Does greater engagement in ESG by listed firms result in enhanced financial performance? : a comparative study between Finland and European countries

Abstract

Using a sample of European countries (specifically, France, Germany and Finland), this thesis aims to explore the relation between Environmental Social and Governance (ESG) performance and financial performance. While ESG factors increasingly feed into corporate strategies and stakeholder interactions, the material impact of these factors on financial performance is still disputed. The analyses are based on two key performance measures, both for the same set of firms: Return on Assets (an accounting-based firm performance measure), and Tobin’s Q (a market-based valuation measure). This study contributes to the existing literature by analyzing how both overall ESG performance, and its three individual components, are related to the profitability and market valuation of a firm.

A panel data of 136 companies from 2014 to 2019 is used in this study to examine the relationship of ESG metrics and indicators of financial performance. Preliminary results indicate the high-level ESG score has little immediate effect. But the social and governance dimensions show stronger effects, although not entirely encouraging across the board. This nuanced relationship suggests that while ESG strategies are unlikely to yield guaranteed short-term financial performance, they may indeed provide long-term value drivers where regulations and expectations from the bodies of interest are strong.

These results are helpful to the ongoing conversation in ESG finance because they argue that ESG should not be viewed as just a compliance requirement, but rather a strategic imperative that can help organizations create sustainable value over the long term. The study concludes with managerial implications for corporate leaders, as well as recommendations for future research considering the industry specificities in the practices of ESG.