How Does ESG Impact Firms’ Financial Performance: Empirical evidence from European companies

Sammanfattning: This study investigates the relationship between ESG factors and corporate financial performance (CFP) by using data from listed companies in the European market and Thomson Reuters’ ESG scores. The analysis reveals a complex picture, with mixed results for different ESG components. While the environmental component shows no significant association with return on assets (ROA), the overall ESG score together with social and governance components exhibit contrasting effects. The significant positive impact of overall ESG score on ROA indicates the ESG disclosure benefits the corporate financial performance. The social component scores positively impacts ROA, reflecting the benefits of investing in employee well-being and a positive work environment. As for the governance factor, the positive effect can be the result of the improvement of management efficiency. These findings highlight the multi-dimensional nature of ESG's influence on a firm's financial performance, emphasizing the importance of considering specific ESG components. The results provide insights for stakeholders, including investors and policymakers, navigating the intersection of ESG and financial outcomes.