Impact of ESG on firm performance - evidence from Europe

This study examines the relationship between Environmental, Social, and Governance (ESG) ratings, as well as the overall ESG rating and firm performance. Using a sample of public European firms over the period of 2012 to 2020, we investigate the extent to which ESG ratings are associated with firm financial performance, measured by the return on sales (ROS). The results indicate that firms with higher ESG scores tend to have better financial performance. The result is robust when disaggregating by environmental, social, and governance individual ratings, but presenting different magnitudes. While we found that environmental and social factors are positively associated with firm performance, governance factors also show a positive relationship but are slightly weaker than the other two. This study provides evidence for the ever-growing importance of ESG in firm performance and the reason investment decisions should be prioritized based on ESG ratings.