The impact of the Paris Agreement on ESG and firm performance -The relationship between ESG factors and firm performance metrics in European firms

Abstract

This study examines whether the Paris Agreement has an impact on the relationship between ESG factors and firm performance in European firms. The final dataset of the study consisted of 594 companies from Europe in the measurement period 2011 to 2019. To research the effect, a linear regression model is used and the dependent variables measuring firm performance are ROA, R, and Tobin’s Q. The findings indicate that the environmental component (E) of ESG has a significant positive impact on Tobin's Q following the Paris Agreement. However, the composite ESG score was found to be insignificant, offering no valuable insights. Subsequently, a final regression was conducted with a two-year lag for the Paris Agreement, as the agreement's implementation is continuous and it is challenging to pinpoint an exact "before and after" period. This analysis revealed significant effects of ESG scores on both ROA and Tobin’s Q, suggesting that firms gradually adapting to the Paris Agreement's guidelines may experience improved performance over time.