From Capability to Sustainability: Managerial Ability, ESG Practices and Carbon Performance

Abstract

The growing severity of climate change has increased pressure on firms to improve environmental sustainability and reduce carbon emissions. Although existing studies have examined the role of ESG practices in achieving sustainability objectives, limited attention has been given to how managerial capabilities contribute to corporate carbon performance and the mechanisms through which this relationship occurs. This study addresses this research gap by investigating the impact of managerial ability on carbon performance and examining the mediating role of ESG practices in the relationship between managerial capability and environmental outcomes. Using a longitudinal panel dataset of 180 non-financial firms listed on the Pakistan Stock Exchange from 2016 to 2025, this study analyzes approximately 1,800 firm-year observations. Managerial ability is measured using the efficiency-based approach proposed by Demerjian et al. (2012), ESG practices are constructed through a comprehensive disclosure index, and carbon performance is assessed using firm-level carbon efficiency indicators. Empirical analysis employs fixed-effects regression, mediation analysis, and System Generalized Method of Moments (System GMM) to control unobserved heterogeneity and potential endogeneity issues. The findings indicate that managerial ability has a significant positive effect on corporate carbon performance, suggesting that capable managers are more effective in implementing environmental strategies and improving resource efficiency. Furthermore, managerial ability positively influences ESG practices, and ESG practices significantly enhance carbon performance. The mediation analysis confirms that ESG practices partially transmit the effect of managerial ability on carbon performance, highlighting the importance of sustainability-oriented organizational mechanisms. This study contributes to the literature by integrating Upper Echelons Theory, Resource-Based View, and Stakeholder Theory to explain how managerial capabilities are transformed into environmental improvements through ESG implementation. The findings provide valuable implications for managers, investors, and policymakers seeking to strengthen corporate sustainability practices and accelerate carbon reduction efforts in emerging economies.