Using the First Difference, Forward Orthogonal Deviations, and System GMM Techniques to Measure the Impact of Environmental, Social and Governance Performance on Financial Risks for Companies listed on the S&P EGX/ESG index

Abstract

This paper proposes the use of the first difference generalized method of moments (FD-GMM),forward orthogonal deviations generalized method of moments (FOD-GMM), and system generalized method of moments (Sys-GMM) techniques to measure the impact of environmental, social, and governance (ESG) performance criteria as independent variables and return on total assets (ROA), leverage (LEV), liquidity (LIQ), firm growth rate (FGR), and size of enterprise (SIZE) as control variables on financial risks as dependent variables, which can be measured by Altman's Z-score index. This study applied to seventeen companies of non-financial institutions which comply with sustainability standards and there are in S \& P EGX / ESG index in Egypt that include various sectors in the period from 2020 to 2024. The study used consistent, valid instruments and coefficient bounds tests to select the best model. The results showed that the two step FOD-GMM model was the most effective model to estimate the relationship between ESG-score, G-score, and control variables on financial risks compared to the FD-GMM and System-GMM models .It was more suitable and safer for small sample that used in this study, in addition they have valid instruments and consistent estimators. It has also a higher predictability compared to other models.