The Influence of ESG Management on Organizational Performance in the Public Sector

Abstract

The deepening economic polarization caused by the global response to Covid-19 has led to the pursuit of new and continuous growth strategies. In an era of high uncertainty, private companies' hunger for what is predictable led to a shift in the management paradigm from a growth-oriented to sustainable. Whats more, these changes are not limited to the private sector. In 2021, the Korean government attempted to change the management environment of the public sector through a campaign targeting the spread of ESG. It is therefore no surprise that ESG has become the buzzword of choice within public institutions as it provides evaluation incentives that have achieved visible results since the rapid spread of ESG in 2021. However, unlike the private sector, which has years of empirical studies to reassure it that ESG indeed has a positive effect on corporate performance, the evidence for the impact of ESG management on public organizations remains limited. In this context, this study attempted an empirical analysis on how ESG activities of public institutions affect organizational performance. Specifically, this study first tried to examine how ESGs total score impacts the performance of public institutions and then investigated how each ESG factor affects those institutions organizational performance. In this study, each item corresponding to E, S, and G was selected by referring to the ESG evaluation standards of the Korea Institute of Corporate Governance and Sustainability (KCGS), which are most widely used to measure the level of ESG activities. Three years of ESG data from 80 public institutions was collected and used as an independent variable and from this, 240 observations were obtained. The dependent variables were then classified into financial performance and non-financial performance wherein each institution's Return of Asset (ROA) and customer satisfaction ratings were used as substitutes. Multiple Regression Analysis by the Pooled OLS Model was conducted to verify the hypothesis that ESG activities of public institutions have a positive effect on organizational performance. As a result of this empirical analysis, it was found that ESG activities measured by ESG total scores of public institutions have a statistically positive (+) effect on both ROA (financial performance) and customer satisfaction (non-financial performance). When analyzing the impact of each ESG factor, the Environmental (E) and Social (S) variables were found to have a statistically significant positive effect on ROA and (E) factor showed a relatively greater effect on it. In terms of customer satisfaction, all 3 ESG factors had a statistically significant positive effect and (S) factor was found to have the greatest influence on it. This study is meaningful in that it attempts to pioneer a new horizon for ESG research by expanding empirical ESG discussions to the public sector. In addition, it is valuable in that it attempted an empirical analysis by integrating each element of E, S, and G, which have been previously studied individually in the public sector. Furthermore, the results of this study can help determine the justification of resource input to ESG management and determine appropriate ESG-related policies with a limited budget in the future. Based on this papers conclusions, it will be meaningful to further examine the influence of ESG from various concepts and perspectives on organizational performance in future studies.