From Tree Huggers to Money Makers: How ESG Scores Boost Corporate Financial Performance in the EU
This thesis examines the relationship between Environmental, Social, and Governance (ESG) scores and financial performance as measured by both accounting- and market-based measures; Return on Assets and Tobin's Q. The study takes a particular focus on the European Union (EU), more specifically on companies operating in the region and the union's strong commitment to achieving the Sustainable Development Goals (SDGs) and more general efforts towards a more sustainable future. The large and updated dataset of 288 companies enables a more robust basis for conclusions. Eight fixed effects regression models are run to perform causal inference analysis. The results generally indicate a significant and positive impact on both ROA and Tobin's Q, confirming the findings of many previous studies and the hypothesis. Nevertheless, the combined ESG score and the social pillar (S) do not significantly impact Tobin's Q. A key finding is that the environmental pillar reaches significance with a positive impact on both financial performance measures. This result serves as a contribution to existing literature. Overall, the results provide evidence that ESG factors should be considered by both existing shareholders as well as potential investors. Additionally, the study may be of interest to regulators and companies as support for decision-making.