In an environment characterised by economic volatility and rising expectations for responsible corporate behaviour, firms are increasingly required to strengthen financial stability through effective governance and sustainability practices. This study examines the structural interactions between corporate governance, ESG performance, and financial stability using a Structural Equation Modelling (SEM) approach. Grounded in agency and stakeholder theories, the study conceptualises corporate governance and ESG performance as latent constructs and investigates their direct and indirect effects on financial stability.

Firm-level data are analysed using Confirmatory Factor Analysis (CFA) and Structural Equation Modelling in AMOS to validate the measurement and structural models. Model adequacy is assessed through standard goodness-of-fit indices, ensuring construct reliability and validity. The empirical findings reveal that corporate governance has a significant positive influence on ESG performance, while both corporate governance and ESG performance contribute positively to financial stability. In addition, ESG performance is found to partially mediate the relationship between corporate governance and financial stability, indicating its role as a key transmission mechanism.

The study contributes to the sustainable finance literature by offering an empirically validated SEM framework that integrates governance and ESG dimensions in explaining financial stability. The findings provide valuable consequences for corporate managers, regulators, and policymakers, emphasising the importance of embedding ESG considerations within governance structures to enhance long-term financial resilience.