Financial Characteristics of Firms With High ESG Scores

Abstract

This study investigates the impact of Corporate Financial Performance (CFP) on Environmental, Social and Governance (ESG) measures. A large part of earlier literature concerns the effect of ESG on CFP. In later years, some studies have examined whether the causality may flow the other way which is the vantage point of this thesis. Out of a data set of more than 8000 firms globally, a random sample of 100 US firms is selected. The ESG data runs from 2004 to 2020 and is sampled monthly. To measure the effect of CFP on ESG, three different measures of CFP are chosen. These are size, measured by total assets and market capitalization, profitability, measured by return on assets (ROA) and return on equity (ROE), and net income. The results from running multiple OLS and GLS regressions while controlling for sector and time since listing on the stock market, indicate a generally positive but small effect of the CFP measures on ESG. These effects result in accepting the hypotheses that profitability and net income lead to higher ESG ratings. The regressions on the two measures of size have contradicting results, resulting in the hypothesis of a larger firm size leading to higher ESG not being accepted.