falls from the mean value), and Variance (variance or the square of the standard deviations from the mean).From Table 5, the sample of ROE that represents the financial performance has a mean equal to 2.01, whereas the minimum and maximum ROE differ from 1 to 3. The score represents ROE percentage categories, indicating 1 (low ROE), 2 (average ROE), and 3 (high ROE).For each of the ESG pillars, the environmental score shows a mean of 2.69, the social score shows a mean of 2.44, and the governance score shows a mean of 2.51.The environmental score has the highest mean, and the social score showsaslightly lower score among the independent variables.The score indicates a great variation from the worst-performing companies to the best-performing companies (1 to 4 score), and the control variable (SIZE) is also categorized from 1 to 3.

Normality Test
Based on general guidelines, the acceptable level of skewness and kurtosis should be in the range of ±1.0 [78].However, George and Mallery [79] considered the acceptable range of skewness and kurtosis to be ±2.0 to prove a normal univariate distribution.Whereas Kim [80] stated that, for sample sizes greater than 300, either an absolute skew value greater than 2 or an absolute kurtosis greater than 7 may be used as reference values when defining substantial non-normality.Thus, in this study, the

Correlation "r"
Correlation "r" assesses the degree of relationship between two variables, also known as the association of the variables.Jensen [81] stated that if correlation coefficient of two variables shows 0.90 or higher, one of the variables should be eliminated.Table 7 shows the correlation matrix of the variables.Based on Jensen [81] overall, there is no correlation coefficient that recorded 0.9 or higher, indicatingthat it ishighly correlated.In the case where the correlation coefficient is less than 0.05 or at a significantly low level, both variables were still declared to be linearly related and considered significant.Correlation was stated to be not significant if a very high significance level (for example, 0.50) was obtained, and both variables were not linearly associated.
Multicollinearity was the easiest to detect and test using correlations.For this current study, the correlation matrix (Table 7) proves that there are no issues of multicollinearity, as Jensen [81] suggests.

Reliability Test
Cronbach's alpha (α) is used to test the inter-item consistency andreliability Cronbach's coefficient alpha.The reliability analysis of all the variables for this current study is summarized in the Table 8.As for this study, the result obtained has Cronbach's Alpha reliability coefficients above 0.7 for all variables.The Cronbach's alpha (α) value for this study's five variables is 0.926, which is more than 0.8 and considered good.In conclusion, the results were consistent, and random error was avoided.

Hypotheses Testing
The regression analysis was used to test the three hypothesized associations between the three independent variables; environmental performance, social performance, and governance performance and the dependent variable, which is financial performance.The firm size (SIZE) is included as a controlling variable.Regression analysis was used in this study with significant level of α = .05.To successfully test the association between these variables, one set of multiple regressions is conducted to testthe impact ofenvironmental performance (EP), social performance (SP), governance performance (GP), and the controlling variable (SIZE) on return on equity (ROE), which represents financial performance.The multiple regression model for this study is shown in Equation 2.
R square explains how many variations of the dependent variable the independent and control variables in the regression explain.Table 9 shows the R square value is 0.083.The R square indicates that 8.3% of the variations infinancial performance can be predicted from the independent and control variables.In this study, the financial performance refers to ROE, explained by three significant independent variables (environmental performance, social performance, and governance performance) and control variable (firm size).Meanwhile, the balance of 91.7% is clarified by other factors.The value of adjusted R square is 7.3%, which the tendency to describe the ROE by the independent and control variables, considering the number of independent variables and sample size.10 shows the result of the ANOVA (statistical method that separates observed variance data into different components to use for additional tests) that the independent variables and control variable statistically predicted the dependent variable, F (4,346) = 7.875, p <.001.Thus, the overall regression model is a good fit for the data.While Table 11 shows the unstandardized coefficients of each of the independent and control variables, which also predicted the relationship with the dependent variable.

Environmental Performance
The resource use, emissions, and innovation were components of environmental performance that influenced the environmental pillar scores [82].These aspects represent the basic factors that determine the company's sustainable investment achievement.In this study, environmental performance was measured by the score of E's (environmental) from Eikon Refinitiv.Hypothesis H1 was developed to identify whether environmental performance influences the financial performance of companies.
H1: There is a significant relationship between environmental performance and financial performance.
The result in Table 11 shows that environmental performance has a significantpositiverelationship with financial performance of publicly listed companies in Japan (p < .05,ß = -.109).This means that when environmental performance goes up by 1 standard deviation, financial performance of publicly listed companies in Japan goes up by -.109 standard deviations.Thus, H1 is accepted.

Social Performance
Social performance represents the ways in whichcompanies can instillthetrust and expectations of associated members and society, by only being socially accountable and aiming to attract stakeholders.According to Naeem and Cankaya [59] social performance is the relationship between companies and society which involves responsibilities towards internal and external stakeholders.Part of the Note: a. Predictors: (Constant), SIZE, SP, GP, EP.
responsibilities of a company are the workforce administration and personnel welfare, human rights activities, serving and fulfilling duties to the local community and to the general society, product responsibility, and so on.H2: There is a significant relationship between social performance and financial performance.
When looking at the impact of social performance on financial performance, Table 11 demonstrated that there is a substantial connection between social performance and thefinancial performance of publicly listed companies in Japan (p < .05,ß = .163).This means that when social score increases by 1 standard deviation, ROE also increases by .163standard deviations.Therefore, H2 is accepted.

