Sustainability and Corporate Performance in the Global South: The Influence of the Environmental Pillar and Institutional Quality

ABSTRACT Corporate sustainability in the Global South unfolds under heterogeneous institutional conditions, where firms face simultaneous pressures from global ESG standards and local governance constraints. This study examines the relationship between ESG‐aligned environmental practices and corporate financial performance, considering the moderating role of institutional quality. Drawing on the Natural Resource‐Based View and institutional theory, we argue that the economic value of environmental capabilities depends on governance contexts. Using panel data from 3359 listed firms across 77 Global South countries (2004–2021), we estimate random‐effects models with clustered standard errors. Financial performance is measured by EBITDA, Tobin's Q, and ROA, while institutional quality is captured by the Worldwide Governance Indicators. The results show that environmental practices are positively associated with firm performance across all measures. However, these effects are stronger in weaker institutional environments and attenuate as governance quality improves, indicating an institutional substitution mechanism. The findings highlight that ESG–performance relationships are context‐dependent and caution against one‐size‐fits‐all sustainability strategies.