A Literature Review on ESG Score and Its Impact on Firm Performance

Abstract

Research covering Environmental, Social, and Governance (hereafter ESG) and financial performance often suffers from inconsistent terminology and jargon. ESG refers to companies and investors incorporating environmental, social, and governance issues into their business. Meanwhile, the ESG score is an innovative method of evaluating a company's activities. The ESG score focuses not on financial reporting, which investors and managers are accustomed to using when making decisions, but on statements on the corporation's influence on the underlying pillars of the score. Stakeholders and fund managers believe that firms with high ESG scores yield better operating performance, higher returns, and lower firm-specific risk. But still, abundant inconclusive evidence attracts sustainability scholars to fill concerning sustainability disclosure and performance. Therefore, this paper examines the need for overall ESG scores and their impact on the firm performance of listed companies. It shows that there are both positive and negative relationships between ESG scores and firm performance. The author intends to continue research by formulating the hypotheses for analysing the influence of overall ESG scores on firm performance and proposing a model for analysing this correlation. The findings of this study will be helpful to investors, policymakers, and other related agencies and widen the scope of literature to examine the impact of overall ESG scores on their accounting performance (ROA and ROE) and market valuation (Market Capitalisation).