As ESG (environmental, social, and governance) has become a major business trend, many firms put ESG into their business practice to fulfill market and stakeholders' demands (Wang et al., 2016). With a growing emphasis on ESG, firms must decide how to integrate ESG into their organizational strategy. Although ESG is a popular business trend, it is meaningless if ESG reduces firm value. For successful ESG implementation, ESG strategy must be integral to the business model (Duque-Grisales and Aguilera-Caracuel, 2021). With the integration of ESG into the firm's business process, sustainable activities enable firms to improve their economic and social performance by tapping into the synergies between business and societal agendas (Duque-Grisales and Aguilera-Caracuel, 2021). Core competence refers to an organization's accumulated strength compared to other organizations in the industry (Wheelen, 2019). It is the unique integration of leadership, technologies, specialized skills and knowledge, organizational culture, and the working possesses (Wheelen, 2019). Even though the literature on ESG emphasizes integrating ESG into firms’ core capabilities, there are only a few studies that developed ESG implementation and integration framework in specific dimensions (Fatima & Elbanna, 2022) and the literature shows mixed results. Since previous research presents unclear results regarding ESG implementation and firms' core competencies, this study aims to 1) investigate how ESG strategy could integrate with firms' core competencies and 2) clarify ESG embeddedness drivers. The findings provide significant implications for academics and managers by clarifying how firms can enhance their value through ESG with firms' core competencies.

Environmental, social, and governance (ESG) considerations have become increasingly important for firms' sustainability. Mandates for ESG information disclosure have been implemented in over 25 countries, including the EU, Australia, and China (Krueger et al., 2021). However, little attention has been paid to the drivers and mechanisms of ESG, which remain unclear. The existing literature has mainly focused on the consequences of ESG which shows mixed results and paid little attention to the drivers of ESG (Paolone et al., 2021). The majority of prior research suggests that ESG activities positively affect firms' financial performance (Nekhili et al., 2019). On the other hand, some researchers show a significant and negative relationship between ESG performance and a firm's financial performance (Duque-Grisales and Aguilera-Caracuel, 2021). To fill the research gap, this study attempts to identify 1) firms' internal and external factors that lead to ESG performance as drivers of ESG, and 2) firm performance as the consequences of ESG. The study found that environmental innovation activities, ESG committees, external audits, and ESG compensations related to environmental innovation could be drivers of ESG application and performance, leading to better firm performance. Moreover, the findings indicate that ESG performance positively affects firms' financial and non-financial performance. Understanding the adoption of ESG is crucial for firms since ESG requires a long-term perspective. This study contributes to the literature on ESG and firm sustainability and suggests new directions for managers to implement ESG in their business model. Especially, this study argues that taking a carrot-and-stick approach could lead to better ESG performance and firm performance. Therefore, managers might consider internal policies to encourage ESG that can lead to better firm performance.