The link between ESG and financial performance in sensitive and non-sensitive industries. A quantitative study of the European market

Abstract

Purpose: The topic of ESG and its relationship with financial performance has been studied by researchers for the last decades. In this thesis, to further understand the relationship between ESG and financial performance, industry affiliation has been considered. The purpose of this thesis is to test if industry affiliation has a significant effect on the relationship between ESG and financial performance by distinguishing between sectors and industries that are more sensitive to ESG issues and those that are not. Methods: This thesis follows a quantitative research design using secondary data from Bloomberg. The data of this thesis was collected for the companies listed on the STOXX Europe 600 index and the period 2015-2020. Twelve linear regression models with ESG and its three pillars as independent variables and Tobin’s Q, ROA and MBR as dependent variables were developed and tested on the two groups of companies. Results: Three of the twelve regressions for the sensitive group showed significant results, with the regression model with G and ROA showing a positive relationship. Six out of twelve regressions for the non-sensitive group results showed a significant result, with a positive relationship for each significant result. ESG had a more positive relationship with the financial performance measurements for the non-sensitive industries than the sensitive industries. Out of the three ESG pillars, G showed the most significant results. Out of the three financial performance measures, ROA showed the most significant results. Conclusion: The results give no support to the hypothesis that ESG and its pillars have a more positive relationship with ROA, Tobin’s Q and MBR in sensitive industries than in non sensitive industries. This could be due to many reasons. One reason could be due to ESG disclosure is not a good proxy for ESG scores, as it does not assess performance, just reporting.