Determinants of profitability performance in renewable energy firms: Analysis of ESG, innovation, and financial indicators using non-linear panel models and machine learning

In the context of the global energy market's decarbonization, the financial sustainability of renewable energy firms constitutes a strategic imperative, essential not only for meeting ecological targets but also for ensuring macroeconomic stability. This study investigates the impact of Environmental, Social, and Governance (ESG) performance and Innovation (R&D) investments on the Return on Equity (ROE) of 233 renewable energy firms operating globally over the 2016–2022 period. While extant literature has predominantly relied on linear models to explore this relationship offering valuable insights this study aims to expand and deepen the current discourse by incorporating non-linear dynamics. Anchored in "Strategic Threshold Theory," it posits that the relationship in question may vary contingent upon the firm's level of institutional maturity. To this end, the study employs a hybrid methodology that synthesizes econometric rigor with modern data analytics techniques. To detect complex and regime dependent interactions among variables, Hansen's (1999) Fixed Effects Panel Threshold Regression is integrated with Gradient Boosting Decision Trees (GBDT) algorithms, augmented by Shapley Additive Explanations (SHAP) for interpretability. The empirical findings reveal that the impact of ESG and innovation expenditures on profitability is non-monotonic, exhibiting a "regime dependent" character characterized by structural differentiation based on the firm's institutional capacity. The results indicate that for firms falling below the identified critical thresholds in sustainability performance and innovation capacity, these investments act as a cost burden, suppressing profitability. Conversely, once the threshold is surpassed, they transform into strategic assets that mitigate risk, enhance efficiency, and bolster reputation, thereby strongly supporting financial performance. Notably, the determining power of the social component on profitability and the stabilizing role of governance mechanisms emerge as prominent findings of the study. This study contributes to the relevant literature by providing empirical evidence that financial success in the renewable energy sector is contingent upon surpassing institutional maturity thresholds, rather than merely on the magnitude of investment.