Empirical Analysis of ESG and Financial Performance

Abstract

In recent years, the impact of companies on society and the environment has become an important topic in both public discussions and business decisions. Within this context, the concept of Environmental, Social, and Governance (“ESG”) has developed into a key framework used by companies and investors to guide decision-making. The growing focus on ESG is not driven by strong empirical evidence linking it to higher returns, but rather by increasing demand for responsible investments with a long-term perspective. However, previous research on the relationship between ESG and financial performance remains mixed, with findings divided across positive, neutral, and negative relationships. This thesis contributes to the academic discussion by critically reviewing the literature and performing an empirical analysis of portfolios sorted by ESG performance, based on ESG scores from Refinitiv Workspace. This data provider was chosen for its complete coverage of the sample period and its use of a numerical scoring methodology, which is suitable for regression-based analysis. Using widely recognized linear regression models, portfolio returns were examined in relation to established risk factors. The results provide no significant evidence of a relationship between ESG scores and financial performance among STOXX Europe 600 companies. Across all models, alpha values are not significantly different from zero. Several factors may explain this outcome. In addition to methodological considerations, the inconsistent interpretation and application of ESG across firms and investors possibly play a role. ESG covers a broad and complex set of indicators, often influenced by subjective interpretation, inconsistent reporting quality, and lack of standardization. From a broader perspective, the findings highlight key challenges regarding the future relevance of ESG as an investment tool. The absence of a clear link between ESG and financial performance raises the question of whether ESG can continue to be seen as a valid investment criterion or if it risks becoming more symbolic than practical. To support future research, the thesis presents a framework with five important factors to consider when studying the relationship between ESG and financial performance.