ESG and Firm Performance: Evidence From Selected Countries in Europe

Abstract

The 2008 financial crisis highlighted the need for ESG disclosure in corporate reporting. Yet there has been inconclusive evidence about its relationship with firm performance. This research investigated the relationships among Environmental, Social, and Governance (ESG) factors and firm performance in Europe. This study seeks to understand how firm performance affects ESG ratings and how ESG ratings impact firm performance. Panel data analysis was employed to analyse data of listed companies from the selected countries in Europe (Germany, United Kingdom, Italy, France, and Norway). The research findings indicate that there is no significant relationship between earnings per share (EPS) and ESG. Furthermore, there was a significant positive relationship between ESG and Market Value (Mcap). However, a significant negative relationship is observed between return on assets (ROA) and ESG, suggesting that firms investing in ESG may face challenges in generating sufficient returns on their assets due to the cost burden associated with ESG investments. For effective ESG implementation, policymakers and managers should prioritize cost reduction and profitability strategies.