The Impact of ESG Performance on the Financial Performance of European Area Companies: An Empirical Examination

Abstract

Achieving climate neutrality, as dictated by international agreements such as the Paris Agreement, the United Nations Agenda 2030 and the European Green Deal, requires the conscription of all parts of society. The business world and, in particular, large enterprises have a leading role in this effort. Businesses can contribute to this effort by establishing a reporting and operating framework according to specific Environmental, Social and Governance (ESG) criteria. The interest of companies in the ESG framework has become more intense in the recent years, as they recognize that apart from an improved reputation, ESG criteria can add value to them and help them to become more effective in their functioning. In particular, large European companies are legally obligated by the Non-Financial Reporting Directive (NFRD—Directive 2014/95/EU) to disclose non-financial information on how they deal with social and environmental issues. In the literature, there are discussions on the extent to which a good ESG performance affects a company’s profitability, valuation, capital efficiency and risk. The purpose of this paper is to examine empirically whether a relationship between good ESG performance and the good financial condition of companies can be documented. For a sample of the top 50 European companies in terms of ESG performance (STOXX Europe ESG Leaders 50 Index), covering a wide range of sectors, namely Automobiles, Consumer Products, Energy, Financial Services, Manufacturing, etc., we first reviewed their reportings to see which ESG framework they use to monitor their performance. Next, we examined whether there is a pattern of better financial performance compared to other large European corporations. Our results showed that such a connection seems to exist at least for some specific parameters, while for others, such a claim cannot be supported.