ESG, Climate, and Financial Performance: Impact of ESG and Climate Action on Value and Profitability of High Carbon Emitting Companies

Abstract

This thesis aims to investigate the intricate relationship between ESG and financial performance, especially in light of recent environmental regulations and global climate change initiatives. Utilizing a sample of 145 high-emitting companies from various regions and sectors, the research employs a quantitative methodology using fixed and random effects regressions on panel data to understand ESG and climaterelated factors impacting financial outcomes comprehensively. The key findings reveal a positive link between ESG performance and market valuation but an inconclusive impact on profitability. The environmental score exhibits a similar pattern, positively correlated to climate change activities. The results also demonstrate a significant relationship between the E and CCT scores, highlighting the potential value of E scores as an indicator of a company's climate-focused initiatives. However, financial rewards for high-emitting companies are limited to regions and sectors where the E score positively influences financial performance. The study's implications emphasize the significance of considering regulatory environments, market expectations, and industry-specific features when examining the association between ESG performance and financial performance in diverse contexts. Industry practitioners are recommended to strengthen sustainability initiatives by allocating additional resources, which can improve company value without negatively affecting profitability. Investors should prioritize companies with consistent improvement in ESG and climate change performance while considering individual pillar/theme scores and industry contexts in investment decisions. Overall, this research provides valuable insights for sustainable investing in high-emitting companies, especially in the North American region and Industrial sector, where ESG performance and environmental score significantly impact market valuation.