Business strategy, environmental, social, and governance performance, and cost asymmetry in Brazilian firms

Abstract

The objective of this study was to examine business strategy as a contingency factor in the relationship between environmental, social, and governance (ESG) performance and cost asymmetry in Brazilian firms. A gap was identified concerning the scarcity of empirical evidence in emerging economies on the interaction among ESG performance, business strategy, and asymmetric cost behavior from the perspective of contingency theory. This study contributes to a deeper understanding of the relationships among ESG practices, strategic orientations, and cost-related decisions for the financial sustainability of organizations operating in volatile markets. The findings alert managers to the risks associated with cost rigidity in scenarios of declining revenues, indicating that high levels of ESG performance or different strategic profiles do not necessarily ensure greater operational flexibility. Accordingly, without alignment between internal processes and strategy, ESG investments may generate undesirable cost rigidity, undermining competitiveness during periods of revenue decline. A descriptive, archival, and quantitative research design was adopted, based on 1,693 observations from 222 firms listed on B3 S.A. – Brasil, Bolsa, Balcão, using data from LSEG^® covering the period from 2015 to 2024. Multiple linear regression estimated by ordinary least squares was employed using Stata^® software. The results reveal that cost asymmetry is a persistent characteristic of Brazilian firms. However, they challenge the international literature by demonstrating that ESG performance and business strategies do not act as determinants of cost rigidity in the Brazilian context. The findings further indicate that the COVID-19 pandemic can be considered a critical contingency condition, during which firms with higher ESG performance adjusted their costs more intensively in response to declining revenues. This suggests that, in Brazil, ESG practices have not yet matured to the point of being fully integrated into operational cost decisions during periods of economic stability. Additional tests confirmed the robustness of the findings.