Publication: Working Paper Series No. 162

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“How ESG Performance Impacts a Company’s Profitability and Financial Performance” by Edgar Loew (Frankfurt School of Finance and Management), Lindsay Endres and Yajie Xu (Southwest University) was published on 19 January 2024 in the EBI Working Paper Series No. 162.

Integrating Environmental, Social and Governance (ESG) principles into corporate strategies has become a focal point in the modern business landscape. The pressure from news releases, investors and regulators pushes companies to integrate ESG into their portfolios. This study primarily examines the impact of ESG performance as well as single environment, social and governance pillars on profitability and financial performance for Western European listed public companies using Return-on-Asset (RoA) and Tobin’s Q as indicators. Additionally, this study also uncovers the impact of ESG on two specific sectors, namely, Energy and Financials.

To this end, this study analyses an extended period of historical data from reliable data providers with carefully considered methodologies and reveals a positive significant correlation between ESG performance and a company’s profitability as well as financial performance. The environmental pillar is significantly negatively correlated with both profitability and performance. The government pillar shows no significant correlation with company profitability. The energy sector tends to be more sensitive to environmentally related issues, while most of the findings regarding the Financials sector appear to be inconclusive.

Ultimately, this study provides an overview of ESG principles based on extensive qualitative research and evidence-based quantitative methodology which advance a better understanding of the relationship between ESG performance, a company’s profitability, and financial performance. By bridging the gap in the ESG research field, this study aims to shed light on the potential risks and opportunities associated with ESG integration and provide the reader with several implications for investment decision-making.

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