Governance Performance
Corporate governance is a measure used to manage organizations' activities towards refining business and corporate responsibility to recognize lasting shareholder value while bearing in mind other stakeholders' benefits [83].Hypothesis H3 was developed regarding the governance effect on financial performance.Management aspects, shareholdersatisfaction, and CSR strategy were used in measuring the governance performance [84].
H3: There is a significant impact between governance performance and financial performance.
The current study found that governance performance also has a significant positive relationship with the financial performance of publicly listed companies in Japan (p < .05,ß = .079)( Table 1 1).It indicates that the ROE is predicted to increase by an average of 0.079 when the governance performance goes up by one.As a result, H3 is not rejected.

Summary of Results
Overall, looking at the drivers of financial performance, Table 12 shows that environmental, social, and governance performance strongly predicts financial performance (ROE).The R square value shown in Table 9 indicates that all independent variables can explain 8.3% of the variation in ROE.Al l three independent variables have a significant positive influence on the dependent variable where p < .05The standardized beta values of EP (-0.212),SP (0.282), and GP (0.130) indicate that every increase of one standard deviation in the E, S,andG performance results in -0.212, 0.282, 0.130 standard deviations,respectively, in the financial performance.Therefore, H1, H2, and H3 are accepted, where the EP, SP, and GP have a significant positive relationship with the FP.However, only the control variable (SIZE), hasproven to have no significant relationship with ROE (p > .05,β = .076)(Table 11).

Hypotheses Result Hypothesis 1
Accept H1: Environmental performance significantly predicted financial performance.Hypothesis 2 Accept H2: Social performance significantly predicted financial performance.Hypothesis 3 Accept H3: Governance performance significantly predicted financial performance.
Table 13 provides a summary of hypothesis testing for the study.All three hypotheses were accepted, showing that environmental, social, and governance performance strongly predicts financial performance (ROE).

Conclusion
The study investigates the impact of ESG pillars individually on a firm's financial performance, considering firm profitability in the world's 3rd largest economy, Japan.The study used individual ESG scores to measure ESG performance, and financial performance is measured using ROE.The regression result shows a trend toward the positive effect of each ESG pillar's performance on financial profitability in Japan.The relationship implies that higher E, S, and G performance in Japan affects a firm's profitability.This may happen due to the positive behavior of companies towards ESG activities or CSR practices, the highly sustainable investment culture of investors in socially beneficial activities, and the fact that investors and consumers are very sensitive to the ESG aspects of companies compared to other developed nations.
This study highlights the importance of stakeholder theory and its potential to enhance ESG and financial performance.The study findings agree with those of Aboud and Diab [85] study which also used stakeholder theory.The result of the study demonstrates the positive implication of or ESG on firm value,which can be explained through stakeholder theory.Additionally, this study can contribute to future research in this area by identifying gaps in literature and areas where further research is needed.
In terms of theoretical implications, the findings may make a meaningful contribution to industry players and investors in Japan, contribute to an understanding of the factors affecting financial performance, and contribute to future research on the impact of ESG performance on financial performance.Despite that, this study is not exempt from limitations, including time limitations in conducting this study and insufficient information needed to fulfil the research objectives.Future studies can be done by enlarging this study's sample size or population and observing other areas or countries.Further studies are also suggested to incorporate other factors and analyze the factors contributing to the high correlation between environmental, social, and governance (ESG) performance.

Significance Contribution
Applying the arguments of stakeholder theory, this study contributes to the growth of sustainable corporate strategies that are valued for environmental, social, governance, and firm's financial performance, using the Japanese companies as an illustration.The outcomes from this study would provide valuable input to the academic body of knowledge as they can provide empirical indications on the relationship between ESG performance and financial performance in the Japanese setting, which can add to the existing literature on the topic.Next, this study can identify any unique characteristics of the Japanese context that may affect the association between ESG performance and financial performance.This may provide some stimulus for future research in this field.

Limitation of the Study
It must be admitted that this study has several limitations.The results might be flawed because of these boundaries.
Time Limitation:One limitation of this current study is the time limit.This study relied solely on the Refinitiv Eikon database for data collection.While this database contained all the necessary information for the study, due to time constraints, it was not feasible to cross-check the data with other databases, and the study's reliance on the correctness and reliability of the data may have potential inaccuracies.
Insufficient Information:Another shortcoming of research studies is insufficient information, which is crucial to carrying out a comprehensive study.For instance, in this study, only 351 publicly listed companies were successfully sampled out of a total population of 3,810 observations.This limited

Future Study
From the limitation, it is suggested to increase the sample sizes of future studies because larger samples produce more accurate mean values, thus increasing the chances of detecting outliers that could distort the data and have a minimized margin of error.In addition, it would be interesting to examine the moderating role of some factors in the relationship between ESG and the firm's performance.Moreover, the correlation analysis between the variables shows that all three independent variables are highly correlated (Table 14).Thus, future studies should study the three pillars of ESG to understand their relationship and identify factors (X) that cause the high correlation between each respective pillar (Figure 3).The findings could establish indirect relationships when predicting the financial performance of companies.

Table 1 .
Source of data collected.

Table 2 .
Range of return of equity (ROE) of industry in Japan.

Table 3 .
Description of equation variables.

Table 5 .
Descriptive statistics for scale variables.

Table 7 .
Correlation among the subscales of the constructs.
Note: Dependent variable: ROE

Table 12 .
Summary of coefficient for regression.

Table 13 .
Summary of result -Hypothesis testing.